«Nord Stream» or «North Wind»?
Plan for Russia’s invasion of Ukraine was unofficially called «North Wind». Its amplification in 2015 was to be reincarnated mega-project of gas pipeline Nord Stream as a valid motivation for the EU member States. Especially after the failure of the much-touted by the Russians the South Stream and the Turkish Stream. Ambitious «appendage». Russia never considered gas as a commercial product, if even strategic. Gas for the Russian Federation is a symbol of power, influence, longing for empire, thirst for revenge. «Russian peace» in short. Russia’s citizens have long been inspired a thought that «the whole Europe will become frozen without them and will get down on knees before Russia». The apotheosis became quite the official brand - «Great Energy Superpower». You see, it sounds much better than «raw-material appendage» of the Eurozone.
Especially since the Russian Federation had grounds for optimism. Europe consumes a huge gas volume: in 2010 - almost 610 BCM, while produces only 311 BCM, herewith production continuously reduces. British fields in the North Sea have long passed their peak, currently production is twice as little than ten years ago. Norwegian fields are not yet able to ensure the necessary increase in gas produc tion. The government of the Netherlands deliberately restricts production at the legendary Dutch Groningen field. Within ten years - from 2005 to 2014 - gas production volume in the countries of the Eurozone fell by 50 BCM. Against the background of the forecasts (partly by proRussian experts) on the continuing growth of gas consumption in the European Union, the Kremlin’s bet seemed to be almost a winwin. However, it is «almost» worked out: Gazprom missed shale revolution in the United States that increased production there and sharply (many times) fell off prices at regional and local markets. But due to possibility of natural gas deficit at the end of the «zero» years in the USA, many facilities for transportation and receiving of liquefied gas, as well as for its re-gasification were built under this «event». Today, this infrastructure of the United States is not in demand. And liquefied gas previously intended for Americans «rushed» to Europe. Offshore liquefied gas receiving, which has long remained the Algerian exotic for French, became a common technology in the 2000s. Ten countries of the Eurozone built more than two dozen terminals capable to receive imported LNG. These facilities are capable to meet the third of the EU’s needs in gas imports. New ones are currently being built… The situation for Gazprom would be even sadder if not a disaster at the nuclear power plant Fukushima in 2011. Japan suspended operation of fifty nuclear reactors, and the demand (and therefore prices) for liquefied gas sharply grew. Its key distributors - Qatar and Oman - turned their flows to the East. Therefore, the competition to Russian gas in the European market somewhat weakened. On the other hand, capacities to receive and re-gasify liquefied gas did not disappear. So, LNG supplies from the United States are expected in the coming years. In addition, relatively cheap American gas started displacing domestic coal that ... rushed to Europe, replacing a part of gas volume in energy sector. Projects to supply Central Asian (now also Iranian) gas are becoming clear.
So, Europe did not «get down on knees» and is actively (though not without problems) diversifying sources of energy supply, above all, sources and routes of natural gas supplies. Long-term stagnation of the economy in the Eurozone also negatively affected gas consumption (energy savings does not count in this case): last year, gas consumption in the EU member States fell by 18%, to 486 BCM, compared to 2005. If we talk about oil aspect (it is much more substantial for Russia), before the annexation of the Crimea and the invasion of the eastern regions of Ukraine, the Kremlin’s medium-term program was based on oil prices over $100/barrel. Russia’s leadership never dreamed even in nightmares of current contract figures that sometimes go down to $40/barrel. Natural gas previously sold to companies from the European Union at $350-400/thousand cubic meters also fell in price almost twice. Meanwhile, Russia’s lawmakers continue making budget up into pages, focusing on global hydrocarbon prices. But the collapsed three times hryvnia was followed by double collapse of «superpower’s» ruble. Left bank, right bank… The Kremlin’s ambitions have not been shaken. Plans for the global gas dominance in the European Union crashed, but Moscow is still struggling for east direction. Some of its efforts are aimed at maximum reduction (ideally for Russia - to zero level) of the transit role of gas transmission system (GTS) of Ukraine. In the 90-ies of the last century, Russia exported through Ukraine’s GTS currently hated by the Kremlin over 90% of Russian gas, last year - about 40%. Pipeline projects bypassing Ukraine became almost the main toy of the Kremlin. The first large project was the Blue Stream-1,2 laid under the Black Sea to Turkey, after - the main pipeline Yamal-Europe through Belarus and Poland, later - two threads of the Nord Stream laid under the Baltic Sea. Over the last few years, Gazprom persistently and publicly made much of ideas of bypassing Ukraine through the Black Sea. It was initially the «South Stream» through Bulgaria. After its demise - a mega-project, in the Russian version - the Turkish Stream. The Kremlin was of a little interest in the economy of projects. The Turkish project was moving forward despite the fact that the Blue Stream never run at full capacity, and the Turks were explicitly skeptical about the idea of laying four more new threads. In «hard times» they appealed to Ukraine, seeking for help to transport the same Russian gas. And they have never regretted. Ankara does not need 63 BCM of natural gas imposed by Moscow. Turkey is only interested in the required 17 BCM and — gas discount.
Therefore, Turkey proposed the Russian Federation to expand the Blue Stream (which is logical and would make at least some economic justification) and restrict a new direction of gas supply and gas transportation with one or, at the most, two threads. Gazprom peremptorily proposed the European Union to invest in new infrastructure to supply Russian gas from the «new hub» on the border of Turkey and Greece in the framework of the Turkish Stream, while insisting that af ter 2019, Ukraine’s infrastructure will be disabled (ten year transit contract between Naftogaz of Ukraine and Gazprom will expire in 2019). Wreckage of SU-24 downed by the Turkish missile and the subsequent anti-Turkish hysteria in Russia seem to have sent the Turkish project on the far shelf.
By the way, without waiting for the consent of Bulgaria and then Turkey, Gazprom built on the territory of the Russian Federation pipelines to fill at least first two «Turkish» threads. Now Gazprom is the owner of buried pipes that lead to nowhere. However, pipeline laying business has long been Gazpromrelated feeder (which explains the apparent high cost of some projects). The Kremlin’s attempt to redistribute gas market was announced long before. «North Wind» — «Nord Stream». The unofficial name of Russia’s invasion of eastern Ukraine is «North Wind». Now Russia decided to hit at the interests of Ukraine with the reincarnation of the Nord Stream. Back in early 2015, Moscow had no plan to implement this option, hoping to do with southern projects. In 2012, Gazprom announced plans to expand the Nord Stream with two branches and to extend it to the UK. This project clearly got hung up – Britain refused to exacerbate the dependence on politically unreliable supplier. As a result, Gazprom said about no plans to expand the Nord Stream back in January 2015. «The pipeline has the technical ability to pump up to 55 BCM per year. It is enough at the moment», — the company noted. Indeed, in 2014, the most successful year for its beneficiaries, the Nord Stream (registered in Switzerland) was loaded by two-thirds of its capacity. The main reason is the unwillingness of Gazprom to meet the requirements of the Third Energy Package that provides for free access of other gas suppliers to GTS. First threads of the pipeline Nord Stream (today known as the Nord Stream-1) were laid before the entry into force of the Third Energy Package, but to enter GTS, Germany had to build two surface pipelines - OPAL capacity of 30 BCM per year and NEL capacity of 20 BCM (see scheme below). Despite the stubborn resistance of Gazprom and its German partners, they fell under the sanctions of the Third Energy Package.
A kind of irony is that in theory Russia could circumvent this restriction by issuing permits to export associated gas of its oil companies. However, the policy of full monopolization of gas supplies, the so-called unified export channel, makes it impossible. As a result, about 120 BCM of gas was pumped for four years since the launch of the first thread of the Nord Stream and for three years - the second thread at a capacity of 55 BCM per year. It is out of logic to double the capacity (two more threads 27.5 BCM each) under these conditions. But the case is not so simple.
A few words about «brisk puppies». Taking bribes is bad and unsafe thing. Another thing is to participate in investments. Already in the first two threads of the Nord Stream Gazprom had to give 49% of the shares of pipe management company NordStream AG in favor of Western partners. And that is by no means all Russian «gingerbreads». Gazprom was to give a guarantee of 12 billion EUR for gas transportation (this is more than the cost of the first threads of the Nord Stream). That is, Russian gas company accepted payment of 12 billion EUR in favor of NordStream AG in case of termination of gas transportation agreement. But the most interesting and little-publicized part of the deal was another subject – gas source. The main gas source of the Nord Stream-1 is South-Russkoe field with reserves of 1 trillion cubic meters and annual production of 25 BCM. Despite the «warm» name, it is far to the north, in the Yamalo-Nenets Autonomous District, and is developed by Severneftegazprom. In addition to Gazprom, one can see there very interesting shareholders - German companies WintershallHoldingGmbH и E.ON AG.
Gazprom owns 50% + 6 ordinary shares. Distribution among its partners differs: each has 25% minus 3 ordinary shares plus 3 priority shares (without voting right). Formally - «fiftyfifty». But the point is that face value of shares is different, 6 priority shares are equal to 20% of the authorized capital. So, profit shares look different: Gazprom owns 40%, Wintershall - about 35% and E.ON - 25%. In fact, the following scheme works: Gazprom had to give the Germans direct access to gas production in Russia in return for the right to supply gas to German through almost halfowned by them pipe. The similar scheme appears also around the Nord Stream-2. Last months, Gazprom undertook operations to exchange assets - some of them were completed, some are still in the process. Wintershall access to gas production flashed once again - already at Urengoyskoe gas field. In fact, talks are underway for a long time, the first contacts on this subject started back in last century. The result is expected to appear next year. While we are talking about a blocking stake (25%). According to unofficial data, partners intend to set further share in the amount of 50% each. They started with a blocking stake with regard to South-Russkoe field as well. Reserves in two blocks of Urengoyskoe field are 1 trillion cubic meters of gas and up to 200 million tons of condensate. So, this is a very tasty morsel. At the same time, Gazprom had to give up its share in the company-operator of the Nord Stream-2 – it was reduced from 51% to 50%.
In general, Gazprom recently has to make concessions were out of the question earlier. Market capitalization of the company fell seven times in recent years, so Gazprom is in a bind with the involvement of resources. Especially after the Chinese firmly identified that laying pipes to China will be exclusively at the expense of Gazprom. Sharing, bowing, guaranteeing and making concessions. You wanted – you got «energy superpower’s» share. About our sorrowful matters. Nevertheless, the project North Stream-1, 2 is not only a paper. Last year, Ukraine’s gas transmission system pumped only 62 BCM of Gazprom’s gas (the plan at the beginning of the year was 70 BCM to 80 BCM). «Withdrawal» from our GTS of another 20 BCM to 25 BCM of transit load makes at least one of three key directions of natural gas transportation inappropriate (no one even says on return to the transit of 100 BCM of Russian gas). The danger of the Nord Stream for Ukraine (and the states of the European Union, provided they really share the political interests of the EU members States and commercial companies of these countries) lies in its support by a number of powerful Western companies (often the same companies are the main sponsors of certain parties). Moreover, by calling a spade a spade, not everyone in the same Berlin stands against the idea of becoming a monopoly operator of «Russian gas».
The question is how profitable is it to the European Union, and whether the European Union will support Ukraine in gas transportation matter? Russian project the Nord Stream hits at the interests of Ukraine by depriving it of revenues from Russian gas transportation, primarily to the EU (we are talking about approximately 1.8 to 2 billion USD of income of Ukrtransgaz PJSC and Naftogaz, which shortfall increases the need for external lending). In addition, as mentioned above, the reduction of Russian gas transportation to the EU does not strengthen Ukraine’s GTS, rather weakens competition in the European market, actually cutting off some gas pipelines and directing main gas flow (and therefore revenues) to a single - pro-Russian corridor. A member of the EU – Slovakia – also falls under direct hit: gas transit will be terminated through the country. Poland and Belarus also appear wounded (part of gas volume will probably be withdrawn from the Yamal-Europe pipeline in favor of the Nord Stream). To a lesser extent, but Romania will also suffer. Not to mention the fact that a new large project - in the event of its non-compliance with the Third Energy Package - severely erodes sense of the existence of the latter. Actually, this autumn, the European Commission expressed its opinion about the risks of gas market monopolization and that «it will not meet the EU strategy to diversify sources and routes of gas supply». «On the contrary, if the Nord Stream-2 pipeline is built, it will increase Europe’s dependence not only on one supplier, but also on one gas supply route. The project will concentrate 80% of gas imports from Russia on the same route and will lead to a dominant position of Gazprom in the German market, increasing its share from 40% to 60%», — the European Commission noted.
However, the European Commission has not yet developed own official position. Recently, several EU countries appealed to the European Commission with a letter, drawing attention to the fact that the Nord Stream-2 will negatively affect Europe’s energy security. The letter was signed by authorized representatives of Slovakia, Poland, Hungary, Romania, Lithuania, Latvia and Estonia. However, there is no signature of the Czech Republic representative. The latter first decided to get an advice, and later his government decided to refrain. The Czech Republic can receive gas both through Ukraine and Slovakia, and from the north, through Germany (both European and Russian, from the Nord Stream). But is that a reason? In general, it is too early to say that there is a unified front. And, again, it is Germany will play a significant role in its creation (or noncreation). While the position of the founder of the EU is very restrained: «The project is commercial, and it should be assessed for compliance with EU legislation». Our key politicians already gave comments.
Last week, the President Petro Poroshenko once again stated the importance of «further use of Ukraine’s gas transportation facilities to transport gas to Europe and inadmissibility to implement the North Stream-2 project». «It makes no economic sense, and the project itself is exclusively political», — he noted. Unfortunately, sense of the Nord Stream-2 project can be quite different for certain German companies. And the main challenge, in particular for Ukraine, is to prove that it is not profitable either for Germany or for the European Union. «Sworn friend» of the President Arseniy Yatsenyuk previously gave comments with regard to the Nord Stream-2, quite rightly calling the project «anti-Ukrainian, anti-European». «If Russia with some Western companies build the Nord Stream-2, it will mean that Russia will achieve its goal and will completely deprive Ukraine of natural gas transit to the EU countries», — he stressed. Be that as it may, but apart from loud statements, one requires careful and coordinated work with our Western partners.
Certainly, the phrase «joint work of Poroshenko and Yatsenyuk» provided their tender and mutual «love» to each other is quite relative and even grotesque, rather it is a subject for instructive fables. But the matter is of great importance for the country. Now there are several centers to develop programs to use Ukraine’s GTS. Naftogaz of Ukraine, the Ministry of Energy, the presidential administration and, above all, public gas transportation company Ukrtransgaz have own achievements. To prevent another senseless squabble and rearrangement of papers (as is the case with Chernomorneftegaz), one requires a single point of coordination, as well as the responsible official. Once, there was the position of the Commissioner of the President of Ukraine for Energy Security. One requires a lot, though, watching the almost public fights in the «terrarium of like-minded», it hardly can be achieved. But we should do this. Moreover, a s we approach the restructuring of Naftogaz of Ukraine.
The restructuring is to be done quickly and efficiently. GTS is to become a separate structure as prescribed by the Third Energy Package. GTS is to be privatized involving strategic (but not Russian) investors, as ZN. UA has been saying for more than two years.
Herewith, we obviously will not get much money for it - we missed this moment. Now we are talking about further existence of GTS and its effectiveness as far as possible. Probably, a large company as GTS shareholder will get more credibility than our officials. We may take as an example the Russians that quietly admit foreigners to the capital of their transit systems (however, outside the Russian Federation).
Anyway, we should act quickly, since we will be definitely too late in doing certain things tomorrow. Have Bankova Street and Grushevskogo Street understanding and awareness of this? No fear. One will probably have to inculcate these skills, if necessary, using kicks. This at least makes some sense.