MONOPOLISM OR DIVERSIFICATION ALARM CLOCK GOES OFF IN UKRAINE TO REVEAL ENERGY CRISIS

The subject of reliability and energy supply security for Europe turned out to be especially urgent during the most recent months. The gas conflict between Russia and Ukraine that took place coupled together with severe winter in many European countries, when Europe faced short breaks of natural gas supply from Russia caused, in many respects, the EU’s interest. The dispute between Moscow and Kiev was about the main pipeline to Europe crossing Ukrainian territory. Gazprom wanted control over a part of the pipeline and instead was ready not to hike gas prices. Ukraine’s refusal resulted in the gas giant threatening to increase prices four-fold. From a certain point of view, clear commercial logic played a role in the action of Gazprom.

Common problem, different approaches

Alarmed at the present situation, the EU called upon its 25 member-countries to conclude an energy agreement pact with Moscow. However, Poland once more expressed its special opinion and presented a plan of energy security without consulting the chief energy supplier of the continent. The crisis in Ukraine worried Poland, which imports two-thirds of its gas consumption and 97% of its oil utilization from Russia. During his visit to Berlin in March this year, Lech Kaczynski, the President of Poland submitted a plan to the German Government on reduction of the present dependence of Warsaw upon Russia - the agreement about European energy security to create a new alliance out of EU and NATO countries. According to the plan, European countries should continue importing energy products from Russia but reach an understanding on matters related to energy security. The EU currently does not have a common policy on energy security. Gas supply contracts with Russia are concluded on a bilateral basis. Polish authorities are strengthening their positions with the desire to provide maximum support for the agreement. But only volumes of energy products delivered to Europe make implementation of this idea quite risky. All further actions, in particular, Germany’s unwillingness to exclude Russia has placed the future of this idea under question. Germany while importing 35% of all gas consumed in the country from Russia and giving preference to two-sided contracts, has already concluded agreements with Russia providing close cooperation in the energy field. Moreover, Germany is participating in the North European Gas Pipeline project where two companies Wintershall and E.ON Ruhrgas represent it.

Officials in Brussels did not make any comments regarding Poland’s plan. However, statements like "Europe should refuse "any nationalism" in the energy sector" or "EU should diversify energy products-supply sources and study the issue on creation of a gas reserve to prevent possible crisis" has been sounded more frequently.

Benita Ferrero-Waldner, the EU Commissioner for External Relations & European Neighborhood Policy and Wolf Bernotat, Chairman of E.ON, the largest German energy company, have recently expressed such opinions.

"I think that the event in Ukraine was an alarm bell that warned us to place matters related to security and reliability of energy supply on the agenda," stated Ms. Ferrero-Waldner. Europe needs to speak about this problem in a single voice." As Mr. Bernotat mentioned, E.ON takes serious steps with the view to study outlooks of LNG purchases. Thus, the problem related to diversification of gas supply sources for Germany and other Western European countries will turn out to be more urgent. Simultaneously, with the construction of the first LNG Terminal in Wilhelmshaven, located in the north of Germany, E.ON plans to implement a large project in South Europe. "We are studying the opportunity to construct a terminal for LNG in Croatia," said Mr. Bernotat. Judging by the amount of funds to be invested in the given project (500 million euro), it will be of the same scale as that implemented in Wilhelmshaven.

Besides, E.ON intends to expand its business activity in the territory of state-LNG producers. The company has recently announced its plans to take part in a LNG production project in Qatar that is striving to become the world’s largest LNG producer.

According to the E.ON Chairman, the LNG terminal in Croatia will allow, for the first time, avoiding "almost complete dependence" on Russian gas. In recent years, the concern purchased assets of numerous gas distribution companies of South Europe. E.ON has one more target within the framework of this project, which is to supply the south of Germany with LNG through the Croatian terminal and compensate losses from reduction of the gas production level in Great Britain, The Netherlands and Germany. The E.ON Chairman intends to maintain its wide circle of gas suppliers for Germany and EU. "We do not fall under great dependence upon Russia," he said. "Gazprom did not gain popularity when it ceased supply for a short time. Our experience with Russia as a gas supplier is positive. We have been receiving gas form Russia for the last 33 years, even during periods of political tension", Mr. Bernotat added. According to him, in the course of time, mankind will face problems regarding depleting energy resources. Only few countries such as Russia or Norway will have dominant positions during that period. "E.ON intends to provide balanced diversified supply. We cannot afford too much dependence upon Russia," noted Mr. Bernotat.

In line with the E.ON strategy, the next few years is going to see the concern provide 15-20% of the total volume of gas supply on account of its own production. As Mr. Bernotat stressed, last year E.ON purchased the British company Caledonia Oil and Gas and is now studying the fields of the North Sea in Great Britain and Norway.

Romania keeps up with the common European business and intends to construct a terminal in Konstansa port located at the coast of the Black Sea to import LNG from the Far East. Traian Basescu, the President of Romania stated the following after his visit to Qatar: "This project is part of efforts of the country aimed at searching alternatives to gas import from Russia". The Romanian leader called upon all  concerned European countries to take part in the project, which could quickly become an alternative for energy supply to Europe. Romania striving to join the EU next year, purchases approximately 40% of gas consumed by the country from Russia. The rest of 60% is covered through production of the State Gas Company Romgaz and Petrom SA (the majority stake belongs to Austrian OMV AG).

Are ambitions baneful for Europe?

The German and European energy policy worsens security of supply in Europe and in the middle-term perspective, puts the competition under obvious disadvantage with the USA’. The advisory firm McKins ley&Company gave this conclusion while studying the "Global Integrated Electric Power Perspective" conducted within the energy sector: ‘If the European energy policy is not changed, EU dependence on power generation through means of Russian gas will almost double by 2020,’ shows the results of the studies. Moreover by 2014, Europe will lose the advantage of lower prices on energy in competition with the USA." The studies carried out by McKinsley analyzed the energy policy of the largest industrially developed countries and those with transition economies until 2020. The yielded results demonstrate a radical change in the course of the energy policy.

"By 2020, Europe will not be able to provide cheap and simultaneously reliable and ecologically clean energy at all, says the report. We will have to make more compromises such as refusal of nuclear power."

According to the studies, Germany bears the primary responsibility for decline of competition with USA.. Ambitions related to protection of the climate and simultaneous refusal of nuclear power will result in increasing dependence of Europe on Russian gas. Together, prices of energy will keep on growing. According to the report, by 2020, the percentage of electric power stations in Europe working on gas will grow around two-fold from the present 23% to 44%. Therefore, at the same time, the volume of gas import during this period will bring a 130% growth. It will require expansion of infrastructure, which is unreal. This trend cannot be stopped by means of wider use of renewable energy sources or programs on energy supply. The report runs: "The planned refusal of nuclear power contradicts the task of reduction in dependence on Russian gas".

Possible alternative pipeline routes

Against the background of European disputes, alternatives routes of gas supply to the continent will not undergo significant changes in the near future. Significant volumes of the Russian gas will be delivered to Europe via three main routes: through Ukraine - 120-150 billion m3, North European Gas Pipeline - 50-70 billion m3 and 50-70 billion m3 through gas pipeline systems of Norway due to reduction of gas production in this country. According to western experts, even if expansion of Russian gas supply to the European market is taken into consideration, by 2025 the negative "gas balance" of Europe will reach 150 billion m3.

In order to solve the problem of "missing gas", Europe focus on Iran, namely on Southern Pars - the largest gas field in the world that can be connected to Europe by means of a gas pipeline. This deposit draws attention not only due to large high quality gas reserves but also due to the fact that it is still out of control of Russia, USA and China. According to preliminary data, the annual output at the given field can reach 170 billion m3 without neighboring Northern Pars whose perspective reserves are estimated at 70 billion m3. In fact, Iran is interested in the European market as fixed prices offered by Pakistan, India and other Asian consumers contradicts the interests of the government of Teheran. However, construction of a gas pipeline from Iran to Europe is the most political among all variants against the background of conflict between Iran and USA and recent temporary suspension of negotiations on gas carried on by EU and Iran due to the scandal around Tehran’s nuclear program.

The recent statement made by Rokneddin Javadi, the Managing Director of the Iranian organization dealing with gas export, he mentioned that the contract for 3-5 billion m3 a year can be signed with Nabucco Consortium already in 2006. This proves that the European Union still does not conceal its intentions to import natural gas from Iran guided by the aim of reducing its dependence on Russia. This concerns the Nabucco project that will connect Iran with the European consumers through Turkey, Bulgaria, Romania, Hungary and Austria. The feasibility study of the project was financed with EU funds. Implementation of this project will give another opportunity to the European countries to obtain gas from the Caspian region to Europe bypassing the system of Gazprom. Nabucco would not have been so interesting if other companies in Europe had received permission to export gas from Russia. The desire to get rid of Gazprom’s monopoly is tremendous. Nabucco will deliver 7-10 billion m3 of Iranian gas annually starting from 2011.

Lately the Middle East-North Africa gas pipeline (MENA) project is being discussed more frequently in European circles. The results of the feasibility study of the given project providing gas supply from the Persian Gulf to Europe through pipelines worked out by the German Company ILF Consulting Engineers turned out to be quite optimistic, given the conditions of the present prices on hydrocarbons.

The hypothetical pipeline will start from the fields of Qatar and Iran, which constitute the areas of major concentration of the largest world gas reserves amounting to 72 trillion m3. It will also cover the deposits of UAE, Kuwait and Iraq. From this region, the route can be planned either directly through Saudi Arabia or via Iraq and Jordan into the Red Sea. At this point, Egyptian gas will join the gas flow. The pipeline will then further run along the Mediterranean coast via Libya and Tunis to Algeria to complete its 6,000-km length.

It is notable that a significant part of the MENA route will cross territories where the EU already sees future gas pipelines such as the Eastern-Mediterranean Gas Circular Route. It will connect Greece, Turkey, Syria, Jordan, Egypt, Libya and Tunis and end from both sides in Italy.

One of the most important features of this project is that some of the common cost factors are very favourable for the main pipeline. Low cost of labour in Far East and North Africa is the advantage for such a large-scale project. Besides, good weather conditions of the given region allow for construction all the year round. This will minimize outlays on mobilization and demobilization and simultaneously reduce construction period and construction costs.

Another favourable cost driver is the expected low density of population and low prices on the right to cross private lands. Simple demands on construction in the given region also contribute to formation of a cost-effective structure and reduction of construction outlays. As for operational costs, significant means are spent to generate power necessary for operation of compressors. Natural gas that activates compressors is driven directly from the pipelines. In fact, gas production costs are quite low in this region.

Position of Russia – Assumption of perspective

What are the current plans of Gazprom, which strives to switch to transportation and sale of gas? Is the company ready to yield a significant part of the home market to independent producers so that it can concentrate on export pipelines and gas distribution systems in other countries offering larger profits? Statements made by official representatives of Gazprom show the readiness of the company to give foreign companies minority shares within its gas deposits in exchange for access to retail markets of Europe and USA. This will allow gaining international experience and funds without losing control. Now Gazprom deals with making these intentions a reality. The company owns 35% of shares in the German gas distribution company Wingas operated by BASF and plans to bring its share to 50%. BASF in its turn will receive a 25% share in the largest field located in the north of Russia. Negotiations about a similar transaction are being carried on with E.ON. Gas from the Yuzhno-Russkoye field, which reserves estimated at 1 billion m3, will be transported through the North European Gas Pipeline (NEGP) being jointly constructed by Gazprom and its German partners. Construction of the Russian onshore section of the gas pipeline (Gryazovets–Vyborg) began in December 2005 at Babayevo in Vologodsk region (351 km from St. Petersburg). It will connect the offshore section of NEGP with operating gas pipelines running from Western Siberia. Gas will be transported by 7 gas-compressor stations.

NEGP will connect the Baltic coast of Russia near Vyborg with the Baltic coast of Germany near Greifswald. The outlet point at the Baltic coast of Germany was chosen considering operative access to the main sales markets of Germany, Great Britain, the Netherlands, Belgium and France. NEGP will contribute to meet growing demands of Central and Western Europe in gas import. The first pipe run of NEGP with a throughput capacity of approximately 27.5 billion m3 is scheduled to start up in 2010. The gas pipeline is around 1,200 km long. The diameter of the pipe is 1,200 mm. The operating pressure of gas exceeds 200 bars. The project provides construction of the second pipe and double expansion of throughput capacity of the gas pipeline up to 55 billion m3 a year. The first pipe run costs 2- 2.5 billion euro. The joint amount of investments in the offshore section of NEGP project will be over 4 billion euro. The NEGP will raise the reliability of Russian natural gas supply to European consumers. There are no transit countries on the NEGP project’s way that allows excluding possible political risks. NEGP will directly connect Russia with the All-European gas network and provide Western European consumers with maximum reliable gas supply.

Europe’s dependence on Russian gas supply will grow steadily. Officials in the Government of Russia understand this very well. Position of Russia is strengthened by a number of reasons. Firstly, assuming the coming perspectives state monopolies plays significant role in strengthening the position of Russia that has 28% of world natural gas reserves. Gazprom concluded a successful agreement with Turkmenistan where the latter will purchase gas for 25 years in advance. According to the contract, in 2009 the company will take the Turkmen gas export under its exclusive control. Gazprom expressed intentions to buy 44% share in the gas monopolist Uzbekistantransgaz (Uzbekistan) and significant share in the gas pipeline structure of Kazakhstan.

The gas policy of the country that can surely bring new changes to the world geopolitical system in case some favourable conditions appears for Russia, will hardly contribute to formation of alternative energy sources for the European market.