Why did the Prime Minister of Turkey Ahmet Davutoglu pay a visit to Bulgaria very shortly before the EU Summit in Brussels?

Prime Minister of Turkey Ahmet Davutoglu arrived in Bulgaria two days before the EU summit in Brussels. After the meeting with Bulgarian Prime Minister Boyko Borisov on 15 December 2015, he said, "Bulgaria is a gateway of Turkey to the EU". Immediately after the visit to Bulgaria Turkish Prime Minister traveled to Belgium. What were the reasons for a snap working visit to Sofia only two days before the Brussels meeting?

The talks between the leaders of Turkey and Bulgaria were focused partially on an escalating migration crisis in the European Union since the summit of eight EU countries on 17-18 December was held for further discussion of ways to stem the flow of Syrian and Iraqi refugees. However, Bulgaria had relatively little involvement in management of the waves of migration towards Europe because they entered the EU through the Greek-Turkish border.

Therefore, this issue was hardly the only major reason for the visit, and even more so in respect of migration such a comparison of Bulgaria with "a gateway of Turkey to the EU" is not completely suitable.

Focus Information Agency. Bulgarian Prime Minister met with Prime Minister of Turkey Ahmet Davutoglu

 

Reportedly, the talks in Sofia also included bilateral issues of mutual interest. A speed train from Istanbul to Sofia was mentioned as one of major future transport projects to be carried out. Is that indeed all so? It is evident that the question has not fully disclosed to the public why Prime Minister of Turkey paid this visit to Bulgaria.

The Bulgaria's desire to revive the South Stream gas pipeline project - a serious topic of concern of Turkey

One would assume that the trip of Turkish Prime Minister to Sofia might be also caused by a number of circumstances pointing to the fact that in recent time Bulgaria has taken a more active stance on the resumption of the South Stream project.

Perhaps no surprise that Bulgaria continues with procedures for the South Stream project. Bulgaria has been discussing with the European Commission for several months the possibility of building an abridged version of the South Stream project consisting of two offshore lines, which would deliver Russian gas to a receiving terminal near Varna. As Deputy Prime Minister for Economic Affairs Tomislav Donchev stated in the Bulgarian Parliament, "The last months there have been ongoing meetings and discussions with representatives of various structures of the European Commission in order to carry out a precise legal analysis with their help of what options would be possible according to European legislation to transit gas coming from the Russian side in the Black Sea".

Besides, following the plans of the European Commission, Bulgaria agreed with Greece on the construction of a gas interconnector. Shareholders in the joint project company ICGB signed a final investment decision on the construction of intersystem gas connection Greece – Bulgaria on December 10, 2015 in Sofia. As noted, this project will provide a real possibility to diversify natural gas supply to the South East Europe region.

In addition, Bulgaria's desire to facilitate a return of the South Stream project back to life is indicated by the fact that Bulgaria did not join the group of EU countries, which signed a collective letter against the construction of the Nord Stream II pipeline. "I will defend the position for the construction of Nord Stream II and a gas hub in Bulgaria - it is advantageous for the country and nobody can reproach me for that," Bulgarian Prime Minister Boiko Borisov told Reuters.

The Bulgaria's initiative to establish a regional gas hub "Balkan"

The idea to create a gas hub had first been presented at the energy forum in Sofia on February 9, 2015. The European Commission has supported Bulgaria in principle. In December, according to Reuters, Bulgaria's deputy Prime Minister Tomislav Donchev and Klaus-Dieter Borchardt, director of the EU's Internal Energy Market Directorate informed that the European Commission and Bulgaria set up working group in order to begin assessing the legal, regulatory and financial requirements for creating the Balkan gas hub.

Gas distribution functions of the hub will be carried out based on a new UGS to be constructed not far from the Black Sea city of Varna. From this UGS near Varna the gas will be distributed to Bulgaria, Romania and Serbia. It is planned that in total about 43 bcm are to be delivered to Central European countries.

Turkey zealously monitors current development of Bulgarian initiative to create a regional gas hub. An article in Turkish Weekly, published in early January, was entitled "Bulgaria wants to become main gas hub in Europe."

Even in the absence of comments of the Turkish officials, it is obvious that Turkey itself claims to be a leading supplier of gas on South Eastern border of the EU and the prospect of competition in achieving this goal would unlikely be delightful.

Regional gas hub requires major sources of stable and competitive gas supply

The success of Bulgaria in the implementation of plans to achieve a leading position in the regional gas transport infrastructure will depend not only on the approval of the European Commission regarding mentioned above legal, regulatory and financial requirements. Regardless of how all these conditions would be successfully implemented, as Platts experts correctly noted, "question marks remain over what sources of gas can help create a Balkan hub."

Presently, interconnector with Greece (IGB) is the only one source of gas, which will be actually available for the hub operations in Varna. This gas connection has a length of 140 km on the Bulgarian territory and the planned initial capacity of 3 bcm per year. The IGB pipeline is expected to become operational in 2018. In the next stage, a maximum annual capacity of up to 5 bcm should will be achieved. The IGB pipeline will deliver to Bulgaria 1 bcm of gas, which will start flowing through the TANAP / TAP pipelines by transit via Turkey to Greece in 2019.

Future supplies from other sources of gas, such as regasified LNG from Greece and offshore gas production on the shelf of the Black Sea in Romania and Bulgaria, do not have yet certain implementation timelines. All of them can be considered only in the longer term.

South Stream - a way of ensuring access to capacities of gas sources necessary for the hub "Balkan"

The reply to the question of where to get enough gas in order the Bulgaria's hub really acquires a status of regional distribution center, is suggested by many tens of thousands of pipes stored at the ports of Burgas and Varna, which were originally prepared for the South Stream project. As was known, the two lines of that pipeline had a planned annual capacity of 32 bcm that would be enough to raise of the Bulgaria's hub operations up to the expected level.

Nevertheless, as practice usually proves, just only political declarations and public expression of desire is not sufficient to make anything like that happen. The revival of the South Stream project would require certain actions and decisions obviously not only at the level of the European Commission, but also in Bulgaria itself. For example, to demonstrate serious intent with regard to the South Stream Bulgaria also should reform its domestic energy act, especially since it does not comply with European law.

Two contenders to gas from Russia

Turkey is still counting on imports of gas from a terminal, which is being built on the Black Sea coast of Russia. Despite a dramatic deterioration of relations between Turkey and Russia, anyway the former has not given up its plans to enlarge gas supplies by means of Turkish Stream pipeline.

All Ankara's attempts to arrange replacement of Russian gas have not, as of yet, yielded tangible results. President Recep Tayyip Erdogan's visit to Turkmenistan where he held talks with President Gurbanguly Berdimuhamedow ended in nothing. It was assumed that the Turkmen gas would go to Turkey via Iran, although the existing infrastructure is not sufficient for transit of large volumes. Meanwhile the continued political tensions in the region disrupt these plans. In December, Tehran even halved existing supplies of gas to Turkey, referring to the increase in domestic consumption due to the harsh winter.

Thus, both Bulgaria and Turkey are contenders to Russia's gas. In this regard, returning to the question about the reasons of the working visit of Prime Minister of Turkey Ahmet Davutoglu to Sofia it can be assumed that it could be an attempt to persuade Bulgaria to change its position on the revival of the South Stream project in return for a promise of gas supplies from Turkey.

As one can see, the ultimate goals of the two countries are very similar. Each of them seeks to ensure new supplies of gas within a reasonable time, without which it would be impossible to realize ambitious plans to take the lead in developing gas transport infrastructure in South East Europe, let alone adequately meet growing needs of their national economies.

Klaus-Dieter Borchardt, director of the EU's Internal Energy Market Directorate, explaining the EU position on that question to the Bulgarian news agency, said that Bulgaria and other countries in the region had been focused on large-scale pipeline projects such as the South Stream and neglected the development of regional infrastructure.

There is no arguing the regional infrastructure is necessary, but precisely in order to distribute gas from these large-scale pipelines, without which it becomes simply useless.

This is well understood in Germany, which intends to secure Nord Stream II despite the fact that several EU countries as well as the USA have taken position against its expansion. The implementation of this large-scale project will provide opportunities for creating a regional gas hub in Germany that will encourage further development of regional gas infrastructure in several EU countries, including Austria and Italy.

Why does the European Commission accuse some member states of too much enthusiasm in promoting large-scale projects and limits its own activity (with the exception of TANAP / TAP) by supporting only a development of regional gas infrastructure? Had our countries not learnt yet that they do not need these regional pipes and underground storages without gas?

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Why have EU countries turned out at the junction with a difficult choice of gas transit partners trying to strengthen security of supplies?
 

In May this year, the European Commission adopted a new European Energy Security Strategy, which was a response to an acute political crisis in Ukraine and emerging threats to security of gas supplies to the EU.

Since then, despite all steps, statements and assurances made by the European Commission, the situation remains complex, not to say that by the end of the year it has worsened. Especially it concerns medium-term prospects for the desirable risk reduction of unstable gas supplies to Europe that are becoming daily less and less optimistic.

It is clear that as we talk about the partners of the EU who are responsible for ensuring supplies, we have to consider countries - gas suppliers as well as countries providing the transit through their territory. They are sharing the responsibility as it takes place within any supply chain. It should be recalled that the European Energy Security Strategy mentioned above completely focused on Russia's role in gas supplies to the EU countries. However, this Security Strategy did not pay necessary attention to responsibility of gas transit countries, especially in the case of Ukraine and those violations of the transit obligations, which has been already committed by that country. However, responsibility of gas transit countries, especially in the case of Ukraine and those violations of transit obligations, which had been already committed by that country, are being ignored in this Security Strategy and it shouldn't.

 

 

 

It is impossible not to recognize that gas transit countries play an equally important role in ensuring the supplies. Transit reliability is similarly essential for maintaining a high level of security of supply. A transit country could be figuratively compared with a drawbridge, which our ancestors were supposed to use often at entrances to medieval castles. They were well aware that even if the road to the castle could be in excellent condition, but such a bridge was out of order or under the control of non-friends, security of supplies to the castle would be a big problem.

The fact that transit countries unreasonably have taken a backseat of the European energy policy regarding security of supply reflects the official position of Brussels encouraged by the transatlantic alliance and some followers among the EU member states. By the way, some of the latter are transit service providers themselves for the EU gas market. As a result, it continues to remain silent on the contribution of transit countries in ensuring security of supply, especially if it is negative.

Supply risks related to gas transit countries in particular Ukraine deserve much greater attention

Ask yourself the question what country is the biggest and the most difficult gas transit service provider to the EU? It would not be easy to find anyone among the active population in our countries, who would not know an answer that it is Ukraine.

A close political association between Kiev and Brussels, constant guardianship of the Ukraine's events under supervision of the Washington Administration, recurrent "winter gas packages", etc., all together it serves the PR-campaign creating an image of Ukraine as an absolutely important and, it might even seem, an irreplaceable transit country for supplying gas from Russia.

There are, probably, those among us who could not at once name another transit country for Russian gas. It is Belarus, through which European consumers, especially in Poland and Germany also receive big volumes of gas from Russia. In 2014, Russian gas transit through the territory of Belarus will amount to 45.4 bcm. What is more, unlike Ukraine, this transit route is surely quiet - there are neither problems, nor PR actions relating to the Yamal–Europe pipeline in Belarus. As the phrase goes, "Good business does not go on amidst the hustle and bustle".

However, this expression is not about Ukraine, where shocking news around economic reality and business relationship appear to be very common. Firstly, one may recall that now Kiev refuses to repay sovereign debt by 3 billion USD to Moscow.

Secondly, three months ago, Ukraine and Russia signed a protocol ensuring supplies of gas to Ukraine at market prices for the entire winter season until the end of the first quarter of 2016. It is very important for the security of supplies of Russian gas via Ukraine to the EU. With that in mind, the European Commission acted as a mediator in the multiple dispute-settlement talks that had started long ago in March 2015. Nevertheless, within only two months of signing this agreement, on November 25 Russian company Gazprom stopped supplying gas because company Naftogaz of Ukraine did not pay in advance for the deliveries as it was envisaged by the winter deal. Although under this trilateral agreement, Russia reduced the price it charged Ukraine to the same level granted to neighboring countries, from 251 USD per 1,000 cubic meters to about 230 USD.

In this regard, news agencies quoted the head of Gazprom A. Miller, as saying that "Ukraine's refusal to buy Russian gas threatens a safe gas transit to Europe through Ukraine and gas supplies to Ukraine consumers in the coming winter."

The incident underscores the fact that now the most significant threat to European consumers is embodied in transit risks via Ukraine, but not in the risks relating to the initial supplier. Obviously, even that may be insufficient just to recognize the important role of the risks associated with the transit of gas. It is necessary to judge accurately transit risk levels equally but not lower than risks associated with initial suppliers of gas. Transit risks should not be ultimately ignored (or substituted for some others) while selecting routes of important energy flows to the EU countries.

This observation has meant the necessity of giving separate consideration to both lines of action directed towards ensuring diversification of gas supplies declared by the European Commission including initial gas suppliers and gas transit service providers or gas transit routes.

 

The European Commission still has been putting in place quite modest actions to diversify gas supply routes

In fact, there is only one project in the medium-term plans of the European Commission to create outside the EU a new transit route for gas supplies to Europe. It is frequently mentioned TANAP - the Trans-Anatolian Natural Gas Pipeline (Trans-Anadolu Doğalgaz Boru Hattı in Turkish) from Azerbaijan through Georgia and Turkey to Europe planned in 2019 to add to the EU imports 10 bcm of gas, of which 8 bcm will be intended for Italy and one each for Greece and Bulgaria.

 

A continuing cause of concern is a relatively small capacity of this project in comparison with the volume of gas consumption in the EU. Although TANAP project is considered as a part of the South Gas Corridor, which in the future would be able to provide opportunity of delivering to Europe gas from the Middle East and Central Asia. Nevertheless, it is also admitted that there are still so many interlocking political, economic and technical challenges to be solved achieving these goals. Perhaps it will take even more time to erase most of them than to fulfil the long awaited expedition to the Moon.

It is important that TANAP / the SGC opens a new page in relations between the EU and Turkey, which is going to play the role of one of the leading gas transit service provider to Europe.

Many citizens in the EU countries have recently found out how Turkey has been actively preparing for the role of a transit country when sudden waves of refugees overflowed Europe with the direct Turkish assistance that led many of us here to unpleasant consequences interfering much of a usual way of life.

According to the International Organization for Migration (IOM), this year more than a million migrants and refugees came to Europe. To have a clearer perception of the scope and the depth of this humanitarian crisis it is worth reminding that, in 2014, before the refugee mass exodus into Europe, for example, in Austria number of people with migration background had already accounted for an average of 1,715 million that was 20.4% of the entire population.

Apparently, it is not a proper place to delve into such a dramatic and highly sensitive issue. But, the question that arose consequently: why should not this humanitarian transit have been mutually agreed upon between the EU and the executing country - Turkey?

The practical implication of this was that now almost anyone in Europe hardly would doubt that a poorly controlled transit of migrants and refugee without proper mutual guidance through Turkish territory became a bad prologue to Turkey's introduction as a future gas transit service provider. In other words, this situation reveals that in addition to Ukraine in future the EU may have to include Turkey in the list of difficult gas transit service providers. Indeed, despite some undeniable differences these countries have a great deal in common.

Why does the European Union place itself in a vulnerable situation acting of its sovereign will to make a choice between difficult gas transit service providers?

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Why are investors afraid of losing money in the Ukrainian gas transportation triangle?

 

Winter is coming and it might aggravate again seasonal energy concerns in Europe. In recent years, such an event as tripartite talks between the EU, Russia, and Ukraine on the security of gas transit through Ukraine's gas transport system became a harbinger of the approaching winter season. In 2014 after seven rounds of difficult negotiations, moderated by Günther Oettinger, the former Vice-President of the European Commission, yielded finally a trilateral protocol, agreed by Russia and Ukraine that secured gas for Ukraine and ultimately also for Europe.

 

This year, on September 25 after several rounds of negotiations spanning a number of months, once again Brussels, Moscow and Kiev signed the protocol on the terms for gas supplies from Russia to Ukraine in the period from 1 October to 31 March 2016, which should safeguard the security of gas supply to Europe in the coming winter. As the Vice-President of the European Commission responsible for Energy, Maroš Šefčovič commented: "The agreement on the terms of the new Winter Package is a crucial step towards ensuring that Ukraine has sufficient gas supplies in the coming winter and that there is no threat to the continued reliable gas transit from Russia to the EU".

Yet everyone would now seem to agree that conducting multiple round negotiations ending after midnight is becoming a new pre-winter tradition in Brussels, as the trilateral agreement achieved with such complications is temporary, and it will be repeatedly needed to go through these hard times.

Moreover, it may happen even earlier. On November 25, only two months after the two countries reached an EU-sponsored agreement Russia stopped gas shipments to Ukraine because Kiev had not paid in advance for future supplies.

In the meantime, the European Commission is trying to behave as if nothing can happen and it seems resigned to the fact that the problem of Ukrainian transit will continue to hang over Europe in the future. It is also reflected in the report submitted by the European Commission on the Energy Union development in particular stating that "it is in the interest of all parties that Ukraine remains an important transit country".

Thus, Europe should expect new episodes of this long-running diplomatic serial devoted to trilateral gas talks and "seasonal packages." However, the allegation that there are "the interests of all sides" - is an obvious exaggeration. Furthermore, taking into account the real situation in the Ukrainian economy as a whole and in its gas transport sector, in particular, the expression "remains an important transit country" looks like an attempt of no more than wishful thinking.

In fact, there is nothing new in that Brussels would like Ukraine to keep up a role of "an important transit country". The question that arises then, is what the European Commission has actually made in that respect, more importantly, what has been done by Ukraine itself in order to remain in a position of major transiter of gas, which the country obtained in Soviet times?

With regard to the EC actions, they are clearly aimed at hindering Russia's plans to diversify routes of gas deliveries to Europe, which envisaged the construction of new gas pipelines, and at compelling its largest gas supplier to use further the Ukrainian transit route.

"If you look at the construction and plans of gas pipelines, one of the goals is to make the Ukrainian transit system less relevant, or to cut off supplies through Ukraine completely. This would have very negative consequences for energy security in Europe, because the Ukrainian transit is very important, it is the largest, at 140 billion cubic meters per year," said Vice President for Energy Union Maroš Šefčovič speaking to journalists.

Thus, as it is argued in Brussels the rejection of the gas transit through Ukraine would result in a threat to Europe. However, all one has to do today is just to take a look at the overall condition of the Ukrainian transit and to be sure that such political statements motivated by a desire to present the plans of Russia as a threat, but in fact it turns out the other way around - this particular gas transit through Ukraine is becoming a major threat for European energy security. And those who suggest otherwise would much rather to come down from heights of the Brussels political Olympus to the ground and, more specifically, directly to the Ukrainian gas transportation system (GTS).

Try to find an excuse why a very alarming issue concerning current technical condition of the Ukrainian GTS is deliberately left behind the scenes of forward-looking policy of the European Commission, not to mention the need to modernize its management systems.

Let's see if this is indeed the case as the legend about an Austrian soldier Sigismund of Altensteig says: "That's where the Shoe pinches!"

In September 2014 the Institute for Economic Research and Policy Consulting from Berlin published the results of its study "Improving gas transmission network regulation in Ukraine by implementing Energy Community rules - a tailor made proposal", the main conclusions of which begin with the following phrase: "Gas transit through Ukraine … are decreasing. The pipeline system is ageing and the current regulatory framework does not meet the European standards". It is an objective reality that is reflected in long-term decline in the share of Russian gas transit to Europe through Ukraine, represented in the figure below.

 

In the last five years from 2010 to 2014, the share of Ukrainian transit in Russia's gas deliveries to Europe has fallen by one third from above 60% to a level under 40%.

The physical volumes of gas delivered through Ukraine to Europe have also declined together with the share of Ukrainian transit. In 2014, Ukraine transported to Europe by one third less Russian gas than in 2013 - only 59.4 bcm. In 2013, Russia's gas deliveries through Ukraine to Europe amounted to 83.9 bcm. Before that there was a significant decrease in volume of gas in 2012 - 81.2 bcm, as compared to 104.2 bcm in 2011.

It cannot be overlooked, however, that in the recent decades an annual volume of Ukrainian gas transit has never been even close to the level of 140 bcm, although Vice-President Maroš Šefčovič suggests that Europeans can count on this transit potential. The projected capacity of the Ukrainian GTS at the exit to Europe actually amounted to 142,5 bcm. But in practice according to Ukraine's company Naftogaz, the fluctuations of volumes of gas transit to Europe in 1991-2014 ranged of 92.9 (1992) up to maximum level of 121.5 (2005) bcm.

Ukrtransgaz (subsidiary of Naftohaz) has predicted that gas transit through Ukraine to Europe in 2015 will account for 65-66 bcm. Nevertheless, everybody has to be borne in mind that the consumption of Russian gas in Europe imported via Ukrainian transit will be actually less because of the reverse operations. After crossing the border of the EU, part of the gas is returned back to Ukraine. There are several points facilitating a reverse flow near the border of the EU and Ukraine. For example, in September 2014, Slovakia upgraded a pipeline to supply reverse flows to Ukraine. The link runs from the Vojany compressor station in Slovakia across the border to the western Ukrainian town of Uzhgorod and has a capacity of 14.5 bcm per year.

It would be unnecessarily to say that gas consumers in Europe unlikely noticed a weakening of transit flows through Ukraine shown in the figure above, because gas supplies to Europe were redirected bypassing Ukraine's GTS on other routes particularly via Nord Stream pipeline under the Baltic Sea. The colors on the figure above indicate gas volumes imported by the EU over different transportation routes from Russia. They demonstrate how diversification of gas-supply routes to Europe has been changing during the recent years that, as we know, is of great importance for security of supply.

The position of the Ukrainian GTS is worsened also because, according to various estimates, the sharp decline in the transit volume led to Kiev has already lost about a billion USD of transit revenues. Besides it has long been discussed that if the transit flows to Europe fall less than 60 bcm, the profitability of the Ukrainian GTS will be in question.

The prospect of losing the transit market is more than real and very painful for the Ukraine's economy. The current contract between Gazprom and Naftogaz for gas transit to Europe will expire in December 2019.

In that context, it is appropriate to recall that the contracts on gas supplies to Ukraine and gas transit to Europe for 2009-2019 were signed on January 19, 2009 after the severe gas crisis, which as many still remember, was accompanied by gas cuts in Europe. At the beginning of January 2009, a total of 18 countries experienced a drastic reduction in gas supplies through Ukraine. For example, from January 6 in Austria and Italy deliveries dropped by 90%, and from January 7 in Slovakia and Slovenia by 100%, etc. It would be difficult not to recognize that in this critical situation the existing diversification of gas supply routes from Russia bypassing Ukraine revealed its advantages, when despite gas supplies via Ukrainian transit was shut off in Germany by 100% and in Poland by 90%, imports to these countries continued since it was forwarded on other pipelines through Belarus. The same happened in Turkey where the increase in imports of gas through pipeline Blue Stream under the Black Sea compensated for a reduction of transit deliveries from Ukraine.

The absence of a new contract for the supply of gas to Ukraine in 2009 and Ukraine's debt for gas delivered in 2008, which had reached 2.4 billion USD, was a trigger for that conflict. At the same time, Ukraine was accused of siphoning off gas from its GTS destined to be imported to Europe.

As is known, this year Russia announced that it would not extend the transit contract with Ukraine on disadvantageous terms. Apparently, the European Commission now does not rule out that Russia will fulfill its intention not to renew the transit contract after 2019. There are extensive actions in the EU that can be considered as preparations of the European Commission for such a scenario. The European Commission promotes the TANAP pipeline, has given Project of Common Interest (PCI) status to three other infrastructure projects including Eastring pipeline from Slovakia to Bulgaria, Tesla pipeline from Greece to Austria, and the Bulgaria — Romania — Hungary — Austria bidirectional transmission corridor (currently known as "ROHUAT/BRUA"), not to mention the forthcoming LNG plans. All of these steps taken by the Commission may be considered for certain as the preparation of alternatives in case of closing of the gas transit via Ukraine.

It is not surprising that the European Commission is trying to insure in such a way against uncertainty in the Ukraine crisis. To date, there are no indications that Ukraine itself is able and willing to make constructive efforts for saving the gas transit to Europe after 2019. In fact, the urgency of the problems led to the crisis in the Ukrainian transit has not been alleviated, but on the contrary, it has considerably worsened over the years since the severe winter test in 2009. Ukraine's debt have increased, but the state itself officially declares its persistent insolvency.

At the moment two months after signing the winter package Russian company Gazprom has stopped gas supplies to Ukraine on 25 November since Kiev had yet to pay in advance for future supplies. Ukrainian economy is on the lowest level ever and is experiencing an unprecedented growth of corruption. According to more than optimistic analysis made by Fitch Ratings, in 2016, Ukraine's economy can increase of only 1 percent and in 2017 - up 2.3 percent; given that the factors caused the deep recession in 2014-2015 remain unchanged.

Everything indicates that the attractiveness of Ukraine as a place of investment now is close to zero. Therefore, this country has no any option but to rely on sovereign debt restructuring, as well as the miraculous appearance of foreign investors. It is necessary to mention that the World Bank, the European Investment Bank, or other politically engaged moneylenders far removed from private business and social interests are hardly possible to include.

Since last year, Ukraine has been trying to sell nearly 50 percent in its GTS to EU and U.S. but Western buyers are not willing to rush to take up the offer realizing that the system's value depends on a steady supply of Russian gas. They prefer to keep watching over political twitches and twirls within the gas transportation triangle EU-Russia-Ukraine from outside.

It would be logical to assume, therefore, they do believe that if their business ships fall in that kind of the Triangle right now... as you also know their crews will be at unreasonably high risk of being lost.

So it is no wonder that there are no signs of new private foreign investors in the Ukrainian gas transport system. Nobody would like to be at risk of disappearing in the Ukrainian gas transportation triangle.

Why are our policymakers in Brussels, in spite of everything, still attempting to preserve a worn-out Ukrainian gas transportation system as some sort of political relic?

And that is important, who will ultimately have to bear these expenses?

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Why do calls for diversification of European gas supplies divert attention from the financial interests of energy consumers?

When you are struggling to pay growing gas and electricity bills, about whom would you first think? Probably most often you are thinking about a rise in prices and your relationship with energy supply companies. It is unlikely that in this case you are more concerned about the changes in the global energy market and the current development of the global energy policy.

Of course, nobody doubts that there is a link between what is happening in these global spheres and the retail price of gas for heating systems in our homes. However, practically such an impact of the processes on a global scale does not look like those, which in our view should be according to the fundamental market laws.

Therefore, it is worth seeing the facts and trying to understand how, figuratively speaking, "messages" from the world market and the sphere of energy geopolitics really reach our energy consumers' finances.
Such an unprecedented strong "message" is the steep fall of oil prices, which became one of major events in the world development. According to “The IEA Oil Market Report”, oil prices sank to six-year lows in August 2015 as a supply overhang grew and concern deepened over the health of the global economy, especially in China. As before, oil prices were affected by high volatility, and the Brent crude oil traded in September slightly above 48 USD per bbl. and NYMEX WTI at 45.20 USD per bbl.
The fall of oil prices carries manifold implications. Low oil prices are said to be the key reason for the financial market instability, outflows from the energy sector and other harmful effects. It is nevertheless obvious that a significant decline in oil prices should bring tangible benefits to end users of energy.

Meanwhile media companies focused on seeking to confirm the existence of those benefits. For example, early this year the BBC News published an article "Oil price falls: Will consumers benefit?" The author noted that, in fact, adequate benefits could be hardly expected. He compares figuratively the price fluctuations in the market with launching missiles and falling feathers. “The cost of petrol and domestic energy are said to rise like a rocket when the oil price goes up”, he wrote. “However, the claim is that they only drift down slowly, like a feather, when the oil price comes down…”

In the EU gas market even the "rocket and feather" criticism is not sufficient to describe actual distortion of pricing in gas supply chain from production to end consumers.

It is well known that gas imports by pipelines strongly prevails in gas supplies in many EU countries. According to "BP Statistical Review of World Energy June 2015", natural gas was imported into Germany in 2014 exclusively by cross-border pipeline amounting to 85.0 bcm. Italy's imports of pipeline gas totaled 46.9 bcm of gas in 2014 and only 4.5 bcm in the form of LNG.

A distinctive feature of the pipeline gas trade is that many gas contracts are long-term covering periods up to 20 years. It is particularly important that prices in these contracts have commonly been linked to oil prices. European contracts use mixes of oil products or crude oil and usually include review clauses, specifying that either side can request a review – typically after three years.

Linkage of long-term contract gas prices to those of oil is based on price competitiveness of two main kinds of fossil fuels that end-users should have a real choice between burning gas and oil products, and would switch to any of them if given a price incentive to do so. An alternative is hub-based prices that have not been so widely used in Europe yet and they are applicable in general to other types of contracts and in other world regions.

There is no doubt that what it is written in the contracts of our European companies and their foreign partners - providers of gas to the EU are strictly observed and as a result due to oil prices decline import prices of natural gas have also moved downward with a certain time lag, usually from 3 to 6 months.

Despite these changes "Eurostat" data of the Figure 1 below shows that the decline in oil prices has not had adequately impact on the retail gas prices for domestic consumers in the EU. Brent has shown long dramatic decline since 2012 while the EU-28 average gas prices for domestic consumers continued to grow with some seasonal fluctuations.

So what is the reason, you may ask, behind the fact that oil prices has been falling, and contractual prices for gas imports follow the trend with a time lag, but average retail prices for gas in the 28 EU member states do not respond properly?

The point is that one of the main reasons for these inconsistencies is reduction of the relative share of gas cost in retail price. So what do citizens of the EU have to pay for?

Actually, besides the cost of gas there are another two components in retail price: one is network costs related transmission and distribution infrastructure costs and the other - taxes and levies. In 2014 the European Commission published a working paper "Energy prices and costs in Europe", which analyzed the changes in the structure of gas retail prices for households and industry in the EU for the period from 2008 to 2012. In particular, it is noted that the energy cost element is generally the largest, though its share is diminishing. At the same time on average for the EU the network component for households has risen within only five years by 17% and taxation went up by 12-14%.

According to "Quarterly report on European gas markets" (vol.8, issue 1; first quarter of 2015) published by the Directorate-General for Energy within the European Commission, the retail price has the following structure: on average, 50% of the price covers the gas itself, while the other half covers distribution/storage costs (25%), energy taxes (9%) and VAT (16%). However, there are significant differences across Member States.

Let's consider the calculation of the Figure 2 below made for 15 EU countries on the basis of data of «Eurostat» and one of main suppliers of gas to Europe, Russia's Gazprom. This calculation shows that the share of gas cost in retail price varies widely by country - from 31% in Italy and the Netherlands to 92% in Romania. Meanwhile, in this case, the average share of gas cost also amounted to about 50% as in the above-mentioned "Quarterly Report on European Gas Markets". As you can see, on average, a half of the retail price is intended for paying for imports of gas and the other half - for services provided by our local gas distribution companies and taxes. Moreover, as the Figure 2 shows, revenues in the EU countries - leading importers of gas have been impressive. In 2014 Germany imported 40.3 bcm of gas from Russia obtaining by those means about 19 billion Euro, while Italy's import of gas accounted for 21.7 bcm and revenues - almost 16 billion Euro

 It is not a random choice of gas supplies from Russia. Сommissioner Arias Cañete emphasized at the European Parliament Plenary in Strasbourg on 7 October 2015, that the EU still imports around a third of its gas from Russia. In his opening remarks Commissioner Arias Cañete also said, “We would like to see Russia as a reliable supplier of natural gas in future; but we would also like to see that the transport of Russian gas fits into our diversification strategy”.

The question that arises then given the facts presented above what do you think Brussels should remain focused on implementing the EU energy policy in favour of end users of gas and their current well-being?
On the one hand, no one denies that the diversification strategy is aimed at protecting the interests of gas consumers in Europe, as it should serve to strengthen the guarantees of security of supply. It should also then be recognized that Russia also is fulfilling, as if in line with the wish of the European Commission, its own strategy of diversification of supply enhancing the existing gas pipeline network to the EU by launching new projects Nord Stream 2 and the Turkish stream.

But on the other hand, we may wonder whether it is impossible at the current diversification of supply, which allows our countries to make good money from gas imports, to maintain reasonably justified level of retail prices, consistent with global trends? In other words, geopolitical aspirations initiated by Brussels and their transatlantic allies should not overshadow and override vital financial interests of the Europeans.

Why is it hard to provide gas consumers with guarantees that the energy policy of the European Commission does not leave aside the issue of an unjustified level of retail prices and does have a positive impact on the financial well-being of EU citizens?
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Can it happen that the Turkish Stream pipeline will be implemented only by half? Why?

In December last year, Russian President Vladimir Putin and his Turkish counterpart Recep Tayyip Erdogan agreed to build a gas pipeline, known as "Turkish Stream". As is well known, this pipeline should be built in place of the canceled “South Stream” under the Black Sea through Turkey to the border with Greece.
Turkey enthusiastically embraced the initiative of Russia. “Turkey and Europe will be taking as much gas as they need, this means Turkey will serve an energy hub for the entire region”, President Erdogan said at an oil and gas sector workshop in December in Ankara.

After ten months, it becomes clear that there is the frustration of many regarding the negotiation process, as it has gone on for too long. In all that time passed since the official launch of the project “Turkish stream”, the parties have not yet signed an Intergovernmental Agreement (IGA) to formalize what was agreed at the highest level in December. It has already given rise to a wide speculation for mass media and expert community about the prospects of the project implementation and even its inexpedience for Turkey.

Yet logic suggests that the remarks stating that the project is not even profitable for Turkey clearly look false. Obviously, Turkey will be able to obtain from the “Turkish Stream” both economic and political benefits. Apart from meeting the growing demand for gas in the Turkish domestic market, the economic attractiveness of the project is ensured by possibility of obtaining annual payments for gas transit services to the border with Greece. “Turkish Stream” onshore section is 180 km. With a total capacity of gas supplies of 47 bcm, transit payments received by Turkey will amount to about 250 million USD per year.

Along with such revenues, there are political benefits that entails the growth of Turkish influence in both the Balkans and the EU although it is difficult to quantify them.

Of course, multi-billion-euro international projects are not organized "overnight," and haste would not be productive at all, if it is necessary to achieve an acceptable balance between the interests of both parties. However, there is another kind of balance in the basics of business philosophy which is characterized by the expression "time is money", attributed to Benjamin Franklin. It is considered an axiom that the loss of time is equivalent to the loss of money. In other words the attempts to mark time in order to induce more benefits to their advantage, increasing the risk of losing at least part of their interests and capabilities.

Following this logic in relation to the project "Turkish stream," it can be assumed that 2015, especially its first half, in the future will also be called as the time of missed opportunities when the process of decision-making and bilateral agreements on the project has been suspended.

As a result, if you are keeping track of developments, you know that in September Gazprom officially announced about the postponement of the "Turkish stream" launch, as it is not feasible to put into operation the first string in December 2016, as originally planned.

The political crisis in Turkey, where after the elections in June, the ruling party failed to form a new government, is used as a reason of the delay. Under the circumstances, the signing of the IGA will be possible only after the early parliamentary elections in November and the subsequent formation of a new government in Ankara.

Nevertheless, this is not the only reason for the postponement of construction plans, since the IGA could have been inked earlier in the first half of the year before the beginning of the political crisis. Other reasons are caused by the desire of Turkey to use its position in negotiations with Russia, because, as it seemed, Russia had no other alternatives to developing a new route of gas supplies to Europe in replacement of the canceled “South Stream”.

Upon the statements of high-ranking officials in Ankara, Turkey continues to insist on granting with no delay a discount over prices of Russian gas. Initially this discount was part of last year's agreement between Moscow and Ankara over the construction of the “Turkish Stream”. President Putin, during his visit to Turkey on December 1, said that Russia is ready to give a discount of 6% for the supplied gas. In the course of further negotiations, the Turkish side held out for a higher discount, supposing that it should be not less than 10.25%. According to Reuters, the talks between Ankara and Moscow on the construction of the "Turkish Stream" were suspended in late July due to the lack of a key agreement on a discount. Looking back, most likely, if the IGA had been signed before the political crisis, then the discount would also have been approved.
Besides that, Turkish Minister of Energy Taner Yildiz said that Turkey would like to sell itself gas from the Turkish stream. It means that Turkey wants to buy Russian gas at its border and then to carry out its own sales to the EU.

A similar story had already taken place in Ukraine, where Kyiv twice in 2009 and in 2014 declared its desire to buy gas at the border with Russia and sell it on their own to Europe. Russia did not accepted the Ukrainian initiative. There were no enough supporters of the Ukrainian initiative in the EU either, because obviously it is contrary to the European principles of gas trade, aimed at restricting the activities of intermediaries and resellers.

No doubt reselling of gas by Turkey for supplies to Europe would lead to an increase in prices and pose an additional financial burden on our European consumers. So it is unlikely acceptable and it seems to be widely understood in Turkey, especially, in light of Turkish declarations to enter the European Union and to join the European energy legislation.

Alongside with the reasons for changes in the construction schedule of the “Turkish stream”, it is interesting to be aware of its implications.

Turkey's attempts to squeeze more preferences in exchange for further promotion of the "Turkish Stream" project and an indefinite prolongation of talks has led to the fact that Turkey's plans to become one of major transit countries for gas supplies to Europe now are losing a solid ground.

Russia has reacted to such walking of Turkish partners at a tardy pace by means of a new step in collaboration with partners in Europe. Early in September, the Russian gas group Gazprom signed a shareholders' agreement with BASF/Wintershall, E.ON, Engie, OMV and Shell to build “Nord Stream 2” pipeline system to increase gas supplies to the EU. The new project company “New European Pipeline AG” for the construction of the “Nord Stream 2” has already been registered in Switzerland with a share capital of 1 million CHF. The “Nord Stream 2” project envisages the construction of two offshore pipelines with the aggregate annual capacity of 55 bcm of gas to be installed from Russia to Germany through the Baltic Sea and its implementation has been targeted by the end of 2019.

Now, let us recall that under Gazprom's plans, the “Turkish Stream” pipeline will be split into four offshore pipeline strings with a total capacity of 63 bcm a year. The laying of the first string was planned to start in mid-summer this year, and complete the construction of all four strings by the end of 2019.

At the same time with public announcements regarding the project "North Stream 2", there were reports that "Turkish Stream" can be reduced up to two strings. Meanwhile Moscow sent two offers to Ankara relating to the “Turkish Stream” project, apparently showing readiness to untie a negotiations jam regarding the pipeline for gas deliveries to Turkey. Russia’s Energy Minister Alexander Novak said that Moscow is ready to sign an IGA for the construction of one string of “Turkish Stream” that will supply gas for the Turkish market only which is to take about 14 bcm. A separate IGA can be concluded for the construction of pipes 2 to 4, which are projected to carry gas to the EU via Turkish territory. Obviously, the final number of the offshore pipeline strings will depend on the readiness of Turkey as well as demand for gas in the Eastern European countries. It does not clarify how much the new initiative on the “Nord Stream 2” would affect this decision but anyway it occurs.

The whole world witnessed how our European companies once again demonstrated their business acumen, and how Germany is seizing the initiative from Turkey to receive a new powerful stream of Russian gas and new opportunities for transit services.

It is important that significant volumes of gas from the "North Stream 2" can be intended for consumers who expect to receive it through the "Turkish stream." This is especially refers to Italy, since the end point of the "North Stream 2" on the Baltic Sea coast near Greifswald is much closer to Baumgarten where the biggest import and transfer station for natural gas is located in Austria. The currently effective contracts with Italian companies stipulate Baumgarten as the natural gas transfer station. Naturally, a shorter route of gas supplies is more attractive because it allows reducing the transportation costs and favorably affects the utilities prices.
Thus, if the "Turkish Stream" remains only with two instead of four strings of the pipeline, Turkey will have to say goodbye to the expectations of the large transit incomes, which in this case will accrue to Germany and Austria, as well as with a challenging opportunity of being one of major transit countries for gas supplies to the EU.

It is said that a well-known, especially in business circles, proverb "strike while the iron is hot" perhaps came to Europe from the old eastern folklore. Maybe so, because, in fact, this common saying, which sounds as an abstract from an instruction for business, can be found online in Turkish language - «Demir tavında dövülür».

Meanwhile, the question is still open: why this time is Turkey missing to take advantage of their native saying while Europe really makes that?
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Why does Europe need at last to open its eyes to Russia’s intentions and to believe that the Turkish Stream project will be realized?

Global intelligence company Strategic Forecasting Inc. (Stratfor) certainly could not be suspected of loyalty to the Russian initiatives and projects. Stratfor makes economic and geopolitical outlook for large corporations and the US government agencies on the basis of information gathered from official sources and through their own channels. Their analytical information, naturally, intended for the needs of their main customers. So anyone would hardly doubt that Stratfor' work is definitely committed to the interests of the country, in particularly, aimed at restraining Russian energy projects in Europe by any means.

However, recently Stratfor probably has surprised everybody with a degree of objectivity of their analytical article about the Russian-Turkish relations and the Turkish Stream gas pipeline project posted on their website under the title “Russia Carries On With Turkish Stream Pipeline”.

The main arguments of Stratfor analysts lead to the fact that Russia and Turkey will be able to obtain substantial benefits by building a new gas pipeline in spite of all possible political tempests that are likely to be created by Brussels and Washington to prevent further the construction of this gas pipeline.

Stratfor analysts give particular attention to a firm position of the Russian energy company Gazprom, which plans to start constructing the underwater part of the Turkish stream pipeline in June, regardless of whether or not the project will be able to overcome the political obstacles in Europe. In relation to such a prospect, Stratfor notes that Russia has resumed a contract with Germany's company Europipe for 150 thousand tons of pipe for the project. In May, Gazprom  also notified a subsidiary of Italian energy company Saipem, that it could begin laying pipes for the planned pipeline in the Black Sea.

Two giant energy construction vessels Castoro sei and Saipem 7000 passed through Bosphorus to the Black Sea already at the end of last year to take part in the South Stream project, as shown in the photo. It is important that the underwater part of the Turkish Steam will run mostly along the same route as the proposed South Stream project, which was scrapped last December after the EU objected on the Third Energy Package grounds. Thus, the resources attracted by Gazprom for the South Stream with the minor costs are to be redirected to the Turkish stream.

Stratfor analysts also reminded that Gazprom had informed Europe about the plan to cease using its current export route through Ukraine in 2019 and would shift those natural gas supplies to the Turkish Stream pipeline. “But the Europeans – as indicated in the article - believe Russia will not follow through with its plans if Europe does not build the infrastructure necessary to deliver gas from Turkey to the markets currently serviced by the Ukrainian route”.

Actually, it is high time now for Europe at last to believe that the Turkish stream capacities will be in demand even if Brussels is going to continue restrictive policies, and European countries do not build a gas transport infrastructure from the border with Turkey. In this case, Gazprom can rely on the future expansion of the Turkish market, as in the next 10 years the demand for blue fuel in Turkey will rise up to the capacity of two lines of the planned pipeline. It means that demand for the Turkish stream gas will be in any case, even if Brussels keeps the policies hampering access of South Europe countries to Russian gas.

Meanwhile, clearly showing its intentions, Gazprom has presented the Turkish Stream project at the World Gas Conference, held in Paris and declared Reuters its plans to begin construction later in June.
According to the presented information by 2020 the 1,090-kilometre pipeline project, including 180-kilometre of onshore part, is planned to deliver 63 bcm (2.2 tcf) of gas a year to Turkey, of which 47 bcm (1.7 tcf) will be intended for Europe.

Indeed, if Europe does not open its eyes to the obvious situation and does believe that Russia is willing to build the Turkish stream, then unnerving challenges will await Europeans after 2019. Because Brussels's politicians just is restricting access of the Southeast part of our continent to energy, especially if we take into account the Russia's intention to stop the  gas transit through Ukraine in 2019.

Then what are Europeans to do with their future energy needs while, unfortunately, some South East European countries still remain in a state of energy poverty?
Why can it happen that the European consumers will be forced to use more expensive LNG, or even worse, liquefied shale gas from the US?

Why may the shale gas promised by the US to Europe be non-competitive?

Brussels' hopes on the production of shale gas in Europe as a new alternative source to meet growing needs in energy are weakening before our eyes. Attempts to extend the US shale boom in Europe do fail, demonstrating fiasco of the Washington's intentions to make Central and South East Europe independent of Russian energy.

The Wall Street Journal wrote back in March that Chevron, Exxon Mobil and Shell almost completely stopped exploratory drilling for hydraulic fracking in Europe. Chevron stopped its last European fracking operations in Romania in February. Shell reduced world-wide shale spending by 30% in a number of countries including Turkey, Ukraine and Argentina. Exxon withdrew out of Poland and Hungary, and suspended its German fracking operations.

However, the EU continues to hope, if not for development of shale gas production in Europe, then at least for imports of shale gas from the US in the form of LNG. These high expectations are inspired by the impressive performance of the US shale gas industry.

According to the U.S. Energy Information Administration (EIA), presented in the chart above, currently only four countries in the world - the US, Canada, China and Argentina - have driven the development of shale deposits up to commercial production levels. The absolute leader in the production of shale gas is the United States.

According to Reuters, the total U.S. gas production has increased by 43 percent from 51.9 billion cubic feet per day (bcfd) in 2005 to a record 74.4 bcfd in 2014. The EIA expects gas output to reach 78.4 bcfd in 2015 and 80.0 in 2016.

These optimistic estimates diverge from the views of many experts, who assert that further growth in shale gas production is possible only in case of a stable oil prices rise on the global market. In reality, however, U.S. crude futures CLc1 (Crude Oil Front Month Futures) decreased by 46 % from the level of more than 107 USD in June 2014 down to USD 58 at the end of May 2015.

If such a trend continues further, experts expect that it will hinder the natural gas production growth. This is indicated by the Genscape Inc. data, which predicted a reduction of daily production of shale gas by 1.1 bcfd in the US next year.

Bank of America Merrill Lynch also expects the decline in production of natural gas in 2016 in the US. According to the Bank's forecasts, the reduction will amount to 1.3 bcfd by slowing down the production of shale gas from deposits in Marcellus and Utica under the influence of falling LNG prices by 50%, which in turn are linked to oil prices.

It is obvious that the expected reduction in the production of shale gas will not be conducive to the development of its exports from the United States.

At the same time, the predicted trend in the production of shale gas in the US is not the only problem in the pursuit of shale LNG supplies to Europe. Another problem is the low quality of shale LNG from the US, which calls into question its competitiveness.

Japanese importers highlight in particular the existence of quality problem of shale LNG from the United States. Their attention and concern regarding this issue is caused by the fact that Japan is going to increase significantly the share of LNG from the US in Japanese imports.

Expert opinion in this country is particularly important because Japan is the world's largest importer of LNG. According to a special report of the EIA published in January 2015, Japan's share in global imports of LNG was 31% back in 2010. On March 11, 2011 a tragic earthquake and tsunami hit Japan. The earthquake destroyed all the off-site and almost all the internal power sources in Fukushima-1 nuclear plant. After that terrible disaster LNG demand in the Japanese market has increased significantly, and in 2014 Japan's share in global imports of LNG reached 37%.

Historically, Japan was among the first countries to import LNG. The first shipments of LNG from the United States to Japan took place in 1969 from gas fields in Alaska. Meanwhile, since then the share of US LNG in Japanese imports has remained insignificant. According to the BP Statistical Review of World Energy 2014, the largest supplier of LNG to Japan in 2013 was Australia (21%) followed by Qatar (18%), Malaysia (17%) and Russia (10%).

In recent years Japan, as well as the EU, has looked forward to importing LNG produced from shale deposits in the United States. However the United States is evidently in no hurry to begin LNG exports. It is well known that American exporters had to obtain approvals from the federal Department of Energy to supply gas to countries, which do not have free trade agreements with the United States. Such free trade agreements are in force with 20 countries but there is neither Japan nor the EU among them. The new legislation should simplify the permitting procedure but its adoption is still pending.

More importantly, the prospects of shale LNG supplies to Japan from the US are overshadowed by the fact that the American LNG is of inferior quality, especially heating content, which does not meet the market requirements.

The report of the Institute for Energy Economics in Japan indicated that “LNG from the United States will be leaner than LNG from traditional producers in the Asia-Pacific region with lower heating content, lighter in gravity, less ethane and propane, and mostly comprising of methane. While a vast majority of Japan's city gas has a standard heating value of 45-46 MJ /(m3), natural gas distributed in the US has only 37.3-40.1 MJ/(m3) on average”.

Japanese experts also argue that low characteristics of the US LNG quality besides the weak competitiveness may cause logistical problems associated with its storage and distribution to consumers. As a matter of fact it will require after regasification to mix the leaner LNG from the US with the richer one delivered by other countries or to create a separate capacity for storage and distribution.

Such a pessimistic scenario of LNG supplies from the US to Japan obviously has to be very symbolic for the EU, where the same problems should be expected.

This is actually important taking into account that in spring the European Commission launched an EU Energy Union to bind the 28 countries into a single energy market aimed at tightening competition.

How in case of the newly formed single EU energy market can the politicians in Brussels count on the successful market positioning of shale LNG from the US, less quality, but more expensive considering the cost of shipping across the Atlantic?

Why should European consumers have to pay for these not economically, but clearly politically-motivated plans recklessly focused on replacing Russian gas with the shale LNG from the US having a lower quality to price ratio than its competitors?