Why is it a big surprise to Brussels that Russia will stop gas transit via Ukraine?

It is better for comparison to start with considering surprises caused by natural disasters. Perhaps this is what it is the most difficult to predict and to prevent. As you may know, all over the world considerable resources are spent on current monitoring and assessment of the impact of various natural hazards on energy markets, from a sharp drop in temperature in winter to a catastrophic earthquake and tsunami that could radically change the concept of energy development of entire countries. So as it happened in Japan after the Fukushima nuclear disaster.

However, it is not always possible to avoid the consequences. In January severe storms in the North Sea caused a nasty surprise - three major gas fields were shutdown facing a high danger of short circuit in power supply. Statoil was forced to stop production at the largest gas field Troll, which accounts for 60% of all gas on the Norwegian shelf. Production outages triggered by bad weather resulted in a sharp drop of about 40 percent in Norway's gas exports. Obviously, it is impossible to foresee these kind of surprises.

Nowadays in the 21st Century climate change and political tensions are having significant implications on the energy market. Nevertheless, often the events taking place in this area, firstly, are not always, and, secondly, are not so straightforward perceived by everybody as something extraordinary. In general, there is a common opinion now that it is hard to find any big surprise for us.

Arguably, the cancellation of the South Stream gas pipeline project became a real sensation. Many observers and experts noticed that President Vladimir Putin's decision to abandon the South Stream announced on December 1 actually stumped politicians in Brussels. There were no clear comments of the EU leaders even on the next day. The arguments appeared later that Russia allegedly was required to negotiate for many weeks in order to denounce the interstate agreements on the construction of the pipeline. Although for everyone who had ever followed just a bit of the South Stream project development, it was obvious that because of a growing political pressure from Brussels and Washington Bulgaria would never give permission for the construction, and therefore further implementation of the project would be impossible.

Maybe then, for somebody it was a real surprise. However, interpreting the well-known saying "Sawing off the branch they're sitting," we can point out that in this case the surprise was that partly sawed off branch collapsed at UNPREDICTABLE TIME, but it was not the fact of the collapse itself.

In other words, it is unlikely a surprise that the project, which had been "sawed off" so diligently for several years, collapsed. Europe should be much more surprised if the project somehow would hold out under such conditions, should not it?

If we reject unserious versions trying to explain the expression of surprise in the reaction of European politicians, then it remains only to assume that they expressed an outwards demonstrative amazement. And indeed there was no surprise to those who deliberately and openly led the situation with the South Stream project to such an outcome.

It is in the past already, in the history of the EU's relations with Russia, where in the future a separate chapter will be devoted to the unfulfilled South Stream project. It would make sense for all of us to see the hidden intrigue of this past story in order to recognize correctly what real and, especially, what alleged surprises further await the European energy market. After all, there will be still other causes yielding new surprises.

The EU looked like very much surprised again when the Russian Gazprom announced its intention to redirect in the near future its natural gas transit, which goes to Europe via Ukraine. The Vice President of the European Commission, in charge of Energy Union Maroš Šefčovič was informed about it during a one-day visit to Moscow on January 14. At the meeting the head of Gazprom Alexey Miller said: "The project (South Stream – ed.) is closed. The gas pipeline Turkish Stream is the only route by which can be supplied 63 bcm of Russian gas going now while in transit through Ukraine. No other options. Our European partners informed of this, and now their task is to create necessary infrastructure from the border of Turkey and Greece".

Maroš Šefčovič commented that he was “very surprised” by Alexey Miller’s statement, adding that such a decision could have a negative impact on Russia's reputation as a reliable supplier of gas.
However, underlining the reliability of Russian gas supplies, Maroš Šefčovič perhaps unintentionally got directly to the point. That is it because Russia has already explained not once that the decision to build the South Stream pipeline bypassing Ukraine induced by the necessity to ensure security of gas supplies to Europe. After its cancellation, Russia again found the other route around Ukraine as "Turkish stream."

Obviously there is the only one reason in this case - it is a non-decreasing political and economic instability in Ukraine, which, unfortunately, the EU could not take under international control up to now. And many of us in Europe doubt that it hardly ever would be possible.
It is appropriate to recall how the supplies of natural gas to Europe were completely shut off twice in 2006 and 2009 because of a pricing dispute between Russia's Gazprom and Ukrainian gas monopoly Naftogaz.

First serious dispute began in March 2005 over the price of natural gas supplied and the cost of transit. Russia claimed Ukraine was not paying for gas. At the same time Ukraine siphoned off gas from the transit pipelines which was intended to be exported to the EU. Ukrainian officials at first denied the accusation, but later admitted that transit gas was used for domestic needs. When the negotiations came to a standstill on January 1, 2006 Russia cut off all gas supplies passing through Ukraine and only on January 4, 2006 Russia and Ukraine reached a preliminary agreement, and the supplies to Europe were restored.

The second shut down of gas transit to Europe via Ukraine happened in the most severe period of winter in 2009 and lasted for nearly two weeks. Because of the gas supply disruptions through Ukraine in 2009 Slovakia and a number of Balkan countries had to impose severe restrictions in gas consumption, many industrial enterprises stood still and electricity power supply was disconnected as well.

Now under a catastrophic mismanagement of the country and resumption of massive hostilities in the South-East of Ukraine, neither any Kiev's promises nor encouraging words from Brussels cannot reassure in the reliability of the Ukrainian gas transit route to Europe, it does not matter who will be trying to prove it.

Now let's imagine that in 2019 Russia will fulfill its intention not to renew the transit agreement with Ukraine and also will offer the EU to receive gas from other routes, primarily by the planned Turkish stream pipeline. It's hardly possible to allege that the construction of Turkish Stream pipeline can result in reducing the security of supply in the EU or will somehow influence negatively on reputation of Russian gas supplier. It shouldn't be surprising that now Russia itself as a reliable supplier openly suggests taking into account in advance these future gas route changes.

Ultimately, it comes as no surprise for Europe, but instead there will be the challenging task that should encourage the EU to implement the European energy security strategy with consideration of new southern routes of gas imports to the EU to be opened in the near future.

As it is correctly noted in the comments published by The Economist, with all its disadvantages a perennial contention over the construction of the South Stream, as well as the recent turn of events in the direction of the Turkish stream can positively affect the integration within the European energy sector. And besides, Russia's energy policy has actually given an additional impulse to accelerate the development of the project of the Energy Union.

However, the question then arises: whether all the countries in Europe are ready for such a development?

Why is it unlikely possible for Bulgaria to become a testing ground for the newly created Energy Union?

In the middle of the 20th century Sir Winston Churchill had already called the Balkans as "Europe's soft underbelly". Since then, unfortunately, little has changed, and these unflattering comparisons were already used countless times. Again, there is an article in such an authoritative source of international news as "Financial Times" under the same title:” The Balkans are the soft underbelly of Europe”. This time an old unpleasant epithet is applied to the Balkans in the article of Bulgarian political scientist.

Even so, it is doubtful whether the majority of the Balkan countries agree with this characteristic. As for Bulgaria, the political scientist is right saying so about his own country. Unfortunately, Bulgaria has turned out the weakest link in the chain of partner countries, which have taken a consistent position for several years pursuing their national interests in strengthening its own, emphasize once more, its own energy security by means of participation in the South Stream project.

Bulgaria experienced the most intense political pressure. There was no other partner country taking part in the South Stream project implementation visited by so many high-ranking policy makers from Brussels and Washington. Ultimately, Bulgaria did not sustained, turned backwards under that political pressure and blocked the South Stream pipeline by not issuing construction permits. Since then, the opponents of the South Stream pipeline are pleased to repeat that the cancellation of its construction reducing Moscow's influence.

But the problem is that this so-called "influence reduction" did not move the Balkan countries any closer to solving pressing economic issues, which require a drastic improvement in energy supply. The Bulgarian political scientist called the Balkans just a "EU's backyard" in his article in FT. Nevertheless, it should not mean that EU citizens living there do not need modern and stable lighting and heating, environmentally friendly transport, etc., do they?

Almost nobody conceals now in Europe that Russia's refusal to construct the South Stream gas pipeline came as a total surprise. As if the EU did not do its utmost to slow the commencement of its construction until the very last day apparently not expecting it really can happen. An awareness about what had really happened appeared only when Russian President Vladimir Putin stated about cancellation of the South Stream gas pipeline. Before that neither in Sofia nor in other European capitals, obviously, such a scenario was not considered.

That is why the Prime Minister of Bulgaria Boyko Borisov had urgently to leave for Brussels to consult with the European Commission Vice President Maroš Šefčovič. The Prime Minister brought to Brussels a proposal to build a gas hub in Bulgaria, which could be a part of the infrastructure necessary for implementation of plans for creating the Energy Union.

Meanwhile, there are still doubts that the idea of this gas hub originally belonged to Bulgaria since before that the country's leadership did not demonstrate enough initiative often proving appropriateness of Churchill's characteristic with regard to the Balkans mentioned above. However, it does not matter who invented the idea of constructing a gas hub in Bulgaria. Another thing is much more important. This idea resulted from the necessity of providing the society with convincing arguments that, despite the problems with the South Stream pipeline, there are some alternative projects for energy development and, therefore, the loss is not so great.

But there is an understanding as well as more or less concealed annoyance in the majority of the Balkan countries that in fact they will encounter a significant loss of future benefits because the project cancellation postpones real opportunities of increase in energy consumption by several years.

Meanwhile it is necessary to consider not only energy problems, but also missed out huge investment gains. Russian Gazprom invested in the Nord Stream pipeline through the Baltic Sea, and it was supposed to be with the South Stream as well.

Joint project companies were created for implementation of onshore part of the South Stream pipeline in all countries - partners of Central and South East Europe. For example, South Stream Bulgaria is a joint-venture company established to manage the project in Bulgaria, owned equally by Russia's Gazprom and the state-run Bulgarian Energy Holding (BEH). In August last year South Stream Bulgaria joint venture raised its capital to 397.6 million Levs (about 200 million Euro).
Having abandoned the South Stream project Gazprom stopped investing into development of the EU gas transportation infrastructure. More importantly, this decision marked the beginning of radical changes in the strategy of the Russian company, which before was primarily focused on gas deliveries to the countries of end users in the European market.

In this regard, the head of Gazprom Alexei Miller stated after the talks in Moscow with the European Commission Vice President Maroš Šefčovič on 14 January that the new Gazprom strategy in Europe would be built in compliance with EU plans for creation the Energy Union that envisage centralizing purchases of Russian gas. In this regard, Gazprom intends now to construct new pipelines for delivering gas up to Europe's borders only.

Especially it concerns a new gas pipeline Turkish Stream announced simultaneously with the cancellation of the South Stream, which is considered as its direct successor. The new pipeline to Turkey will have an annual capacity of 63 bcm and will include a gas hub on the Turkish-Greek border specially constructed for customers in Southern Europe.

It turns out that Russian Gazprom purposely changed the new gas transmission infrastructure to make it consistent with the model of the future Energy Union, which has become one of the top priorities of the new European Commission team. The European Commission Vice President Maroš Šefčovič said it is expected that the concept of Energy Union is to be presented in February 2015. The Concept of Energy Union will include infrastructure projects aimed at building a single internal energy market.

However the question is whether the gas hub proposed by Bulgaria is included in the Concept of Energy Union? Probably not, and in future Bulgaria will be receiving gas from the Turkish gas valve since an opportunity of taking a position of the major Balkan hub on the South East border of Europe was missed forever. Because without the South Stream there is no gas in Bulgaria to distribute and to transit. "Gas hub does not make sense without Russian gas, "- said the former Bulgaria’s President Georgi Parvanov on the construction in Bulgaria a gas distribution hub instead of the South Stream pipeline.

Obviously, the chances to build a gas hub in Bulgaria on the EU money are very weak. Furthermore, there will be no financial support from Washington as it became clear after US Secretary of State John Kerry's visit to Sofia, when he announced plans just to send the top US energy official and no more.

Therefore, Bulgaria is unlikely to become a testing ground for the implementation of a new model of the Energy Union, acting as a gas intake and transit facility for the EU gas imports. Now Bulgaria is offered another role clearly defined in the article of well-known American edition «Foreign Policy» on January 16 under the title: "Bulgaria Is the New Battleground in Fighting Russian Energy".

No wonder as far as Bulgaria has served against its own energy interests and now the country will be getting so called anti-gas bastion rather than a gas hub.

Why does it happen that actually the fight against real energy projects, which are capable to strengthening energy security, is presented as an undeniable option? 
Why did it suspend improving the quality of life especially by means of achieving for that a required level of energy consumption in EU countries?

Is there anybody who would be willing to invest in the Ukraine’s gas transportation system? Moreover, why is there actually no one at all?

Popular opinion has been spread for a long time, especially among European politicians, that the pipelines "Nord Stream" and "South Stream" had the only one goal - to punish Ukraine depriving this country of gas transit business. Of course, this point of view primarily reflects the Ukraine's interest in retaining of its transit revenues. This is a fact that now it is one of the few stable sources of foreign currency earnings, which are very severely lacking on urgent needs of the Ukrainian dented economy.

As well as everywhere in the energy sector now Ukraine is experiencing an acute shortage of funds for purchasing gas. Therefore, no wonder if the amounts received from Russia for gas transit services are paid back to the Russian company “Gazprom” for new gas deliveries. According to Ukrainian sources, in September 2014 Russia paid for the transit of gas 68 million USD and about 70 million USD in October. These, in terms of gas contracts relatively small amounts were included in 387 million USD that on 5 December the Ukrainian company “Naftogaz” transferred to “Gazprom” as an advance payment for the supply of 1 bcm of gas from Russia. Recently on December 31 "Gazprom" received 150 million USD from Ukraine’s "Naftogaz" as an advance payment for Russian gas supplies in January 2015.

At first thought, usage of transit revenues for gas purchase seems to be a common practice, and perhaps Ukraine has to be just satisfied with this possibility. However, if you look at this situation from our side taking into account EU countries' interests as importers of Russian gas transported through the Ukraine’s gas transportation system (GTS), the attitude towards this practice should be quite the opposite, because it is bad for Europe and even very bad!

The main problem here is that, as is widely common in energy sector, the calculation of gas transit tariffs is based on operating and investment costs. That means that revenues obtained from gas transit payments mostly should be directed to ensuring proper maintenance and technical condition of the Ukraine’s GTS.

Meanwhile, actually in Ukraine such basic requirements have been ignored for many years. It had taken place already at a time of the previous Ukraine's governments. And even more so under the pressure of severe fiscal deficit now nobody cares to use this transit money for its intended purpose of GTS maintenance. Ultimately, the Ukraine’s GTS keeps operating although a service lifetime stipulated by the technical regulations for the majority of pipes and equipment have been completely exhausted long time ago.

An excessive deterioration of the Ukraine's GTS caused an increase in number of technical accidents. Last summer there were two gas explosions in the Poltava region on the largest pipeline "Urengoy - Pomary - Uzhgorod", which pumps Russian gas to Europe. Later in autumn an accidental depressurization put out of order the pipeline “Brotherhood” in the Transcarpathian region on the section “Valley – Uzhgorod – Border”. It is not difficult to figure out that in all cases the main reason appeared an out-of-limit technical deterioration and lack of funding for necessary modernization.

The pipeline accident in the Poltava region apparently made the Ukraine's government pay attention to the pressing problem of deteriorating the GTS condition. As a result, last summer the Ukraine's government officially announced the beginning of a radical modernization of the GTS at its own expense, which, according to preliminary estimates of Ukrainian experts, would amount to 5.3 billion USD for 5-7 years.
Since there is no money in the country in August the Verkhovna Rada (the Ukrainian Parliament) at the third attempt adopted the law on modernization and operation of the GTS. It launched a procedure of attracting investors to the Ukraine’s GTS, where the state will own its share in a control package, and another 49% can be distributed only among an operator company or several companies from Europe or America.

However, so far the expectations of reconstructing the Ukraine's GTS by means of foreign investors have not been met at all. The Ukraine's Government attempts of attracting foreign companies and, in particular, the negotiations with Chevron, Statoil and other companies have not yielded any result yet. There are several reasons for a failure.

First of all, it is necessary to realize that, in spite of the Minsk Agreement, Ukraine is still teetering on the brink of the renewal of hostilities which have already massively undermined the Ukrainian economy. Meanwhile artillery strikes and civilian casualties take place up to now.

In addition the US Congress passed the "Ukraine Freedom Support Act" on December 13 that would allow 350 million USD in lethal and non-lethal military assistance to Ukraine from 2015 to 2017. It should be quite clear to everybody that even promises of supplies for military use instead of private investments will not contribute to the stabilization of peace in Ukraine. Under such circumstances it is unlikely possible to find investors who would dare to invest heavily in a multi-billion project that should be fulfilled near half-ceased battlegrounds. Do they?

Besides that, we have to recognize a critical weakness in functional structure of the Ukraine’s GTS, which I described almost half a year ago in the end of June. It consists in the fact that the infrastructure of the Ukrainian transit pipelines simultaneously are in permanent and total use for meeting the needs of internal gas consumers in Ukraine. Direct access of local Ukrainian consumers to transit pipelines as well as an insufficient administrative control and corruption that all together make it easy to carry out an unauthorized gas offtake. Or by other words it means stealing a transit gas partly instigated by a severe energy shortage in the country.

Practically it will not change anything if European or American companies become co-owners of the Ukraine’s GTS. In such circumstances, they are unlikely to be able to ensure that Russian gas intended for Europe will not be pumped out on the territory of Ukraine. But in that case why should investors sustain such financial and image risks?

Finally, we need clearly to understand the consequences of recent events - namely, Russia's action of canceling the South Stream pipeline construction. Simultaneously Russia and Turkey completed an agreement on the construction of the other gas pipeline with the same capacity of 63 bcm, which is now called the Turkish stream.

The announcement that the South Stream would be halted caused a surge of enthusiasm in Ukraine. Ukrainian Prime Minister Yatsenyuk again repeatedly called foreign companies to invest in the Ukraine’s GTS. But at the same time almost nobody paid attention to the fact that, as well as the South Stream, the Turkish stream will provide a new route for gas supplies to Europe bypassing Ukraine. Therefore, redirection of the Russian gas pipeline to Turkey means only one thing: Ukraine will lose a status of gas transit country for the foreseeable future.

Nevertheless, the transit agreement between Russia and Ukraine will be valid for another five years until 2019. As long as there are no companies willing to invest in the Ukraine's GTS neither in Europe nor in the US, the financial burden of its preservation from a complete collapse rests on the EU itself. While politicians in Brussels and Washington go on talking about gas dependence on Russia, as you can see, the real threat to our security of gas supplies is much closer. It is right behind the EU borders and has a name that is known as "the Ukraine's gas transportation system."

An indirect recognition of this fact is that the EBRD extended a loan for modernization of the Ukraine's GTS in December. But the allocated amounts are much less than those required according to the calculations in Ukraine. It is 200 million USD intended only for the reconstruction of the Urengoy - Pomary - Uzhgorod pipeline.

Generally speaking now when the Ukrainian economy is sinking into deep trouble, this loan would be like "a drop in the bucket."

Obviously Europe launched its loan initiative too late spinning out almost until a middle of winter! Now Ukrainian media covers so-called rolling power cuts occurring every day in all the cities, which, by the way, a few of us in Europe can imagine. And what is more there was a nuclear power plant accident in Zaporozhye, which resulted in shutting down one of its generating blocks. Ukraine purchases coal from a far South Africa and negotiates about coal shipments even from Australia. Ukraine's government approved temporary electricity import from Russia.

It is paramount for European security of gas supplies that due to acute shortage of energy from the very beginning of winter Ukraine started increasingly pumping out gas of underground gas storages (UGS). There are 12 UGS in Ukraine with a total active capacity of 31 bcm. According to the Gas Storage Europe Association (GSE) data in 2014, the maximum filling volume of the Ukraine's UGS was recorded on October 19 and accounted for 16.759 bcm. As of January 10, 2015 this volume dropped by 37% to 10.615 bcm. Furthermore, from 5 to 6 bcm out of 16.5 bcm is a so-called inactive gas that in principle cannot be used at all.

As a matter of fact Ukraine does not have to use much of its storage volumes for the domestic consumption because these UGS facilities perform an important role of buffer stocks in the gas transit system, ensuring security of stable supplies to meet peak increases in gas consumption in Europe especially during a cold spell in January and February. Meanwhile, the Ukraine’s UGS now filled only to 33.51%.

For refilling the Ukraine’s UGS, it is necessary to import gas from Russia. But evidently Ukraine has no money for that. Instead, there is a multi-billion unpaid gas debt to Russia, which Ukraine hoped to pay off with the financial assistance of the European Commission.

In such a tense situation, why are our European politicians in Brussels and in other European capitals still urging to the accompaniment from Washington that Europe should cope with its gas supply without Russia? Why did the EU refuse a new gas pipeline to supply Russian gas bypassing the decrepit the Ukraine’s GTS? And ultimately why is Ukraine going to squeeze further out the EU to finance its GTS while, as we see, it is of no interest to investors?

Another Pyrrhic victory for EU: forcing Russia to abandon the South Stream project.
Can empty gas pipes become a reality for Europe? Why?

It is known that a Pyrrhic victory achieved at too high a price is tantamount to defeat.
This old saying is fully consistent with the events taking place now in the European energy market. Unfortunately, persistent political confrontation between the EU and Russia strongly encouraged from another side of the Atlantic, has overwhelmed Europe's traditional abilities of prudently aiming for our own economic benefit, which is being more often replaced by unassured expectations of the fulfilment of predictions and promises.

Now you can hear and read a lot of enthusiastic reports that Europe had demonstrated firm principles insisting that the pipeline "South Stream" should meet the requirements of the Third Energy Package that made Russia retreat from its plans. Although our media tries to ignore the fact that, first of all, it was Brussels and Washington victory over Bulgaria, which was forced not to give a bureaucratic permission for the construction of the pipeline "South Stream".

The biting irony of the situation in Bulgaria is that this country known as one of the most economically underdeveloped countries of the EU already has got a list of such "victories" over projects. Despite the fact that Bulgaria needs much more than many other members of the EU to develop its energy industry this country experienced freezing such energy megaprojects as the Burgas–Alexandroupoli oil pipeline for transportation of Russian and Caspian oil from the Bulgarian Black Sea port of Burgas to the Greek Aegean port of Alexandroupoli and a nuclear power plant "Belene". It happened again when gas pipeline "South Stream" was being added to this list.

However not only Bulgaria but also other countries of the EU would have to pay a high price for this "victory". Before that other South-Eastern European countries as well as Bulgaria actively prepared for the possibility to pour into their economy a powerful flow of Russian gas. But now they are expecting real actions of Brussels to implement the European Energy Security Strategy released as far back as in May.
Just a week after an unexpected statement of the Russian President Vladimir Putin on termination of the project "South Stream" the European Commission held an emergency meeting of energy ministers of the EU countries, where it was announced that allegedly there are alternatives to Russian gas. These alternatives have been published on December 9 in the joint statement of the European Commission and the EU member states whose interests are affected to varying degrees by cancellation of the project "South Stream".

Ultimately such a statement is important for the European Commission in order to demonstrate an outward unity. As to the EU countries participating in the meeting this statement was aimed at somehow diverting public attention from the problems around the project "South Stream" and also showing for their citizens that they would be willing to seek a replacement of the former energy development plans. Together with other countries Romania hastened to join to the statement in order not to miss an expectable funding from Brussels on this occasion, although this country long ago had refused to participate in the project "South Stream". At the same time Hungary that was always in the first row of the project supporters, declined to sign the statement obviously realizing a hypocritical nature of the situation.

In fact what the European Commission proposes now as alternatives to mitigate and in some countries even as means of outliving the "victory" over the project "South Stream" raises a lot of doubts both experts and anyone else who is familiar in general with present realities of the energy market.

The proposals of the European Commission put forward for compensation of abandoned gas deliveries by "South Stream" previously scheduled to begin in the fall of 2015 are especially unrealistic regarding the use of oil and gas resources of the Black Sea and the Eastern Mediterranean. The development of these gas resources was mentioned only once in the European Energy Security Strategy in the context of projects of the distant future to be realized after 2020. Moreover, there is no any data yet properly proving a commercial value of potential gas resources of the Black Sea. A verification of hypotheses about the presence of substantial volumes of gas on the Black see shelf would require many years of costly works.

As to the use of gas resources of the Eastern Mediterranean it could be a realistic scenario if we take into account the natural gas reserves in the Israeli shelf, where two new large gas fields were discovered in 2009-2010. It is the Tamar gas field with reserves of 274 bcm and the Leviathan gas field located 130 km off the Mediterranean port of Haifa, which has estimated gas reserves of 481 bcm considered now as one of the largest newly discovered gas fields in the world. However, Israel is planning to deliver gas from these fields not towards Europe but in the opposite direction. Israel has already signed preliminary agreements with Egypt and Jordan that envisage exporting gas to the amount of up to 70 billion USD within the next 15 years.

It is impossible to estimate a complete potential of the sea shelf gas reserves near Cyprus because they have not been properly explored yet. But this task encounters a very difficult political obstacle - even for exploratory drilling first of all it is necessary to conduct a territorial delimitating of the sea shelf of Cyprus and to define the rights to use the natural resources of the island. This problem has not been solved for forty years since when Cyprus was divided into three parts: Greek, Turkish and another part under control of British military forces.

Besides that, it is necessary to take into consideration separately that transport and logistics infrastructure for gas deliveries to Europe from the Eastern Mediterranean would cost dozens billion Euros. Neither Cyprus nor Greece has got such financial capabilities. Ultimately, it would take many years to extract and bring this Mediterranean energy to Europe.

As you can see, the gas supplies from the Black Sea region and the Eastern Mediterranean should be attributed to the very distant future. The question is when will it happen? But it is even more difficult question: up to what extend could these opportunities be really implemented?

The second alternative proposed by the European Commission for compensating shortages of energy because of the cancellation of the project "South Stream" concerns future development of LNG terminal network. The necessity of LNG terminals is being discussed permanently and, of course, public attention to this topic is quite justified. Nevertheless, if we imagine that such a modern network of LNG terminals would be created, the question immediately arises: where to get gas volumes necessary for its effective usage.
In my post on October 23 I already wrote that the European LNG market is losing out to its competitors who more actively attract suppliers of LNG to Japan, China and other Asian countries. It is still unknown when the US will start delivering to us a long-promised shale LNG.

Consequently, there is a high probability that the planned terminal network in significant extent will accommodate LNG from Russia. It is noteworthy that there is an idea to build a gas hub together with LNG terminal at the end of a new pipeline "Turkish Stream" near the Greek-Turkish border for distribution of Russian LNG further along the Mediterranean.

By the way, LNG from Russia may appear in the Mediterranean even before completing the construction of the gas pipeline "Turkish Stream". For example, recently Russia has negotiated possible supplies of LNG to Bahrain in Persian Gulf. Therefore, it will come as no surprise for you to learn in future that instead of Russian gas failed to be transported by the pipeline "South Stream" Europe would buy Russian LNG.

As saying, what we had gone from, then to the same we will return! However, in fact it will be a return with the transition to a significantly higher price level taking into account LNG production and transportation costs.

One more, the third alternative of replacement of undelivered Russian gas proposed by the European Commission is to be well-known to us. This is the "Southern Gas Corridor" consisting of the pipeline TANAP from Azerbaijan via Turkey and the pipeline TAP through several countries alongside the coast of Adriatic Sea. Now there is a supplementary idea of creating a so-called "vertical corridor", which will consist of cross-border gas pipelines linking GTS in Romania, Bulgaria and Greece that will allow these countries in the future to connect with the TANAP pipeline and, it is not improbable - to the pipeline "Turkish stream" as well.

An encouraging information about the project TANAP is that after its completion scheduled for 2018 Europe will receive 10 bcm of gas per year from Shah Deniz gas field in Azerbaijan.
However, an important question arises that its capacity is insufficient since Azerbaijani gas would be enough only to compensate for less than sixth of volume of undelivered gas by the pipeline "South Stream" with an annual capacity of 63 bcm.

Meanwhile the statements about possible doubling of "Southern Gas Corridor" capacity up to 20 bcm a year do not stand up to scrutiny, as all the arguments break against boundaries of the existing resource portfolio. It is obvious that a significant increase in volumes of gas deliveries without an adequate increase in resource portfolio would result in deteriorating the security of gas supplies. Therefore, the latter is hardly possible in case of using only Shah Deniz field.

There is no reasonable answer where the pipeline TANAP can get gas in addition to supplies from Azerbaijan. Availability of additional gas supplies from Turkmenistan and Iran remains in the row of unrealistic ideas. Now deliveries from Turkmenistan are mostly aimed at the Chinese market providing more than 88% of pipeline gas to this country. It is unlikely that Turkmenistan is sufficiently interested in the construction of the Trans-Caspian offshore pipeline in the direction of Azerbaijan, which requires very large investments. It is equally important that such an offshore pipeline under the Caspian Sea must get certain environmental and other permits from all Caspian states including Russia. As to Iranian gas, you will remember that it would require settling a whole complex of problems in relations with this country.

As a result, we can see that all the alternative proposals of the European Commission actually do not bring nearer, but on the contrary postpone a stable growth of gas supplies to Europe. This is especially true of South-East part of the continent.

Why does it happen that the struggle for European energy security sometimes looks like as the struggle against this security, when our policy makers are trying to convince us that less gas supplies to Europe in the longer term would be better (!?), than much larger gas supplies, which could start as early as next year?

Why should Bulgaria pay an exorbitant price for European solidarity?

After Vladimir Putin had said that Russia would abandon South Stream Pipeline, the headlines have appeared in news media: "The South Stream is breaking against the wall of European solidarity". However, this is obviously the point of view of those European countries that were not directly related neither to the construction, nor even to a future gas consumption to be delivered by the "South Stream". There should be entirely different public opinion in Austria, Serbia, Hungary, Bulgaria and other countries - in fact, public expectations of economic growth and dreams of a better and stable life in general crashed against this wall. Meanwhile in return these countries have received only compliments from Brussels and Washington.

Bulgaria happened to be the number one loser, although as in sign of encouragement this country has been promised speeding up the process of accession to the Schengen area. Visa abolition by the EU can really become for somebody an emergency exit for avoiding future problems. After all, in any case it would facilitate a relocation from the warm countries of South-Eastern Europe where gas usage is extremely low, to the North Europe with high per capita energy consumption.

About three months ago in the blog post on September 1, I already wrote about the "Bulgarian bastion", at that time expressing the hope that it will be a temporary obstacle on the way of real strengthening the European energy security. Unfortunately, the "Bulgarian bastion" was turned into the wall of European solidarity. Now Bulgaria is nailed to this wall by the entire power of transatlantic allies' influence. It is resulted in that one of the European countries much more than most of others requiring an economic assistance was deprived not only of new revenues but also in the long term of those revenues, which now Bulgaria is permanently earning from gas transit.

Brussels has always shunned issues related to economic losses of Bulgaria in case of cancellation of the South Stream project, replacing the assessment of such a pessimistic scenario with the stress tests campaign in case of emergency caused by interruption of Ukrainian transit this winter. Most probably, they should be nervous because the calculation of missed benefits and other losses resulting from failure of the South Stream project logically would lead to a discussion of the need to compensate for the economic losses of Bulgaria, which sacrificed their sovereign rights to make decisions in national energy industry.

As Vladimir Putin pointed out at the press conference in Turkey: “If Bulgaria is deprived of the opportunity to act as a sovereign nation, then they should at least demand money from the European Commission to compensate for their lost profits, because direct revenues to Bulgaria's budget alone would have been no less than 400 million euros a year”.
In addition, the South Stream project would bring over 5 billion euros of investments in Bulgaria, which would provide over 6 thousand of new jobs. Now at the beginning of the preparatory phase of construction 800 people were already employed on the offshore part of the project, 80% of them - Bulgarians.
It was expected that the project would ensure a significant increase in gasification of the residential sector in Bulgaria. In fact, now only 2-3 % of Bulgarian households are taking advantage of natural gas usage, this is compared to the average number in Europe, which stands at around 50%. This highlights an actual opportunity for growing in regards to energy efficiency as well.

Our mass media is widely disseminating an idea that the main reason for the cancellation of the South Stream project was not at all the EU-US policy aimed at building an opposition to the project and forcing Bulgaria to join it, but that because of steadily falling oil prices, this project has become prohibitively expensive for the Russian company "Gazprom". However, the argument allegedly concerning the high cost of the project completely collapses if we take into account that Botas Petroleum Pipeline Corporation signed in Ankara a Memorandum of Understanding on constructing an offshore gas pipeline across the Black Sea towards Turkey. The new gas pipeline will have the same capacity of 63 bcm, with 14 bcm scheduled for Turkish consumers. It is necessary to draw a special attention to the fact that now this volume is being delivered via the Balkan Corridor. Another part of nearly 50 bcm will be transported to the Greece–Turkey border, where a gas hub will be arranged.

It actually reveals that, firstly, in the future, Turkey will not need supplies of Russian gas via Bulgaria. Therefore, besides the above mentioned losses caused by termination of the South Stream project there will be the loss of existing transit payments in Bulgaria as soon as a new gas pipeline to Turkey is constructed. That is what is now Bulgaria annually receives about 60 million euros for the transit of 14 bcm.

Secondly, in future it will be unlikely possible for Bulgaria to purchase gas from Turkey at the same prices as it would be in the case of direct supplies from Russia.
Nevertheless, it is evident that Europe's efforts are contributing a great deal to the establishment of Turkey's position as a leading transiter of gas on the EU southern borders. How it can affect gas supplies to the EU, obviously, deserves a special consideration.

Ultimately Brussels will have to continue searching excuses and trying to shift off responsibility from themselves for consequences of the destruction of the gas infrastructure agreements.
The following quotation from the novel of famous English writer Elizabeth Bowen as an epigraph could set a non-biased coverage of these events of the EU gas market: “Sacrificers are not the ones to pity. The ones to pity are those they sacrifice”.

Why did it happen to Bulgaria? Why did a leading role of the victim of European solidarity fall to Bulgaria despite the fact that according to a survey of the Institute of Modern Politics carried out in this country in September 2014, South Stream project enjoyed the greatest level of public approval amongst all current energy projects, 51% survey respondents indicated that they supported the project?

Why does a "Golden age of gas" come to China, and maybe Turkey is already on the verge of it, while Europe could be prepared for an elusive "Age of Shale"?

China has long stopped surprising us with their high rates of economic growth and unique projects. Although there are more and more talks about slowing down the development of this country, new projects continue to be created that each time makes us move further away the limits of our imagination. For example, such a project is like the largest in the world fan-shaped solar-powered office building located in the Shandong Province in northwest China. This building set a new world record for the usable area covered by solar panels, a total area of which amounts for 75 thousand square meter.

Chinese natural gas market also deserves much of our attention, especially with regard to growing environmental requirements. Air quality problems give an impulse to the Chinese government to take tough measures for reducing environmental pollution. In this regard, the use of natural gas, especially as a replacement of coal, becomes one of the main directions for reducing emissions. It is stated in the 2014 Medium-Term Gas Market Report of the International Energy Agency (hereinafter - IEA) that the development of energy, industrial and transport sectors of the Chinese economy stimulates demand for gas which will increase over five years by 90% and in 2019 will amount to 315 bcm. The national gas resources will meet a half of the demand since projected natural gas production in China will grow by 65 per cent from 117 bcm in 2013 to 193 bcm in 2019.

In the meantime, it is expected that China will continue to act as a major importer in the world gas market.
Here it is very appropriate to repeat a summarizing conclusion of the IEA five-year forecast, published on 10 June of this year: " 'Golden Age' of gas coming to China".

In fact, it is unlikely possible for us to consider the EIA experts' conclusion as something extraordinary. That is rather a matter of the recognition of obvious facts.

A the same time there is another statement in this IEA market report which should be regarded already as a signal to Europe that expected changes in the global gas market will pose significant challenges for the European energy security. In particular, it is quoted as saying that "near-doubling of Chinese demand for gas by 2019 offsets slowdown in other regions (of the world – ed.)".
Let us to clarify that it will happen primarily because of the reduction in gas supplies to European market!

Consequently, gas intended now for "European" imports after a while will become gas for "Chinese" imports... In such a manner, probably, we shall be told soon about LNG redirected to Chine from Qatar, Peru, etc. What is more important, it can obviously concern the gas imports by pipelines from Russia!

Apparently, our policy makers in Brussels both in the former and in the new structure of the European Commission in addition to all the other duties indirectly are turning into reality the above-mentioned forecast of the Chinese gas market development.
In Europe, all of us know their statements about the aims of diversification of gas supplies to the EU and strengthening the security of gas supplies by means of reducing the share of Russia in the European gas market.

There is a famous old saying: "Be careful what you wish for, it might come true".
Have our policy makers in Brussels and other capitals really expected that their wishes would be executed by Russia to that extent? What kind of reaction from Russia did they expect to receive in response to the repeated statements of their intention of limiting the share of Russian gas imports and, particularly, in response to the decisions of the European Commission aimed at countering the construction of gas pipeline "South Stream"? Unfortunately, getting deeper and deeper into a gas confrontation with Russia, Europe mostly confine itself to vague generalities and assessments of the stress tests before the upcoming winter.

Our old and therefore wiser Europe, unfortunately, showed no foresight. After all, the majority in Europe hardly expected to obtain such an extensive and definite response of Russia.

At first, the Russian counter-response became the new Russian-Chinese gas agreement, which provides for supplies of gas to China via a so-called "Western route". It is especially important for Europe, that gas for Western route to China will be produced at the same gas deposits in Western Siberia, which are used to ensure supplies to our market.

Thus, while there is an political discussion in Brussels how to carry out a diversification of gas suppliers, Russia is already performing in practice a diversification of its export markets.
Although the tone of the EU policy makers began to soften and there have been recently some statements mentioning the gas pipeline "South Stream" as an important project for Europe.
However, it was too late and not enough - so now Russians shut down the project "South Stream" themselves!

Not for the first time, as they might say, unwittingly, Brussels and Washington efforts to restrain Russia in the energy market have played a catalytic role in its transition to a new, higher level of diversification of export markets for Russian gas.

New, but maturing for some time breakthrough in relations with Russia in gas sphere was achieved in the talks of President Vladimir Putin in Turkey where he stated that for Russia under the present conditions it is impossible to continue implementation of the "South Stream" project because of the non-constructive position of the European Union.

“If Europe does not want to carry out [South Stream], then it will not be carried out,” he said. “It would be ridiculous for us to invest hundreds of millions of dollars constructing a project, bringing it to Bulgaria’s borders and having to drop it from there on.”

In turn, as a result of these negotiations, Russian supplies would increase by 3 bcm through the pipeline "Blue Stream" and Turkey would receive a 6 per cent price cut on Russian gas from January 1. Ultimately, Turkey has taken an important step toward becoming the gas hub on the southern border of Europe. Moreover, this is a considerable contribution into the opening of the "golden age of gas" at the Anatolian peninsula.

Meanwhile current developments in the European gas policy reveal even for non-experts that further attempts of the dialogue with Russia from a position of monopoly buyer of its gas do not make sense.
It is obvious that packages of sanctions and other types of EU pressure on Russia have given unique results. Nevertheless, to our disappointment they are opposite to those on which many Europeans would like to count.

It raises disappointment of Bulgarians that their country lost a historical chance of being a big player at European energy market should not it?
It happened also much to the annoyance of other countries of South East and Central Europe, which in vain have been preparing for the implementation of the pipeline "South Stream" for a number of years.

Now Europe is suffering from a shortsighted policy in energy sphere and is looking constantly backwards on the transatlantic partners, who promise an elusive "Age of Shale" setting back hopes for a "Golden Age" at the European market of natural gas. The impression is as if somebody else decides for Europeans that there will be no new demand growth in gas in Europe, and that Europe should live out its remaining time only with thoughts about the Golden Past. Indeed, according to Eurostat in 2013 gas consumption in 28 EU member states decreased by 0.4% in comparison with 2012.

Why under these circumstances do the political ambitions of some of our state leaders not give way to economic feasibility, as well as to citizens' desire for stabilizing relations with Russia strained below any reasonable limits, especially in the gas sphere? 
Why would not do it, and thereby actually drive Europe's economy forward particularly in the less-developed European countries to the sustainable growth?

Why does Russia terminate construction of the pipeline "South Stream"?

This breaking news has appeared in the heart of Europe at a press conference in Stuttgart, where meetings of representatives of the German business community with the Minister of Economic Development of Russia Alexey Ulyukayev took place a few days ago.

Answering journalists' questions at a press conference Alexey Ulyukayev said that he admits the possibility of terminating construction of the pipeline "South Stream".

"South Stream — is a way to remove transit risks for the European consumers if the European consumers have a demand for decrease in risks, we will construct South Stream if this demand isn't present, we won't build it" — Alexay Ulyukaev declared.

Thus, Europe is offered to decide upon whether to assume or, on the contrary, thanks to the pipeline "South Stream", to absolve themselves of transit risks related to gas supplies of 63 bcm, taking into account that this volume of gas is about 75 percent of the gas transit carried out at the high risk via very unstable Ukraine.

Talking about the press conference in Stuttgart, it is possible to expect that upon the Russian initiative, but in this case not upon Brussels, there will be a need once again to count resources necessary for replacing the gas imports from Russia.

As it happened before, in addition to traditional gas supplies from Norway, Algeria and some others, obviously, future gas supplies from Azerbaijan, Israel, and even Iran would be included into the list of potential gas resources. It would seem that there are many of such promising projects, but unfortunately, it will take quite a long time to get gas from them. No doubt, these projects have a future, but they are able only partially compensate for the gas share of Russia, and that will have to wait for many years.

Specific features and expected results for Europe from implement of these Caspian as well as Mediterranean gas projects deserve special attention and it is worth to highlight them closely in future blog posts.

However, now it is important that news from Stuttgart would be heard by Europe and, in particular, would be clearly known in Bulgaria becoming the first European country that will host the pipeline "South Stream" on its way to the EU and participate in determining fates of the project. That is why our special attention is turned now to this Balkan country and to the newly elected government of Bulgaria, which today really creates the future of the European energy security.