June 10, 2014

Energy Aspects of the Russian Aggression against Ukraine. Part 1.

Oleksiy Volovych

Part 1.

Consequences of the Russian aggression for the Energy System of Ukraine

Energy is a major component of an aggressive policy of the Kremlin against Ukraine, which is still trying to put pressure on Eastern European countries which are critically dependent on Russian energy supplies

Energy is a major component of an aggressive policy of the Kremlin against Ukraine, which is still trying to put pressure on Eastern European countries which are critically dependent on Russian energy supplies. Using natural gas — in particular. The Russian-Ukrainian confrontation due to which was annexed the Crimea and Russian Federation's diversions in south-eastern regions of the Ukrainian state began, had an extremely negative impact on energy security not only of Ukraine, but also on that of the whole Europe.

Having annexed the Crimea, Moscow at the same time is trying to cause maximum losses to Ukraine's energy security through the following actions:

- Deprivation of the main part of Ukraine's exclusive economic zone in the shelf area of the Black and Azov Seas, where have been initiated a number of projects for exploration and production of oil and gas with the participation of leading companies — ExxonMobile, Shell, OMV, ENI, EDF, and others;

- Blocking the work of the Royal Dutch Shell Company on the development of the Yuzovsky shale gas field in Donetsk and Kharkiv regions;

- Blocking of the construction of the Ukrainian variant of the pipeline GUEU “White Stream” which involves laying an underwater pipeline from the Georgian city of Supsa to Feodosia in the Crimea;

- Denial of the access to the Ukrainian shelf deposits of promising unconventional hydrocarbon resources (gas hydrates) in the Black Sea;

Possible change of the route of the gas pipeline “South Stream”
Possible change of the route of the gas pipeline “South Stream” with it partial going through the Crimean peninsula and the shallow shelf zone of the northern sector of the Black Sea

- Possible change of the route of the gas pipeline “South Stream” with it partial going through the Crimean peninsula and the shallow shelf zone of the northern sector of the Black Sea;

- Subordination of Ukrainian state-owned enterprises “Chernomorneftegaz” and “Ukrtransgaz” to the new Crimean authorities with a view to their transfer to “Gazprom”;

- Full control over the Black Sea coast of Ukraine from the Crimea to Transnistria, including Odesa and Southern and Illichivs'k ports;

- Blocking the transportation of Caspian energy resources to European customers within the framework of implementation of projects of the Southern Gas Corridor.

Russia's pressure on Caspian countries

Caspian countries
Caspian countries

http://strategiya.az/

For quite a long time, Russia has been trying to strengthen its control over energy resources and transit routes of their delivery in the Black Sea and Caspian region

For quite a long time, Russia has been trying to strengthen its control over energy resources and transit routes of their delivery in the Black Sea and Caspian region, acting as a transit country and the one who sells a significant portion of fuel-energy resources produced in Central Asia. Buying gas from Turkmenistan, Uzbekistan and Kazakhstan at 200 — 300 US dollars per 1 thousand cubic meters, Russia sells it to European countries at a price above 400 US dollars per 1 thousand cubic meters, with a significant profit.

In 2007, Russia signed a tripartite agreement (Russia, Turkmenistan and Kazakhstan) on the construction of the Caspian gas pipeline, which it sees as a victory in the struggle against the projects of the Trans-Caspian gas pipeline and Nabucco. However, in autumn 2010, Russia and Turkmenistan decided to freeze the pipeline project until the moment when Europe increases its demand for gas.

In order to preserve “Gazprom's” monopoly position in the European market, Russia has been effectively leading the policy of limiting gas production in Turkmenistan. Trying not to let the Turkmen gas get into the Nabucco pipeline, Moscow has declared its readiness to help Ashgabat in arranging gas supplies to South Asia by building the pipeline TAPI (Turkmenistan — Afghanistan — Pakistan — India).

For a long time Russia has been against transportation of Kazakh oil across the Caspian Sea, offering to enact the oil pipeline to Azerbaijan, as well as to ensure maximum transportation of Kazakh oil through Russian territory. But at the same time because of disagreements in matters of payments and the time within which the project will pay for itself, the Russian side for a long time has been blocking the expansion of the Tengiz — Novorossiysk oil pipeline.

In September 2013, V. Putin visited Baku to limit the dominance of Western energy companies in the local energy sector and to bring Azerbaijan back under the influence of the Russian Federation. However, so far it has not succeeded. The Kremlin's pressure on the Azerbaijani leadership has become stronger after Azerbaijan on March 27 voted in favor of UN General Assembly's resolution against the annexation of the Crimea.

Russia is trying to take under its control production of Azerbaijani gas and its transportation to Europe through the revitalization of the NK “Rosneft” in the oil industry of Azerbaijan. In case this fails, Russia has prepared a fallback: there will be found a reason for Baku and Yerevan to renew the conflict in Nagornyi-Karabakh, thereby destabilizing the South Caucasus, and as a result, suspending the construction of pipelines bypassing Russia.

Russia and the EU have begun to compete fiercely for energy resources of Central Asian countries. The European Commission adopted a new strategy of assistance to Central Asian countries for 2007-2013. The EU has introduced the position of the EU Special Representative for Central Asia, which in July 2012 took Ms. Patricia Flor.

For quite a long time Ukraine has been trying to resume direct supplies of natural gas from Turkmenistan and its further exports to Europe. However, the main obstacle here is Russia's refusal to pump Turkmen gas via the pipeline laid on its territory.

The struggle around the “South Stream” gas pipeline

The Kremlin and “Gazprom” have far-reaching plans for destabilization of the entire Black Sea-Caspian region, in particular in order to strengthen its control over production and transportation of Caspian energy resources to European consumers. The first step in this scenario was to establish Russia's almost complete control over Ukraine's Black Sea shelf after the recent annexation of the Crimea.

The democratic world is simply not ready to use energy resources as a weapon

Energy projects in the Black Sea-Caspian region have always been too politicized. But after Russia's aggressive actions against Ukraine in 2014, their level of politicization has risen from regional to global, because Russia's using energy resources as a tool to implement its geopolitical plans is extremely unacceptable to the world community. The democratic world is simply not ready to use energy resources as a weapon. Russia's most politicized energy project is the project “South Stream”, implementation of which would lead not only to a decrease in Ukraine's gas transit status and strengthening of the monopoly of “Gazprom” in Russian gas supplies to Europe, but would expand the imperial ambitions of the current Russian leadership.

To fulfill its obligations to supply natural gas to Europe, “Gazprom” does not need additional pipelines, especially because the pipeline “North Stream” from the very beginning of its operation due to the restrictions imposed by the European Union is half filled with gas. The gas pipeline “South Stream” is being constructed first of all with the political purpose — to minimize the role of Ukraine in supplying Europe with Russian gas.

According to Ukrainian experts, Ukraine's losses after the introduction of the “South Stream” in 2015 could be up to 1.5 billion US dollars annually. However, Russia will not be able to completely abandon the transport of gas through Ukrainian territory, as the Ukrainian GTS has 13 unique underground storage capacities of more than 30 billion m³, which the pipeline systems of “North Stream” do not have and the “South Stream” won't have either. Experts estimate that in case of complete giving up the gas transit through Ukrainian GTS, Russia may lose Ukraine as the main consumer of Russian gas, i.e., at least 12-14 billion US dollars in annual revenue (at prices of previous years).

Implementation of the project “South Stream” will strengthen “Gazprom’s” monopoly in the supply of Russian gas to Europe, which will be a challenge to the European Union, which for a long time has been trying to diversify its sources of supply with the help of Caspian gas. On this basis, the European Union has not included this project into the list of strategic energy projects (Projects of common interest), which may be partially financed from the EU budget.

Route of the pipeline "South Stream"
Route of the pipeline "South Stream"
http://www.gazprom.ru/

Note: The project of the pipeline ”South Stream” was announced in 2007 as an alternative to the EU Nabucco pipeline to transport natural gas under the Black Sea from Russia (Anapa, near Novorossiysk in Krasnodar Krai) to Bulgaria (Varna) and then to Serbia, Hungary, Slovenia, Austria, Greece, Italy, Macedonia and Croatia. In 2008-2009, Russia signed with these countries bilateral intergovernmental agreements on implementation of the project, whose power in the final stage will be 63 billion m³. The project's implementation period is 2010-2017.

The construction will be carried out by the established in January 2008 consortium of “South Stream Transport AG” as part of “Gazprom” and the Italian group “ENI”, which in 2011 was joined by the German company “Wintershall Holding” and the French “EDF”. Members share in the authorized capital is allocated as follows: “Gazprom” — 50%, “ENI” — 20%, “Wintershall” and “EDF” — 15% each.

Commissioning of the first section of the gas pipeline is planned for December 2015. The total length of the Black Sea part of the “South Stream” will be about 925 km, maximum depth — 2.250 meters. The offshore section of the “South Stream” will consist of four parallel pipelines running under the Black Sea within the same route. Construction of the offshore section is expected to begin in the second quarter of 2014. Natural gas for filling the pipeline “South Stream” is planned to be taken from the fields on the Yamal Peninsula via the main export pipeline Bovanenkovo ​​- Ukhta — Pochinki which is being constructed, and then along the pipeline system “Southern Corridor” stretching about 2.500 km, the destiny point of which is the city of Anapa. The cost of the gas pipeline “Southern Corridor” will be 18.5 billion Euros, the cost of Bovanenkovo ​​- Ukhta — Pochinki — 25 billion US dollars and, the cost of the gas pipeline “South Stream” itself — 16.5 billion Euros. So, the total cost of the project will make an astronomical sum — 60 billion Euros. Gas pipeline project “South Stream” may be called a mega-project, because its cost greatly exceeds the “North Stream’s” one. At this, it should be noted that the cost of pipeline construction in Russia is 5 times higher than in Europe, and 8 times higher than in China. If Russia's European partners refuse to participate in the implementation of the gas pipeline “South Stream”, then Russia will suffer huge losses, taking into consideration the fact that the pipeline system at the route Bovanenkovo ​​- Anapa, according to Russian experts, will become needless.

 

One reason for Russia's destabilization of the political and economic situation in Ukraine was its desire to convince European partners to implement the project “South Stream” to guarantee supplies of Russian energy carriers to Europe. Moscow has been trying to persuade the EU functionaries that their attempts to block the implementation of the project “South Stream” because of its non-compliance with European energy law were a mistake. Moscow's task is also to talk the EU into taking the “South Stream” from under the action of the EU Third Energy Package, according to which the owner of energy resources should not own infrastructure for transportation and distribution of these resources at the territory of consumer countries.

But Moscow failed to impose its plans to the EU. Already in December 2013 the European Commission stated that the “South Stream” could not be implemented in the EU if it did not meet the demands of energy laws of the EU, in particular, of the Third Energy Package. The European Commission said that EU member states should review their bilateral agreements with Russia on the “South Stream” and bring them in line with EU legislation. However, according to some experts, there is no real way to ban the construction of the “South Stream”. But the European Commission can significantly limit the use of this gas pipeline, through making its work marginal. Now in the working group there are consultations between “Gazprom” and the European Commission on the settlement of the situation around the gas pipeline project “South Stream”.

April 17 the European Parliament (EP) adopted a resolution calling on the European Union to stop the construction of the gas pipeline “South Stream”. In this resolution, the EP stresses the urgent need for a common EU energy security policy in order to reduce dependence on Russian energy carriers through diversifying energy supply, full implementation of the Third Energy Package and, if necessary, — suspending imports of Russian gas.

On the eve of the second round of talks on May 16-19 between “Naftogaz” and “Gazprom” around the issue of the price of Russian gas for Ukraine, the management of “Gazprom” announced about the possibility to give Ukraine a discount in exchange for the EU's agreement to taking the project “South Stream” from under the action of the EU Third Energy Package.

 

Note: Since April 2014, Russia has set the price of its gas for Ukraine in the amount of 485 US dollars per 1 thousand cubic meters. The Ukrainian side demands to return to the price of the first quarter of this year — 268 US dollars per 1 thousand cubic meters on which it was agreed during the Moscow visit of ex-president Viktor Yanukovych December 16, 2013. If “Gazprom” and “Naftogaz” do not agree on a compromise price of Russian gas for Ukraine, our country intends to sue “Gazprom” in the Arbitration Court in Stockholm.

 

The beginning of implementation of the project “South Stream” thanks to Russia’s signing of bilateral agreements with a number of Central European countries, against the EU energy law, indicates that the EU is not a supranational structure, dictating its conditions to the EU member states. According to experts, this situation requires a revision and solving between the countries of the European Union to harmonize national and allied interests. Obviously, the main component of such audit should be the obligation of all member states of the European Union to fulfill all regulations, orders and directives of the EU and the European Energy Community (EEC) in the energy sphere, in particular, at the conclusion of agreements with countries such as Russia, which are not members of the EU or EEC.