March 20, 2018

“Without Solidarity, Europe Will Not Go Forward…”

The struggle for energy resources and their use as an instrument of political and economic pressure on the states-consumers of these resources has a long history dating back to the 20th century. Especially global this problem became at the beginning of the 21st century. Suffice it to recall what happened to Iraq and Libya and what is happening today in Syria, Eastern Mediterranean and the Caspian–Black Sea region. In Europe, the most dramatical is the energy confrontation between Russia and Ukraine, which, in fact, is part of the problem of relationships between EU countries and Russia in the energy sector.

 

The Phases of the Russian-Ukrainian “Gas War”

The Russian-Ukrainian gas war has already lasted for more than 25 years. 1993 was the beginning of an open gas conflict between Russia and Ukraine. In February 1993, when Ukraine's debt to “Gazprom” exceeded 138 billion rubles, Moscow for the first time announced a possible suspension of gas supplies. The Ukrainian authorities answered that they would block the transit of Russian gas. In response, in March of that year, “Gazprom” signed an agreement in Warsaw on the construction of the “Yamal–Western Europe” transit pipeline bypassing Ukraine via the territory of Belarus and Poland.

The Russian-Ukrainian gas war has already lasted for more than 25 years
The Russian-Ukrainian gas war has already lasted for more than 25 years

In February–March 1994, suspensions of supplies of Russian gas to Ukraine, as well as demands for debt repayment by transferring rights to Ukrainian gas pipelines, were repeated again. The supply of Russian gas to Ukraine continued in exchange for Kyiv's concessions in the dispute with Moscow on foreign assets of the former USSR. In 1999–2001, Ukraine continued the policy of groundless concessions. For gas debts, it gave Russia eight strategic bombers Tu-160 and three Tu-95MS, about 600 cruise missiles X-22. After the 2004 Orange Revolution, the Kremlin decided to increase the price of gas (50 US dollars per thousand cubic meters) several times and then the construction of the “Yamal-Europe” and “North Stream” pipelines bypassing the Ukrainian territory began, which led to a decrease in gas transit volumes.

The price for Russian gas from 50 US dollars per thousand cubic meters in 2005 had grown to 260 US dollars in 2009. Thus, a full-scale “gas war” between Russia and Ukraine, in which Russia used “energy weapons” against Ukraine, began. At the end of 2008, a new phase of the “gas war” started, as a result of which, on January 1, 2009, “Gazprom” stopped supplying gas to Ukraine, and since January 5, its supply to European consumers had decreased. Since January 7, the transit of Russian gas through the territory of Ukraine had been completely suspended and resumed only on January 20, after Yu. Tymoshenko and V. Putin had adopted (January 19, 2009) oppressive for Ukraine gas contracts that are still considered valid. Under those contracts, the base price per one thousand cubic meters of Russian gas was raised to 450 US dollars. “Naftogaz of Ukraine” was obliged to buy 52 billion cubic meters of gas annually according to the “take-or-pay” formula.

April 21, 2010, in Kharkiv, V. Yanukovych and D. Medvedev signed a new and shameful agreement, according to which the price of gas decreased by 30 % in exchange for the extension of the agreement on the lease of the Russian Navy base in Sevastopol for 25 years. Russia terminated this agreement in 2014 after the annexation of the Crimea, and moved to a new phase of the “gas war” against Ukraine, which continues to this day.

 

The Energy Component of Russia's Aggression Against Ukraine

It seems that in Europe today everyone has already realized that Russia is using its energy resources not only for the purpose of obtaining economic dividends, but also as a tool for spreading its imperial political influence on European countries. However, some pro-Russian political forces in those countries continue to indulge Russian imperial ambitions, being guided by their short-sighted corporate interests.

The energy component is one of the main in the Kremlin's aggressive policies. The annexation of the Ukrainian Crimea and the Russian occupation of part of the territory in the East of Ukraine caused heavy losses for its energy potential. Together with the occupied Crimea, Ukraine lost the bulk of the exclusive economic zone on the shelf of the Black Sea and the Sea of Azov, where a number of oil and gas exploration and production projects were initiated with the participation of leading world companies — ExxonMobil, Shell, OMV, ENI, EDF and others. The occupying authorities of the Crimea captured Ukrainian state-owned enterprises “Chornomornaftogaz” and “Ukrtransgaz”, as well as all the oil and gas infrastructure on the shelf of the Crimean Peninsula. In 2014, Ukraine lost control of major coal mining areas in the Donbas (55 mines in Donetsk region and 42 mines in Luhansk region). The coal from those mines is being smuggled to Russia today.

 

The “Turkish Stream” Pipeline

Today, the most dangerous for Ukraine and Europe are the Kremlin's plans to build a “North Stream 2” gas pipeline to stop the transit of Russian gas through Ukraine's GTS to Europe.

Project of the “Turkish Stream” gas pipeline
Project of the “Turkish Stream” gas pipeline

For the same reason, Russia is laying the “Turkish Stream” gas pipeline. With regard to this project, the underwater part of which has been already half built by now, then one of its two lines with a capacity of 16 billion cubic meters per year in 2019 is supposed to reach South-Eastern Europe through Greece, but so far there is no guarantee that this will happen. Firstly, because of sanctions, in 2019 “Gazprom” will have to 100 % finance the “Turkish Stream” itself, simultaneously building the gas pipelines “Power of Siberia” and “Nord Stream 2” if it comes to that. According to the company's calculations, in 2019, “Gazprom” will have to invest almost 1.9 trillion rubles, while it will need to repay debts worth more than 20 billion US dollars. Secondly, today there is no guarantee that in 2019 gas will be sent to countries of Southeastern Europe, because there is still no infrastructure through which Europe could accept this gas, and it is anybody's guess when it will appear. The matter is that, according to the rules of the European Commission, it is assumed that the land part of the second line of the “Turkish Stream” should be laid by gas transport operators of the interested European states. However, the final investment decision is made only after a sufficient number of applications for the reservation of the capacity of the gas pipeline have been received (open season). However, there are no such applications so far. If European partners are not economically interested in the construction of gas infrastructure for receiving Russian gas from the second line of the “Turkish Stream”, it will remain “dry” somewhere at Turkey's border with Greece.

 

“Nord Stream 2”: Who Is “For”, and Who Is “Against”

As for the “Nord Stream 2” pipeline, according to the project, the capacity of the two lines of the second “Nord Stream”, as well as of the first one, will amount to 55 billion cubic meters of gas annually. All in all, the capacity of this trans-Baltic gas transmission system of four lines from Russia to Germany will amount to 110 billion cubic meters of gas, 32 billion cubic meters less than the capacity of the Ukrainian GTS.

Ukraine is vital to ensure the gas supplies to South-Eastern Europe
Ukraine is vital to ensure the gas supplies
to South-Eastern Europe

The construction of this gas pipeline already at the stage of its design, causes heated discussions among politicians and state leaders of European countries, which today are divided into two groups — its supporters and opponents. With some formal reservations about the need to continue deliveries of Russian gas to the Ukrainian GTS, the “Nord Stream 2” project is supported, if not at the state level, at least at the level of strategic oil and gas companies by such countries as Austria, Germany, France, the Netherlands, the Czech Republic, and Finland. Even in the middle of February 2018, Federal Chancellor Angela Merkel said that she saw no threat to the energy security of Europe from the “Nord Stream 2”. She stated this once again on February 16, after meeting in Berlin with the Prime Minister of Poland Mateusz Morawiecki. A. Merkel stressed that her government considered “Nord Stream 2” solely as a business project. A. Merkel's position is actively supported by Austrian Federal Chancellor Sebastian Kurtz.

However, in mid-March, it became known that A. Merkel signed a document that envisages diversification of energy supplies and a sharp increase in the share of renewable sources in electricity production from the current 33 % to 66 % in 2030. These figures are set out in Germany's energy development program, which is part of the Coalition Agreement between the CDU/CSU and the SDP. This program, which was agreed on three months later, was a condition for the creation of a coalition government of the Federal Republic of Germany. Although the document says nothing about gas pipelines, including “Nord Stream 2”, there is a plan to reduce energy consumption from traditional sources by 50 % by 2050 due to energy saving and energy efficiency improvements in all spheres of the economy, which runs counter to “Gazprom”'s forecasts about the future growth of gas consumption in Europe. Thus, Germany is going to significantly reduce its dependence on Russian gas, which calls into question the need for the construction of the “Nord Stream 2”. Germany's position on energy development in the EU countries is of crucial importance without exaggeration, so it should be expected that other highly developed European countries will look to Germany. Indeed, on March 15, 2018, Prime Minister Teresa May announced that Great Britain intends to abandon Russian gas and look for other suppliers within the framework of measures taken by London against Moscow following the scandal around poisoning in Salisbury. But, given that almost a third of the gas the UK consumes comes from Russia, it is likely that re-orientation to other gas suppliers will take some time, perhaps one to two years.

On the other hand, the United Kingdom, Croatia, Romania, Poland, Slovakia, Lithuania, Latvia, Estonia, Sweden, Denmark and, of course, Ukraine with US support are trying to stop the project of the “Nord Stream 2”. As of the beginning of March this year, Poland, Estonia, Lithuania, Finland and Sweden have not yet given their permission to build the “Nord Stream 2” in their territorial waters of the Baltic Sea. In November 2017, Denmark adopted a law prohibiting the passage of the Russian gas pipeline through its territorial waters. The German energy company “Uniper” assumes that “Nord Stream 2” will not be built due to the position of Poland, which has blocked the creation of a joint venture “Nord Stream 2 AG” for the construction of a gas pipeline by “Gazprom” and its foreign partners — Shell, OMV, Engie, Uniper and Wintershall. But after these partners refused to finance the project, the Russian monopolist will have to do it on its own, spending 1.75 billion US dollars. According to experts, the implementation of the entire project “Nord Stream 2” pipeline, taking into account the construction of the necessary concomitant infrastructure will cost Russia 25 billion Euros.

At the beginning of March 2018, the German Nature and Biodiversity Conservation Union (NABU) filed a court complaint against the decision of the mining department of the city of Stralsund, which allowed the construction and operation of the “Nord Stream 2” gas pipeline in the territorial waters of Germany. NABU considers “Nord Stream 2” a climate-political “deadlock”, since, apart from environmental damage, this project can “destroy solidarity and confidence within the EU”. Activists from NABU urged politicians to distance themselves from the construction of the gas pipeline and conduct an independent environmental expertise of the project. In case of ignoring these demands, environmentalists promised to seek the closure of the “Nord Stream 2” project through the court.

V. Putin’s meeting with Austrian Chancellor S. Kurtz
V. Putin’s meeting with Austrian Chancellor S. Kurtz

Russian President V. Putin and his environment are trying to present the “Nord Stream 2” project as one that will not hurt anyone, even Ukraine. For example, on February 28, V. Putin, during his meeting with Austrian Chancellor S. Kurtz, said that the project “is not an alternative to gas supplies through the territory of Ukraine”, but “is absolutely depoliticized and purely economic”. However, previously, “Gazprom”'s representatives had repeatedly stated that after the construction of the “Nord Stream 2” and “Turkish Stream”, they would “guarantee” the continuation of transit through the Ukrainian GTS in the amount of about 10–15 billion cubic of gas. According to well-known Ukrainian energy expert, president of the Center for Global Studies “Strategy XXI” Mykhaylo Gonchar, for the Ukrainian GTS, which has a transit capacity of 142 billion cubic meters per year (in 2017, it pumped 93.5 billion cubic meters), “this would be absolutely unprofitable functioning of such a powerful gas transmission system”. It seems that the Kremlin strategists would like “Gazprom” to continue using the Ukrainian GTS “just in case”.

 

The Position of Ukraine

The position of the Ukrainian leadership regarding the “Nord Stream 2”pipeline project is exact and clear: Ukraine is categorically against this project, because if it is implemented, Ukraine will, firstly, lose nearly 3 billion US dollars in revenues for gas transit; secondly, having lost its transit potential, Ukraine will cease to be interesting for the European Union; and, thirdly, by constructing the “Nord Stream 2” gas pipeline, Moscow sets its hands on the continuation and expansion of aggression against Ukraine. But, unfortunately, in addition to political statements from the top management of Ukraine against the implementation of the ”Nord Stream 2”, little has been done for its actual blocking. In particular, today a number of state institutions, departments and structures are concerned with energy security, but often their activities remain uncoordinated. All that our government officials and Deputies of the Verkhovna Rada can do is ask the European Union and the United States not to allow “Gazprom” to build the “Nord Stream 2”.

If the “Nord Stream 2”pipeline project is implemented, Ukraine will lose nearly 3 billion US dollars in revenues for gas transit
If the “Nord Stream 2”pipeline project is implemented, Ukraine will lose nearly 3 billion US dollars in revenues for gas transit

Today, the head of the “Naftogaz of Ukraine” A. Kobolyev states that “the involvement of a foreign partner in the management of the Ukrainian gas transmission system is the only way to keep transit of gas through Ukraine after the construction of the Russian gas pipeline “Nord Stream 2”. Obviously Mr. Kobolyev means that this can provide Western consumers of Russian gas from the Ukrainian GTS with the level of confidence that is needed to give up the “Nord Stream 2”project. But this statement by Mr. Kobolyev causes at least two questions: the first — where Mr. Koboyev had been before, why he voiced this “good idea” only now, not two or three years ago, taking into consideration that he has been running “Naftogaz” for already 4 years? The second question is, what the volume of gas transit through Ukraine may be already after the construction of the Russian “Nord Stream 2”? A few billions of cubic meters? I have great doubts that this may be interesting for foreign investors.

The following is read in the news: “On February 21, 2018, the Ukrainian government began consulting with international companies that expressed their wish to participate in the management of the Ukrainian GTS. The working group is headed by Vice Prime Minister V. Kistion”. Another question arises: why did the Ukrainian government not begin these consultations 2–3 years ago? Had it started these consultations earlier, today, perhaps, we would already have solid foreign partners who would take control of the Ukrainian GTS. Moreover, recently President P. Poroshenko has mentioned that “more than 10 world-known companies have expressed their willingness to participate in the management of the Ukrainian GTS”.

In our opinion, while for Ukraine the situation around the GTS has a certain political context, for the “world-known companies” it is first of all a business that should bring profits. But what profits can foreign partners expect if the tariffs for transit of Russian gas through the Ukrainian GTS are currently more expensive than the tariffs specified in the project of the future pipeline “North Stream 2”? Why, instead of developing an attractive offer for transit service customers, the Ukrainian government had been inactive for at least two years? And this is the case when the gas transmission system of Ukraine remains unreformed and still integrated into “Naftogaz”. And while Ukrainian officials are only going to “start consulting with international companies” and are discussing who will control the revenues from gas transit through Ukrainian gas transmission system (if it will be there at all in a few year) the “Nord Stream 2” project is steadily coming to completion. So, whether “Nord Stream 2”will be implemented to a large extent will depend also on whether Ukraine can offer a reliable, economically feasible alternative to the Russian project.

 

What Will Win — Solidarity or Mercantile Interests?

At the moment, the European Union is considering approval of amendments to the “Gas” Directive of the Third Energy Package of the EU from 2009 for its application to the “Nord Stream 2”. If the provisions of the Third Energy Package are fully applied to “Gazprom”, then it, as a gas supplier, will lose the right to participate in the construction of the gas pipeline. The main objective of the Third Energy Package is to prevent situations where monopolists such as “Gazprom” will block the competitors' access to consumers through the ownership of gas distribution networks. In other words, the “Gas” Directive provides for a mandatory division between the supplier, transit and gas distributor, as well as the third-parties' access to the gas pipeline, and this does not suit “Gazprom” and the Kremlin, since “Gazprom” will significantly reduce its revenues and, accordingly, possibilities for the Kremlin's political influence on European countries. But, no doubt, there will be companies that, for “Gazprom”'s money will build the “Nord Stream 2” by 2019 and will be entitled to its further exploitation. But even if these amendments are adopted, they are unlikely to stop the construction of the gas pipeline. Most possibly, these amendments will just “make things a bit more difficult” for “Gazprom”, but that will be it. Although without this, recently “Gazprom” has been increasingly facing all sorts of problems. For example, at the beginning of this year, “Gazprom” had a problem with the supply of large diameter pipes from Russian producers for the gas transmission system, which supplies gas to the “Nord Stream 2” from deposits in Yamal, which could lead to a delay in the construction of a connections to it for a whole year.

David Koranyi: “By channeling the majority of European gas imports to one pipeline set, it would also allow the Kremlin to flex its muscles vis-à-vis Western Europe”
David Koranyi: “By channeling the majority of European gas imports to one pipeline set,
it would allow the Kremlin to flex its muscles
vis-à-vis Western Europe”

The result of the struggle in Europe around the “Nord Stream 2”project will depend on what wins — the principled solidarity of all EU countries in the issue of blocking the construction of the “Nord Stream 2”or narrow mercantile corporate interests? I would like European capitals to finally realize that defending Ukraine, the Europeans defend themselves from Putin's Russia, which uses “energy weapons” to spread its imperial influence in Europe. David Koranyi, Senior Researcher for the Global Energy Center at the “Atlantic Council”, says that if most of European gas imports are from Russia, it will allow the Kremlin to “to flex muscles” in relations with Ukraine and the West.

Thanks to the launch of the “Nord Stream 1” gas pipeline, despite all sanctions and tensions in relations between the Russian Federation and the countries of the West, there is a steady increase in the supply of Russian gas to European countries. Thus, in 2017, “Gazprom” exported to Europe 193.9 billion cubic meters of gas, which was 36 % in the energy balance of European countries — by 8 % more than in 2016. If “Gazprom” succeeds in constructing the “Nord Stream 2”, then the supply of Russian gas to Europe could rise to 250 billion cubic meters per year and the diversification of sources of gas supply to Europe can be forgotten for a long time. So far, sanctions have little effect on the amounts of Russian gas production. Thus, in 2017, “Gazprom” increased gas production by 12.4 % to 472 billion cubic meters.

 

Is the USA's Position Turning the Say?

However, the situation can change radically after practical application of the “Countering America's Adversaries Through Sanctions Act” (CAATSA), which allows D. Trump's administration to impose new sanctions on Russia and foreign companies that invest in its new export gas pipelines. This law explicitly states that “Nord Stream 2”should be blocked as it will negatively affect the energy security of the EU as well as hinder the development of the gas market in Eastern and Central Europe and the process of reforming the gas sector in Ukraine.

US President D. Trump repeatedly expressed his dismay with the “Countering America's Adversaries Through Sanctions Act”
US President D. Trump repeatedly expressed his dismay with the “Countering America's Adversaries Through Sanctions Act”

But this does not mean that this law will be immediately applied automatically, as the US President D. Trump repeatedly expressed his dismay with this law, stressing that it will make it difficult for Americans to conclude lucrative contracts. In addition, D. Trump insisted on mitigating the initial version of the law, after which US sanctions for assistance in the construction of the “Nord Stream 2”pipeline would be impossible without prior consultation with European allies. As the US State Department Spokesperson, Heather Nauert, has recently said, at the moment, the White House is not planning to impose new sanctions on Russia, adding that the threat of restrictive measures is enough. If the CAATSA is fully applied, it is likely that in the near future, natural gas production in Russia will decrease. Therefore, it is difficult to predict today whether Russia will be able to fill the “Nord Stream 2” by 2020 if it is built at all. And the main thing is whether it will be needed by European consumers, because in the next two to three years the volume of gas supply to Europe from the Caspian region, the Eastern Mediterranean, the Middle East and the USA could grow significantly. At this, the world demand for conventional energy is decreasing, and the share of renewable energy sources in the world energy balance is steadily increasing.

 

Is an “Energy NATO” Possible?

As you know, the problems of energy security concern not only the European Union, but also NATO. The provisions on NATO's responsibility for the energy security of its members and the protection of the interests of Allied partners were incorporated into the NATO Strategic Concept. At the NATO Summit in May 2012 in Chicago it was decided to create a NATO Energy Security Centre of Excellence. Starting with this summit, the declarations of all subsequent summits (in Wales in September 2014 and in Warsaw in July 2016) constantly emphasized the need to strengthen the North Atlantic Alliance's responsibility for energy security in the Euro-Atlantic area. For example, at the height of Russia's aggression against Ukraine in 2014, NATO Secretary General Anders Fogh Rasmussen said: “We must make energy diversification a strategic transatlantic priority and reduce Europe's dependence on Russian energy sources”. Since May 2016, A. Rasmussen has been a non-staff advisor to President of Ukraine P. Poroshenko.

In March 2006, the President of Poland, Lech Kaczynski, proposed the “Energy NATO” initiative
In March 2006, the President of Poland, Lech Kaczynski, proposed the “Energy NATO” initiative

In our opinion, today should be reconsidered the “Energy NATO” initiative, which, in March 2006, the President of Poland, Lech Kaczynski, officially submitted to the European Commission and the NATO leadership. The draft agreement on “Energy NATO”, presented by L. Kaczynski, provided that the EU and NATO members in case of a need should assist each other in supplying energy in any form. In the medium term, the draft agreement aims at strengthening national energy security systems, and in the long-term — at guaranteeing the stability of energy supply to all parties to the agreement. It was assumed that the parties to the agreement could become the EU and NATO countries, and the partner countries could join later, if they take on an obligation to help the parties to develop the necessary organizational and technical infrastructure. Unfortunately, at that time, the leadership of the European Union, as well as the leaders of Germany, France, Spain and Italy, had a reserved response to this project. And at present, none of the current European leaders even mentions L. Kaczynski's idea, considering it “dead”… However, today Poland is demonstrating its commitment to the principle of mutual aid in the energy sector, since early March 2018 along with Hungary and Slovakia, supplying gas to Ukraine after Russia had refused to sell gas to it. Ukrainians are very grateful to our Polish, Hungarian and Slovak friends for their solidarity.

 

Conclusions and Forecasts

The preservation of the transit of Russian gas through the Ukrainian gas transmission system is not only of strategic economic importance, but is one of the factors behind the containment of Russia's further aggression against Ukraine. As long as Russian gas comes to the European Union's countries through the Ukrainian GTS, Moscow will most likely refrain from widespread destabilization of the situation in Ukraine. But as soon as (somewhere between 2020–2021), the “Nord Stream 2”and “Turkish Stream” gas pipelines go to planned full capacity and Russian gas goes to Europe bypassing Ukraine, we cannot rule out that the Kremlin may resort to intensifying subversive actions against Ukraine and even to large-scale aggression, at least in order to implement the “Novorossia-2” project. It is unlikely that large-scale military actions on the territory of Ukraine would contribute to peace and stability in Europe itself. So, Europeans have to decide — are they prepared to give an adequate response to these challenges and threats? Europeans also need to know that Putin, while remaining in power, will never leave Ukraine alone because without its human and natural resources he will not be able to revive the Russian Empire or the Soviet Union, about the collapse of which he is so sorry. The RF President's election speeches in early March clearly indicate the growth of the aggressive trend in Putin's foreign policy.

Without solidarity, Europe will not go forward…
Without solidarity, Europe will not go forward…

I would like to hope that Russia's use of energy resources as an instrument for realizing its imperial geopolitical plans may not be acceptable to the vast majority of European countries.

This is exactly what the group of German Deputies of the European Parliament and the Bundestag wrote in their appeal to the European community, published in the “Frankfurter Allgemeine Zeitung” on February 19: “The plan for the construction of the second Russian gas pipeline across the Baltic Sea to Germany politically splits the EU and calls into question our solidarity with Poland, the Baltic neighbors, Slovakia, Ukraine, as well as Denmark and Sweden. These countries believe that the Russian project directly or indirectly threatens their security of energy supply. The one who breaks European solidarity today can hardly count on it in the future. Without solidarity, Europe will not go forward”.