THE GAS SUPPLY WEB

A repeat of the 2006 and 2009 "gas wars" scenario between Russia and Ukraine is looking increasingly likely. Kiev is unable to repay what it owes for gas, so Moscow is talking about limited supplies. Ukraine is threatening to block supply of the "blue fuel" crossing its territory to Europe, stating that its ability to support the transit of supplies is not unlimited. Russia, in its turn notes that "the present situation cannot go on for ever", in which Russia does not recognise the legitimacy of the authorities in Kiev, but is rendering economic support to and subsidising the economy of Ukraine to the tune of billions of dollars.

Previously, in similar circumstances, when the supplier country ran into a brick wall with regard to the transit country, the Europeans had to go without Russian gas for approximately two weeks. Formally, the transit price and conditions were cited as the main reason for the argument at that time. What is more, Moscow accused Kiev of stealing the gas. Now the situation is much worse, since it is impossible to reject the political reasons for the "gas war" and blame "everything on business and solely on business". Therefore, in Brussels they have been seriously thinking, and incidentally not for the first time, what they should do in the event of gas supplies being disrupted and also how to reduce their energy dependence on Russia. At this time, Moscow is supplying Europe with approximately 30 per cent of the gas it needs, and a considerable amountof it is supplied via the Ukrainian pipelines, even though there is the northern pipeline on the Baltic Sea bed.

Since 1 April has cancelled the discounts on the gas it supplies to Ukraine which had been agreed within the framework of the Kharkiv agreements of 2010 and also according to the accords reached by [former Ukrainian] President Viktor Yanukovych and President Vladimir Putin at the end of 2013. As a result, in literally one month the price of gas rose from 268.5 dollars per 1,000 cu m to 485 dollars. In its turn, Ukraine stated that price set by [Russian gas supplier] Gazprom is too high and may strike a devastating blow at the Ukrainian economy in its present state. Moreover, Kiev's gas debt for March alone, when supplies were still being discounted, was more than 550m dollars. The total debt for supplies of gas since the beginning of the year has reached 2.2bn dollars. In this state of affairs Russia is preparing to go over to an advance payment system for gas. At a session on Ukraine Russian President Vladimir Putin said that they would get what they had paid for. Moreover, taking into account the complicated situation in which Ukraine finds itself and the fact that the negotiating process between the Russian Federation and the European Union has not been completed yet, this decision on monthly payments was postponed until "additional consultations" had taken place. And here the complicated situation in Crimea also needs to be taken into account…

And while Moscow appears to be putting up with the situation in a condescending manner, the authorities in Kiev are despairingly seeking a way out of the situation that has taken shape, examining variants for buying gas from Europe, since it turns out that the price of Russian gas in the EU countries is lower than that at which it is now being offered to Ukraine. What we are talking about is reverse deliveries from Poland, Hungary, and especially Slovakia. Besides this, Kiev has been promised a package of energy assistance, which includes financial support, ensuring deliveries and storing gas for Europe in Ukraine, the joint exploitation of the Ukrainian gas transit pipeline system.

Experts assure us that Europe itself has no need to worry since summer is on its way, the underground storage facilities are full, and there are far more interconnecting gas pipelines now than there were five years ago. For example, Germany's chancellor, Angela Merkel, (Germany consumes as much as 40 per cent of Russian gas) has stated that she is going to review energy policy. The chancellor thinks that British and Norwegian gas is an alternative to Russia's "blue fuel".

Against this backdrop, the Europeans have named Turkey and Azerbaijan as important partners of Europe when it comes to energy security. Azerbaijan's value is growing since it not only has its own major oil and gas resources, but is also conveniently located on the transit pipeline route from the countries of Central Asia. Thus, the head of the European Commission Jose Manuel Barroso has stated that for Europe the "Southern Gas" pipeline is a political priority, since the project is perhaps different from that of the "Northern" one, but the supplier remains the same, namely Gazprom. Barroso has said that the project for the gas pipeline from Azerbaijan via Italy is a priority for Europe instead of the "Southern Gas" pipeline.

The "Southern Gas" is a project for a gas pipeline to carry 63bn cu m of gas from through the Black Sea to Southern and Central Europe, which would mean that Russia would be able to diversify its deliveries and reduce its dependence on the transit countries. Intergovernmental agreements have been signed with Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia and Austria relating to the construction of the land-basedstretches of the pipeline. At the present time, construction work has started in Bulgaria and Serbia, and the pipeline is scheduled to reach its projected capacity in 2018.

Barroso has already spoken about support for the southern gas corridor, along which it is planned to supply gas to Europe which has been extracted from the "Shah Deniz-2" [Sah Daniz - 2] gas field. The Trans-Adriatic pipeline is to stretch to Western Europe via Turkey, Greece and Albania, to southern Italy and export 10bn cu m of gas from 2019 onwards. Turkey and Azerbaijan have also signed intergovernmental agreements relating to the implementation of the Trans-Anatolian (TANAP) gas pipeline project. Baku should gain very considerable advantage from these projects which are supported by the West. The country can not only consolidate its ties with European partners, but also with Turkey, and expand the European market for its gas, which will in its turn promote growth of the economy.

We need to note that the EU's main weapon against Russia at the present time is the third energy package, on the basis of which the principle of sharing access to the pipeline systems between the gas producers and the firms that market it. This means that, according to these rules, "Gazprom" will not be able to monopolise the pipelines and distribution network on the territory of the EU. Moreover, the Bulgarian parliament has adopted a law in the first reading, permitting the "Southern Gas "on the basis of this, it is not an internal European pipeline, in order to bypass the jurisdiction of the third energy package. It is precisely these events that have evoked a reaction in Barroso regarding the southern gas; in Brussels they believe that Bulgaria should not go against the pan-European strategy.

In actual fact, Europe's problem is that unequal countries make up the EU; they vary in their economic indices and technical possibilities, in their size and geographical location and properly speaking on the extent of their energy dependence on Russia. Correspondingly, the loss from the "gas war" may not affect all countries evenly. For example, proceeding from all that has been said above, the countries of Central and Eastern Europe are much more vulnerable when it comes to comes to imports of gas than the West European countries are. Bulgaria depends on Russia for almost 100 per cent of its gas and that was the country that suffered the most during the 2009 crisis. The Baltic countries also import almost 100 per cent of their gas from Russia. The interests of big business should not be ignored either. For example, literally at the beginning of April the German concern Siemens concluded a contract with the Russian side, according to which it is to supply "Gazprom" with equipment for the sea section of the "Southern Gas" pipeline.

For its part, the USA has naturally remained on the side lines and has stated its aim to diversify fuel supplies to the NATO countries. At the beginning of this month Secretary of State John Kerry stated at the EU-US council on power supplies that American will start exports of gas to Europe next year. The secretary of state promised that they would supply more gas than the whole of Europe is using today. What is more, in March US law-makers called upon the government to lift the restrictions on exports of American oil and gas, which mean that each time the Department of Energy has to issue a permit for the export of fuels. But [the German magazine] Der Spiegel thinks that it is hardly that American gas deliveries will be possible before 2016, because the USA does not have the technology to export liquefied gas at the moment, and that same Germany does not have the terminals to receive it. Besides this, the main consumer of the world's supplies of oil and gas is still the countries of Asia. Therefore Russia and Europe will in the main have to sort things out for themselves.

To all appearances, moreover, Russia does not rule out a re-run of the 2009 scenario. "Gazprom's" CEO, Aleksey Miller, and [Russian] Deputy Prime Minister Arkadiy Dvorkovich have headed for China where they discussed a pipeline going east to take Russian fuels. Dvorkovich said that the Russian Federation and China intended to speed up the drawing up of energy contracts so as to get them ready for President Vladimir Putin's visit to the Chinese People's Republic in May.

But experts think that it will be difficult for China to be a complete replacement for gas exports to the West. Whereas at the moment the volume of supplies to Europe is 160bn cu m per year, China only requires 38-60bn cu m [per year]. For some years now Moscow and Beijing have been unable to agree on a price, although it is possible that "Gazprom" may agree to concessions in exchange for payment in advance, so that construction of a pipeline in Western Siberia can begin. Other countries in the area, mainly in Central Asia,  are competing for a slice of the Chinese market.

It is understandable that Russia might suffer quite seriously from all that has happened. You see, more than half the income in Russia's budget comes from sales of fuels and more than half of all the income from sales by the Russian monopoly gas supplier comes from the European market. The campaign against the EU's third energy package is quite likely to be dragged out and be submitted to Stockholm for arbitration. All this may undermine "Gazprom" financially and affect its position, which will obviously not be to its benefit and will weaken the Russian economy. But for Europe the energy confrontation with Moscow will not be cheap either, in all senses, economic and political. At any rate, the elections to the European parliament, which are to take place in May may cause Brussels to amend its desires and possibilities somewhat in the "gas war".