RUSSIA DESPERATE TO SECURE ITS MONOPOLY FOR GAS TO EUROPE

Russia criticizes EU for taking gas transit issues into their own hands

Does Russia try to dictate how its gas should be transported to the European market, or is it rightfully intervening in order to tell Europe how it can get its gas most effectively to the European market?
Does EU have a sole responsibility to secure its import of gas by taking actions without the intervention of the seller of gas?
What role should the seller of imported gas have, and what is stated in the gas delivery contracts?

All these questions are in the mind of energy concerned Europeans as well as Ukrainians at the moment as Russia launched its attack on the EU deal with Ukraine to upgrade its gas network.

First, we need to look into some historic facts before we can answer some of these questions.

GAS TRANSIT CONFLICTS
The last two years repeating conflicts between Russia and Ukraine regarding the transit of gas through Ukraine territories has revealed that Russia and Ukraine does not act as best friends in this business area. Several accusations from both sides on who is to blame for the conflicts have been launched both between the parties, but also towards the ultimate client for Russian gas, the European politicians.
European politicians have not taken any side to who is to blame, but has decided that enough is enough and has begun to realize its need to secure its import of gas from its various sources, amongst them the Russian imported gas. As 80% of the Russian gas import to Europe, goes through Ukraine, it has become an important question, how can this transit route be secured, both from a technical, but also political standpoint of view.
It was obvious from both of the conflicts, both in 2008 and in 2009, which EU could not do anything and was helpless to the battle between seller and transit countries, Russia and Ukraine. EU stated at one point that Russia had the sole responsibility to ensure gas delivery, and EU could not do anything in this matter.
To get an insight to this problem, one needs access to the gas delivery agreement between Russia and EU. So far, no one has been willing to give details on how this contract is constructed and how the responsibility of transit should be solved.
But given the standings of EU during both conflicts, it is certain that EU understand this is Russia’s problem to solve.
However, EU has grown impatient to Russia and its lack of willingness to come to a permanent solution for existing pipeline transport of gas. Instead EU see that Russia grows more interest to alternative gas transit routes, and has questioned the economics of these alternatives together with environmental concerns, especially for the northern alternative. This has made EU to look into the cost and benefits of upgrading the existing Ukrainian gas pipeline network, and has apparently found this alternative to be a good solution seen both from an economic but also ecological background.


NORD STREAM UNDERLYING THE BALTIC SEA
Russia has politically whole heartedly supported Germany’s efforts in launching the northern Stream pipeline system through the Baltic Ocean, directly into Germany, in order to bypass the Ukrainian network. The cost of this project is estimated to around 14 9 billion Euros. The project has cased concern by involved countries, when it comes to environment and national security issues. The project will also give Russia a proportional stake in the project, hence income.
The capacity of the pipeline is estimated to be around 27.5 bllion cubic meters (bcm) per annum.

SOUTH STREAM UNDERLYING THE BLACK SEA
Parallel to this Russia press hard for the Southern stream pipeline system that will ensure the south eastern part of EU dependencies needs attention from Brussels as well, including Italy’s needs. Parts of this line have to pass Ukrainian continental shelf, and will require extensive environment studies and therefore environmental permits from Ukraine
The last estimated cost for this project was around 20 billion Euros, more than double of either Nabucco or Nord Stream projects. The project will give Russia a proportional ownership, and hence income from transit through this line.
The capacity is estimated to be 31 billion cubic meters (bcm) of gas annually and it may be expanded to 47 bcm.

NABUCCO GAS PIPELINE
The two Russian supported projects outlined above are both competing with the U.S.- and EU-backed prospective Nabucco pipeline that bypasses Russia.
Russia turned down an offer to participate in this project, as it presses for the two above mentioned projects instead.
The cost of this project is estimated to around 8 billion Euros.
The project will introduce new partners on the transit side, such as Turkey, Georgia and Azerbaijan.
It opens for delivery of gas not only from Turkmenistan, but also Iran, which can give Europe even more legs to stand on.
Capacity of the pipeline will be between 4.5 and 13 billion cubic meters (bcm) per annum.

UPGRADE OF UKRAINE GAS PIPELINE SYSTEM
The EU has promised Ukraine billions of Euros enable Ukraine to upgrade the aging pipeline network which pumps Russian gas for the European consumers. 20% of gas consumption in the EU comes through the Ukraine from Russia.

Moscow lashed out at Brussels for entering into a deal with Ukraine to modernize its aging gas transit pipeline network system.

The Russian argument is that the agreement between EU and Ukraine makes no sense without Moscow's involvement.

Russia has stated that the agreement raises a number of questions and said that the EU and Ukraine had failed to discuss the agreement with Russia.
The prime minister of Russia, Putin, argued that the volume of gas to be pumped is a key factor, and this gas can only come from the Russian territory, but no one has discussed the issue with the Russians.

The deal struck between EU and Ukraine followed after a Russian gas cutoff in January to Europe due to a price and contract dispute between Russia and Ukraine which underlined the EU's energy dependence on Russia.
An upgrade of the pipeline will potentially give a capacity of around 60 billion cubic meter per annum. This is by far the largest transit system of all alternatives evaluated so far.

RUSSIAS INVOLVMENT IN GAS TRANSIT SYSTEMS IN UKRAINE
It has been argued from various sources, both officially and unofficially that Russia through Gazprom and other companies has tried to acquire network capacity through direct ownership of parts of the Ukrainian network.
Only in the later stages, after EU came on the track with an agreement, Russia says they would also like to assist with money to modernize Ukraine’s gas pipeline network.
Yushchenko and his officials have accused Moscow of wanting to take control of the nation's gas pipeline network, allegations that Russia has denied.


THE UNDERLYING POLITICAL ARENA IN UKRAINE AND BETWEEN UKRAINE AND RUSSIA
Prime minister of Russia Putin suggested that Ukraine's Prime Minister Yulia Tymoshenko's visit to Moscow be delayed until the gas agreement is clarified.
Tymoshenko's visit was expected to focus on her push for a $5 billion Russian loan to help shore up the Ukrainian economy, among the hardest-hit in the global financial meltdown. The postponement of her visit suggests the loan could now be jeopardized.
Tymoshenko on Tuesday rushed to reassure Russia that it wasn't being shut out of the energy deal with the European Union.
Ukrainian prime minister stated that the agreement opens for all to participate in the investment process, allowing Gazprom and the Russian Federation intend to either invest in this process or attract Russian companies, which could take part in reconstruction and modernization work without intermediaries.
Ukraine's President Viktor Yushchenko, has opposed the efforts to secure a Russian loan, saying it would make Ukraine overly reliant on a huge neighbor determined to bolster its influence over the country and keep it out of NATO.

Volodymyr Omelchenko, an energy analyst with the Kiev-based Razumkov Center said the EU-Ukraine agreement dealt a blow to Russia's hopes to get a stake in Ukraine's pipelines network through the creation of an international consortium. "They got offended because this declaration allows Ukraine to deal directly with the European Union without Russian participation," he said.

Yushchenko's energy adviser Bohdan Sokolovsky said that Russia was welcome to join in modernizing Ukraine's pipelines along with other investors, but reaffirmed that Ukraine will not give up control of its gas transit network. Sokolovsky said the creation of an international consortium of the type Russia had pushed for would violate Ukrainian law.


ANSWERS TO EU’S ALTERNATIVES
Given that EU has a multi-fold challenge on its hands;
Secure transport and need for diversifying the delivery for it energy needs. It also has to think of the economy and ecology of these alternatives. EU also has to think about their use of alternative energy sources in the various time aspects.

When it comes to diversifications of EU’s energy need, it will is clear that in the short and mid term, EU will depend upon Russian gas, as it will take time for alternative energies to play a significant role in Europe’s energy need supply.
EU will not achieve any diversification by building the new nord and southern stream pipelines. It will only create a semi-security for delivery of gas from its sole source of delivery, Russia. Still EU will be very dependent upon Russia and its political stability towards Europe. It will also give Russia a stronghold for other political questions, since Europe will need to play along with Russia, as Ukraine has to do today. The only new pipeline alternative that creates real diversification is the Nabucco project, which bypasses Russia totally.

EU’s alternative of upgrading the Ukrainian gas pipeline network is a real alternative and should be addressed as soon as possible, and the political will to support such a modernization of their network came at the right time. Failure of Russia to be more pro-active in securing its existing transit route, has bloomed out in EU’s effort to take the matter into its own hands. Moscow has argued that the new northern and southern pipelines are needed to reduce the EU's dependence on the dilapidated Ukrainian network. The EU-funded modernization and expansion of Ukraine's pipeline system could call that argument into question. Also one has to question Russia motives as both alternatives supported by Russia, still only will deliver Russian gas, and leave no room for alternative sources in the future. Therefore seeds the doubt about diversification argument totally.

If Ukraine's transit capacity is increased, it will no longer be necessary to build alternative routes, seen from a security standpoint of view alone. The capacity and security of the pipeline will be taken care of as Ukrainian authorities stated that modernizing Ukraine's outdated gas pipelines, which span 37,600 kilometers and comprise 73 compressor stations with 13 underground storage facilities, will cost approximately 5.5 billion Euros. This will become cheaper compared to building alternative northern and southern stream pipelines, as the EU is contemplating.
The European Commission has provisionally estimated Ukraine's modernization program at approximately 2.5 billion Euros, but has not committed a sum to the project.

Therefore, EU need to make a strategy in short to mid term aspect to modernize the Ukrainian gas network at the same time as it builds the Nabucco gas pipeline network. This will secure and diversify EU’s energy needs for traditional energy sources. It will also release EU from having to rely too much on a sole source for its majority of gas needs, and be less prone to blackmailing by sellers of energy.
In the longer term, EU need to address the focus on use of alternative energy sources, such as wind, solar and geothermal sources. A strong focus on these areas will enable EU to reach a diversified and sustainable energy delivery for its needs by 2030, no earlier.