The Ukraine-Russia gas conflicts have a history. Usually the differences have been narrowed down or resolved before the threat of collapse in Europe became imminent. Now there is a big chance Europe will be left without heating in the coming winter.
Ukraine, Russia gas dispute
Since the February coup Kiev has been doing its best to sever ties with Gasprom. The Russian gas deliveries were fully stopped on June 16, 2014. The controversy is to be tackled by the Stockholm Court. Ukraine wants the price to go down to 268, 8 dollars for a thousand of cubic meters. Gasprom insists Ukraine should redeem its debt of 4, 458 billion dollars.
As soon as a hope for reaching an accord appears Ukrainian negotiators use the tactics of bringing the achieved results to naught by putting forward new conditions. For instance, this August Russia offered to return the 100-dollar discount and make the price go down to 385 dollars a ton. In turn Kiev offered to establish two different prices: a winter price of 385 dollars, and a summer price equal to 320 dollars. Kiev had planned to make the offer at the Russia-European Union-Ukraine round of talks slated for September 6. But suddenly it all had been changed just a week before the talks started. Now Ukraine wants the price to be the same as at the spot market minus transit costs. The difference between spot market and long-term contracts prices is significant. The offer is unacceptable. Ukraine also wants the gas terminals be moved to the eastern border. It will make Gasprom reconsider all the concluded contracts with European partners. The forever changing position of Ukraine made the talks stymied.
On September 10 Petro Poroshenko signed a new law on reforming national transportation system. Under the document, the operational and technological control functions are transferred from the state company to an operator that must be approved by the Ministry of Energy and Coal Industry. Operator companies must be those founded and owned only by the Ukrainian state or owned or belonging to residents from the European Union, the United States or the European Energy Community. In this case, the state’s share may not be less than 51%, with the rest to belong to other gas transportation system operators or members of the European network of operators.
On September 12 a new Ukrainian law on sanctions became effective. It allows Ukraine to stop gas deliveries to Europe. Everyone knows what the termination of gas supplies may lead to. The intention to sell the transit system will also entail grave implications. Being the mostpowerful pipeline in the world it starts to lose the importance because of Kiev’s myope policy. In 2007 115 billion cubic meters of Russian gas was transported via Ukraine. It was only 36, 571 billion in the first half of 2014. Even if nothing were changed the total gas deliveries would be 73, 14 billion cubic meters by the end of the year as North Stream has become operational and the territory of Belarus is used for transportation. After the projects are implemented 55 billion cubic meters will be delivered via North Stream, the Yamal-Europe pipeline’s full capacity is 33 billion. The figure is and 63 billion cubic meters for South Stream. It will bring the total capacity to 151 billion cubic meters making it exceed the gas supplies going through the territory of Ukraine in 2007. It is also twice as much as predicted for 2014. The estimates don’t take into account the second pipeline of the route being in the process of negotiation since 2013.
The modernization of the pipeline offered for sale to Europeans requires the investments equal to 19, 5 billion dollars. It makes meaning only in case of stable supplies on the part of Russia. Nobody can say for sure if it would be the case as crisis hits Ukraine.
It a surprising fact that the threats to block the Russian gas transit finds support in Europe. On April 17, the European parliament suspended the South Stream construction saying it wants to reduce the Europe’s dependence on Russian gas thanks to diversification of sources, full implementation of the third energy package and suspension of gas imports if need be. Bulgaria stopped the implementation of the project. European MEPs did not take into account that the termination of supplies would not hit Gasprom only but also European shareholders: Italian ENI (20%), German Wintershall (15%) and French EDF (15%). In case gas deliveries were stopped South Eastern Europe will be hit. Serbia, Moldova, Slovenia, Slovakia and Slovenia depend 100% on the Ukrainian route, it’s 50% for Austria, Greece, the Czech Republic and Croatia, the figure is 40% in case of Italy. No way could the North Stream gas be re-routed to Bulgaria. In the contemporary Europe political considerations often outweigh good sense.Otherwise how can one explain the self-inflicted damage by launching reverse supplies? It has already created problems with gas storage. The storage facilities are only half full in Hungary. Austria and Poland have refused reverse deliveries in favor of their consumers. The decision of Slovakia to supply 10 billion cubic meters to Kiev looks strange. It’s a lot given the country’s size. Slovakian Slovensky plynarensky priemysel said it has received 10% less gas via the Ukrainian route; Polish PGNiG has got 24% less that usually as of September 9. According to Energy Aspects estimates, the gas prices in Europe may increase twice in case Russian gas supplies were interrupted. No matter that the European Union stays on the confrontation course. European energy Commissioner Gunter Oettinger said the price of $485 per 1,000 cubic metres of gas that Russia is demanding was "unacceptable" and not in line with market conditions and determined by politics. Ukraine insists on a price of $268.50 per 1,000 cubic meters. In return for Ukraine making a down-payment, Russia has to give the former Soviet republic a fair price in line with the amount paid by other European countries, he said. "After Ukraine has made a down-payment, we should expect Russia to guarantee a fair offer, a fair price in future." In the medium-term the EU would be affected by Russia stopping delivery to Ukraine, Oettinger noted. Russia supplies around a third of Europe's gas demand and about half of its gas imports from Russia flow through Ukraine. He does not like that the Russia-offered price envisaged the cancellation of export duties. The Russian government’s decision could be altered any time. According to him, the discount does not change the formula of defining the price for Ukraine. He never remembered those who risk to be left without heating in winter.
Shale gas illusions
The European establishment takes the decisions that run counter to the interests of Europeans while the United States goes to any length pursuing the goal of establishing control over the European energy market. US President Obama promises to supply the continent with gas transporting as much as Europe needs. The argument does not hold water. The United States lacks infrastructure for transporting liquid gas, it needs time to do it. The estimates say that all planned 37 infrastructure facilities should be constructed by 2020 before exports to Europe start. According to Fitch agency, with all 37 infrastructure facilities constructed only 68% of European consumer demands would be satisfied. Besides the prospects for shale revolution appear to be exaggerated. According to geologist David Hughes, US corporations have drilled more than 7 thousand wells to generate a 42 billion dollar income while the sales have brought in only 32, 5 billion. British Petroleum has lost 5 billion dollars, the losses of UK BG Group amount to 1, 3 billion dollars and Chesapeake Energy is on the verge of bankruptcy. In 2013 there was not a single well to bring profit in the United States. In his book Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth Bill Powers writes that the information on shale gas presented by US government is too rosy. There is a huge bubble to blow up soon. The shale gas production may well go down before the infrastructure for sales to Europe is there. Washington has one more reason for instigating sanctions against Russia and it prefers not to talk about it. The US has plans to sell gas to Asia where the price is over 500 dollars. They want Europeans to pay at least the same price. It is an element of broader US policy aimed at putting an end to Russian gas deliveries to Europe and creating an artificial deficit to make the prices go up and benefit American companies.
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Having taken a decision to choose the policy of confrontation with Russia, Brussels did not assess the implications. Even under the most favorable conditions Europe cannot refuse Russian gas deliveries. But Russia can move to Asian markets. The “historic” contract with China is signed. The eastern Power of Siberia pipeline is being constructed. Japan has already said it wants a pipeline to connect the island of Sakhalin with Hokkaido. There are plans to sign an agreement with China in November this year to build a pipeline to Europe via Altai route. On September 11, 2014 the Russia-Mongolia-China summit gave the project a powerful impetus. Europeans would better think twice before scarifying their energy security for bolstering US shale gas plans.