COMMON CRISIS

After long debates at the EU last summit the leaders of the union reached an agreement to fight the ongoing energy crisis. They decided on the voluntary joint procurement of gas, a so-called energy solidarity in case of supply disruptions and efforts to save energy.

The member states also agreed on a gas price ceiling, while facing criticism of the idea from Hungary, Germany and the Netherlands.

Meanwhile, the reduction of Russian gas supplies to Europe has triggered a series of new projects and ideas related to gas exports. For example, Russia proposed to expand the capacity of the Turkish Stream pipeline, which will make it the main route for exporting gas to the EU, as well as to create a major gas hub for Europe in Turkey. In parallel, Azerbaijan decided to take a closer look at liquefied natural gas (LNG) and agreed with Romania on a project to build an LNG plant in the Black Sea region.

Weather saves Europe

Another extraordinary EU Energy Council to discuss the anti-crisis package will convene on November 24, 2022.

In the meantime, unexpectedly warm weather in Europe is delaying the start of withdrawals from underground storage facilities (UGSs). This also has a favourable effect on gas prices, which have fallen to their lowest level since June 2021. On October 24, the spot price on the day-ahead TTF in the Netherlands was $301 per thousand cubic metres.

In the last week of October Europe was enjoying unusually warm autumn season with average temperatures almost 3 degrees higher than a year earlier. Apparently, the Mother Nature had a mercy on Europe, thereby postponing the withdrawal of gas from UGSs, which was supposed to start after October 20.

Almost all European countries have filled their storage capacities to either the normative (80%) or maximum levels. So far, Austria, Belgium, France, Hungary, Germany and several other countries have exceeded the target level of 80%.

Latvia has the lowest utilisation rate in the EU so far, with a gas reserve of 56% in the Incukalns storage facility, although it is responsible for ensuring gas supplies for four countries: the three Baltic States and Finland.

On average, reserves in European UGSs have risen to 93.43%, according to the Gas Infrastructure Europe (GIE) association. In absolute terms, this means that there are more than 100 bcm of gas in storage.

Before the conflict in Ukraine, the EU received 40% of its gas imports from Russia, but today that figure dropped to 7.5%. Some Central European states still receive relatively large amounts of Russian gas, while others, such as Cyprus and Sweden, do not use gas at all in their energy mix.

Anti-crisis package

In fact, the EU is experiencing an energy crisis of unprecedented proportions due to declining gas supplies from Russia. On top of that, the Nord Stream 1 and 2 pipelines were blown up in September, leaving supply routes and capacities constrained.

To solve the situation, the European Council decided at the October 20-21 summit to the European Commission's proposals for dealing with the energy crisis as a basis. In other words, EU leaders agreed on joint procurement and capacity reallocation in the event of a crisis in any national market within the EU. These measures are supposed to help in the event of depletion of gas storage facilities to below 15% of total volumes and are expected to strengthen the EU's negotiating position, as this will make it possible to avoid competition between the EU member states.

Another agreement was to create a new trade benchmark for LNG exchange trading. The new format will institutionalise LNG trading and reduce pressure on the gas market by speculators.

President of the European Council Charles Michel said after a debate among European leaders that the summit showed "a unanimous strong determination to act together as members of the EU to achieve three goals: reduce (gas) prices, guarantee security of supplies and keep working to reduce demand".

"We have sent a clear message to the market. We are ready to act together, we can work together, we have a strong political will. I am confident that a positive effect will be achieved very soon," Michel summed up.

President of the European Commission Ursula von der Leyen said there was a good plan to work on energy prices following new agreements by European leaders.

"We will develop an additional new index to better reflect the situation with LNG prices. In the meantime, we will set up a market correction mechanism to limit the cases of overpricing," she said.

Thierry Breton, a member of the European Commission's internal market, believes that the new EU agreement already has a positive effect on energy prices. "Since the announcement, gas prices have fallen by 10%. Today we pay €67 per megawatt hour of energy; last summer it was €300. Yes, prices are going down, they will go down," the commissioner believes.

However, he acknowledged that there is still much work to be done, as the European Commission must now propose concrete actions to be considered by member states "in the coming days".

Black Sea Hub

With the failure of the Nord Stream and complete uncertainty over its rehabilitation, Russia has found a way back into the European gas market.

It is a question of building another gas pipeline system and creating a gas hub in Turkey for sales to third countries, primarily to European countries.

Russia currently only supplies gas to the EU via the route through Ukraine, which is only half-operational at around 42mcm daily. There is also one line of the Turkish Stream (around 45mcm daily).

The new initiative was first announced by Russian President Vladimir Putin during Russian Energy Week on October 12, and again at his meeting with Turkish President Recep Tayyip Erdogan.

"The lost volume of transit through the Nord Streams can be moved to the Black Sea region by creating a major gas hub in Turkey, if European partners are interested," Putin said.

The Russian leader added that a gas hub in Turkey, if established, could become a platform for gas price formation as well as for supplies to European countries.

"Today these prices are exorbitant, and we could calmly regulate them at a normal market level without any political overtones," Putin said.

Gazprom CEO Alexey Miller later explained that restoring Nord Stream's operation is a long process, which could take years, and that shifting capacity to the Black Sea region is a relevant idea.

"How long will it take to restore the lines? Technological issues are also important. The first issue is a political one. The EU and Germany should reply as to whether they are interested in having the pipelines restored and give guarantees of their safe operation. Restoration will take more than a year, it is quite a long story," Miller added.

He also said that Gazprom was ready to set up a trading platform at the EU-Turkey border.

The new initiative has been greeted with enthusiasm by the Turkish leadership, which is not surprising. The implementation of such an initiative would turn Ankara into an important energy hub in the region and would multiply its role in Europe's energy security.

President Erdogan said that a gas hub could be established in the European part of Turkey as soon as possible.

"Europe is now thinking of ensuring energy supplies for the coming winter. We do not have such a problem. We have agreed with Vladimir Putin to set up a gas hub in Turkey to supply gas to Europe. Thus, Europe will order gas from Turkey," Erdogan said.

In addition to the construction of a gas hub in Turkey, this initiative would also require the expansion of infrastructure capacity to increase Russian energy supplies to Turkey and Europe. In other words, the construction of additional facilities along the Turkish Stream, which makes the project quite costly.

Furthermore, it is highly doubtful that the EU would welcome the initiative focusing all its efforts on a life without Russian gas.

Ursula von der Leyen said proudly at the European Parliament meeting on October 19 that Europe has been able to replace, albeit at incredible cost, most of its supplies from Russia and continues to reduce its dependence on Moscow much faster than previously planned.

"We assumed that it would take seven years to switch away from Russian gas. But it took us only eight months to replace 2/3 of Russian supplies. In other words, we have significantly accelerated the switch to other foreign gas suppliers. But we had to pay a higher price for this," she noted.

The Czech Minister of Industry and Trade, Jozef Sikela, has expressed unequivocally his hope that European countries will not buy gas from Russia via the gas hub in Turkey. He admitted that there are serious discussions in Europe about gas and oil supplies and that imports from Russia are a problem. He blamed the high price of Russian fuel for the current situation.

According to Sikela, the gas hub project in Turkey raises questions. "How will this hub work? Europe will know that it is Russian gas. I hope Europe will not buy it," he said.

Meanwhile, the Turkish side has a counter-proposal regarding gas cooperation with Russia. It concerns the cost of imported gas, or the discount that Ankara expects to receive from Moscow, as well as a deferral in payments for the supplied product.

Turkish Minister of Treasury and Finance, Nureddin Nebati, told the Financial Times that he expected good news on both issues. He expects Turkey to "very comfortably" avoid a balance of payments crisis next year, despite having to pay for $100 billion in energy imports.

Turkey imported a record 58.7bcm of gas in 2021. Imports during the first seven months of 2022 remained almost the same as last year (34.2bcm; -0.4%). Russia provides more than 40% of the Turkish gas supply.

LNG cooperation between Azerbaijan and Romania

Meanwhile, Azerbaijan decided to try its chance in the liquefied natural gas market. An Azerbaijani delegation consisting of Economy Minister Mikayil Jabbarov, Energy Minister Parviz Shahbazov and SOCAR management paid a visit to Bucharest, where they signed a Memorandum of Understanding on cooperation between SOCAR and Romgaz.

On the same day, Romgaz announced big plans to develop a project on LNG production in the Black Sea together with SOCAR. More specifically, by signing a memorandum, the companies agreed to prepare a feasibility study for the project, which will include the construction of LNG, regasification and other facilities to transport gas from the Caspian Sea region.

Romanian Prime Minister Nicolae Ciuca explained that the memorandum provides for joint investments with SOCAR. "Following a bilateral meeting that I had with Azerbaijani President Ilham Aliyev, we agreed together to analyse the possibility of starting a joint LNG project on the Black Sea," he said.

According to Ciuca, the project will start with a feasibility study jointly financed by the two sides. However, Bucharest expects to see a final version of the document in a very short time.

"We have agreed with an international company to develop it and we have a guarantee that the feasibility study will be completed, because we need this gas and the creation of capacity in a very short time frame. Eventually we hope to have two terminals - on the eastern and western shores of the Black Sea - so that we can diversify and complement the gas supply corridors from the Caspian basin to Europe," Ciuca said.

Romanian Energy Minister Virgil-Daniel Popescu said Romania would become an important hub in terms of electricity and natural gas supplies thanks to the Black Sea LNG project with Azerbaijan.

Actually, the idea of LNG supply from Azerbaijan to Romania is not new. Once there were discussions on the AGRI (Azerbaijan-Georgia-Romania Interconnector) project providing for the annual export of up to 8bcm of LNG from Azerbaijan to Romania. In the first phase, it was planned to export up to 2bcm of gas through AGRI, increasing this volume to 5 and 8bcm in the second and third phases of the project, respectively.

The project ensures the establishment of LNG terminals at the ports of Constanta and Kulevi. Natural gas from Azerbaijan was to be delivered to the Black Sea coast of Georgia for compression at special terminals and then by tankers to the LNG liquefaction terminal in Constanta. Further, it would be transported through the existing gas transportation infrastructure in Romania to meet the domestic needs of the country and other European states.

However, AGRI has never reached the stage of practical implementation, although the Romanian side prepared a feasibility study for the project. It is fair to say that at that time the European gas market was rather predictable and stable in terms of supplies and the urgent need for such costly projects was not considered.

The current situation in the EU, however, dictates very different conditions and significantly increases the chances of a small European country with a picturesque nature to become an important energy hub in the Black Sea through Azerbaijani gas and investment.