IS A NEW "GAS WAR" LOOMING?

The fact that Europe needs alternative sources of gas has long been known. It is also common knowledge that "blue fuel" from the Caspian region is considered as the main alternative to Russian gas. For now, Azerbaijan, which had initiated the   Trans-Anatolian gas pipeline (TANAP) project, has undertaken the role of the main supplier. This pipeline will transport Azerbaijani gas from the eastern border of Turkey to the country's western border and further through the Trans-Adriatic Pipeline (TAP) to Greece and Italy, with an offshoot to Bulgaria. Initially, 10 billion cubic meters of gas a year is to be shipped, and relevant contracts have already been signed with a number of companies.

But the number of those interested in Azerbaijani gas and, accordingly, in projects on its transportation to Western markets, is not limited to the current participants in the project. This is indicated by the results of a recent visit by Azerbaijani President Ilham Aliyev to Ukraine, during which an emphasis was placed on energy cooperation between the two countries.

"Interaction in the energy sector is one of the priority issues, and our countries have all the conditions available to join efforts in the issues of transporting hydrocarbons to Europe," Ukrainian President Viktor Yanukovych said following the Ukrainian-Azerbaijani talks.

Yanukovych expressed confidence that collaboration in this issue would facilitate reinforcing the positions of Ukraine and Azerbaijan in the Black Sea and Caspian region.

President Ilham Aliyev also noted that issues pertaining to the fuel and energy sector have always played a special part in the agenda of bilateral relations.

"There are very many spheres in which we can actively interact," President Aliyev said. "Azerbaijan as a producer of energy resources and Ukraine as a consumer and transit country play an important role in ensuring the energy security of many countries, and the cooperation between the Caspian and Black Sea regions, including in the energy sector, is exactly the result of our joint activity. For many years Azerbaijan has been reliably transporting and delivering its energy resources to the markets in the Black Sea (region), the Mediterranean and world markets."

A more specific stance of Kiev on the issue of energy cooperation was voiced by Ukrainian Minister of Energy and Coal Industry Eduard Stavitsky.

"We are considering today Ukraine's involvement in the TANAP. We have offered the option of Ukraine's participation both in the investment component and  our companies' contributing to the production of pipes, as well as a new branch, while taking into account our gas transportation network and our storages in western Ukraine," Stavitsky said, emphasizing that Kiev made a relevant proposal during the Ukrainian-Azerbaijani talks.

Stavitsky voiced confidence that Turkmenistan, Azerbaijan, Georgia, Ukraine and the European Union countries are currently interested in a successful implementation of this project.

According to him, the two countries are also mulling prospects for supplying liquefied gas from Azerbaijan to Ukraine.

Shortly after these statements the Russian newspaper Kommersant cited the details of a possible agreement. According to Ukraine's energy ministry, if investment to the tune of around 800m dollars is made, Ukraine may rely on supplies of Caspian gas that would be cheaper than Russian fuel.

Ukraine offers to link up TANAP with gas pipelines in Bulgaria and Romania, and further with the Ananiev-Tiraspol-Izmail pipeline. The corridor to be created will allow transporting up to 10bn cubic meters of gas annually.

"Given that according to the current prices Azerbaijani gas will cost Ukraine 60-80 dollars less per 1,000 cubic meters than Russian gas, this investment will be returned in five years at the most," a source at the ministry told Kommersant.

The possibilities of alternative gas supplies are of paramount importance for Ukraine. Ukraine, which is one of the biggest gas consumers in Europe, is completely dependent on the supplies of Russian fuel and pays one of the highest prices charged in the region, ranging between 410 and 450 dollars per 1,000 cubic meters. And that price includes the discount of 100 dollars, which Russia provides in exchange for the possibility of stationing its Black Sea fleet in the Ukrainian port city of Sevastopol.

Ukraine is seeking to lower the price for Russian imported gas, but has been unable to secure an acceptable fee -- something the Russian company Gazprom's European partners have essentially accomplished. As a result, Ukraine has taken a course toward reducing gas consumption, searching for alternative supplies and ramping up domestic output.

Thus, the country's gas consumption has reduced by 50 per cent in past years -- from 75bn cubic meters in 2005 to 55bn cubic meters as of the end of 2012, with the same figure predicted for this year.

Whereas in 2005 gas imports constituted 60bn cubic meters, in 2012, it dropped to 33bn cubic meters, and the 2013 projection is 28bn cubic meters.

However, the issue regarding the volume of imports remains very questionable. Under the contract which is in effect, Ukraine is to purchase 52bn cubic meters of gas a year. Given a possible 20 per cent reduction in imports, the minimum bulk of the purchases cannot be below 41bn cubic meters, while Ukraine has already significantly reduced its imports. As of the end of 2012, Gazprom said Ukraine is to pay a 7bn dollar bill for the shortage of purchased gas, which Kiev essentially ignored. This year, there could be a reason for a new shortage, costing as much as 10bn dollars this time.

However, Ukraine is still actively looking for possibilities of alternative gas supplies. And now Poland and Hungary, Ukraine's European neighbours, which are supplied with gas by Russia, have come through to assist Kiev. The most astounding thing regarding this situation is that Russian gas imported from these countries costs Ukraine less than the gas delivered from Russia itself, though the imports from Europe slated for consumption in Ukraine are quite insignificant, ranging between 1.5bn and 2bn cubic meters.

Nevertheless, Ukraine has fairly good prospects to secure gas deliveries from other European countries, notably, Slovakia, as this route makes it technically feasible to pump up to 30bn cubic meters of gas annually. According to Ukrainian Energy Minister Eduard Stavitsky, hopes for the opening of this corridor are bound with the signing of the Association Agreement with the European Union.

Another alternative for supplies is the Adriatic Gas Corridor. This gas pipeline links Hungary with Croatia and currently transports gas to the former Yugoslav republic. 

Meanwhile, construction of a liquefied gas terminal is envisaged on the Croatian island of Krk in the Adriatic Sea. In this case, gas will flow in the opposite direction -- into Hungary, and could be delivered onward to Ukraine. Talks on the issue are ongoing quite intensely, and this route is also backed by the European Union. This being said, this option creates quite real opportunities for supplying Azerbaijani gas to Ukraine. Azerbaijan plans to deliver its gas to Croatia anyway -- as part of the branching-out from the Trans-Adriatic Pipeline, and from there it could be pumped towards Ukraine.

For the time being, however, Ukraine has to settle for the expensive Russian gas, simultaneously reducing its imports and consumption and trying to increase its own production.

It is worth mentioning that Ukraine's domestic gas output is also quite large, amounting up to 20-21bn cubic meters, but the consumption level is still higher. Recently agreements have been concluded with Chevron and Shell on exploration for and development of shale gas (Ukraine sits on the world's third-biggest shale gas reserves). Negotiations are also underway with ExxonMobil regarding operations in the Black Sea shelf. If the operations are successful, the Ukrainian government intends to ramp up production to 30bn cubic meters of gas a year over the next 10 years, and, having reduced the gas consumption level, completely rid itself of imports.

The relations between Ukraine and Russia are either stable or full of threats of "gas wars", that shakes Europe which experienced the hardship of these wars in past years. During that period Ukraine and Russia were unable to hammer out a deal on a price and volume of gas supplies, and, as a result, Kiev was fully blocking gas transit to Europe. The latest "gas war", which occurred in early 2009, led to the transfer of Ukraine to the market-based norms of gas pricing.

In Europe, these "wars" exacerbated the issues of ensuring energy security and the possibility of alternative gas supplies.

In fact, another "war" could have flared up late this year. In early November Gazprom announced that Ukraine's Naftogaz had outstanding debt worth over 1bn dollars for the gas supplied in August and October and threatened to introduce 100 per cent upfront payments for gas supplies. Naftogaz responded by suspending the purchases of Russian gas and started deriving it from the gas storages. This actually made Gazprom nervous, as the Russian company became worried over the prospects of gas supplies to Europe during the cold time of the year. In this context it is worth mentioning the specific features of Ukraine's gas transportation system: on particularly cold days the "blue fuel" delivered to Europe is derived from the gas storages. So, a reasonable question arises: who should replenish the Ukrainian gas storages? According to Gazprom, Ukraine take care of as it ensures the gas transit to Europe, while Kiev says this is the Russian gas monopoly's problem.

But in any case, a new wave of tension was avoided for now as the sides reached agreement both upon a phased repayment of the arrears and upon ensuring the gas transit. 

The winter still lies ahead, and it will not be too difficult to find a pretext for "war". However, given the fact that Kiev has suspended work on the signing of the association agreement with the EU, Ukraine will probably not have to freeze this winter.