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Dimitris B. Kokkinos
Managing Partner
INDEURCOG Energy Consultants Ltd.

Copyright: www.rieas.gr

Note: The paper was delivered by Mr. Dimitris B. Kokkinos at the Conference “Caspian Energy Crossroads: The New Energy Routes and Axis”, organized by RIEAS and the Press Code Journal at Titania Hotel (29 January 2009) in Athens, Greece.

My ten years of involvement as an E.C. external consultant and my position INOGATE coordinator in a number of Inogate projects gave me a good understanding of the hydrocarbon situation in Russia, Central Asia, the Caucasus and Eastern Europe.

I consider the link between the European Union and RUSSIA in the supply and consumption of natural gas as vital to the European Union interests and I contribute this article stating that the views expressed are strictly my own.

The present state of affairs in the supply of Russian Gas to Europe underwent an acute crisis. The acuteness of this crisis does not however make it short. The many parameters of this crisis threaten to make it endemic.

There is no doubt that a main factor of the Gas dispute is the political quarrel between Russia and Ukraine. Russia considers that Ukraine is almost not a state but a mix of Russian and other peoples and its Government and ruling elite are neither trustworthy nor strong, which is not completely wrong.

But if we leave political differences aside because in any case this is what the media focus on, there are great economic differences and technical problems which will engage the attention of all the interested parties for a long time to come.

The biggest problem will be the price of the Gas. The price is defined by the Long term Sales and Purchase agreement, because, as DEPA found out recently the spot market for gas is small. This price is at present 450 Euros for 1000 cubic meters and is a function of various mean prices of oil and maybe some other parameters.

In the, until recently, bullish market of hydrocarbons, gas prices did follow with a time lag oil prices and the finances of Russia which are based to very considerable degree to the export of hydrocarbons and other raw materials were going very well. With the present crisis the prices of those goods dropped dramatically and Russia lost a very important part of its exports income. To underline the point though it suffices to state that those exports were of trillions of euros annually and are now reduced to the order of 50%.

It is obvious that as Russia sees its development plan to shrink, the standard of living dropping and the finding of prestige funds of a Big Power such are armaments funds or space programs funds to be difficult, Russia feels the need to act to stem and/or reverse the situation.

On the other side, Ukraine saw the devaluation of its currency to 50%, the entry of IMF and the standard  of living which had just started to pick up to drop again to third world levels.

On top of it due to the situations mentioned above the fact that Ukraine was paying 180 Euros per 1000 cubic meters as opposed to the European price of 450 Euros was not going to last for long.

The Russians asked European prices for their Gas. They asked for something more. To be paid for the stored in Ukraine Gas.

The stored Gas, of a value of 2 billion euros order of magnitude, was stored in Ukraine to ensure the stability of the system and was paid traditionally when it flowed either towards Europe or in Ukraine which was the usual. The stored gas was the only guarantee that the Ukraine had that it would not freeze in winter and Europe had for unexpected events that would affect the flow of Russian Gas to Europe. Ukraine could not avoid payment.

Russia with the heavy and ungracious way that defends her interest demanded to be paid immediately. Although Russia is within her rights, the demand “pay now or you are cut off”, is in the logic of Shylock in the Merchant of Venice of Shakespeare, particularly when this is requested from a country which has just collapsed financially and which further to be the next door neighbor is also allowing Russian Gas to be exported through its soil to W. Europe.

As if those complications were not enough, Ukraine took care to add also its own. The continuing friction between President Yusenko and Prime Minister Timosenko, each of whom is being guided by the vested interest of it own team, to say nothing of the Ukrainian oligarchy and the opposition, has as a result for the country to lack a united negotiating front particularly when it negotiates with the President of Russia Medvedef and Prime Minister Putin who also have between them a muted antagonism.

Ukraine however, for a number of years now, does the unacceptable. It takes gas without paying for it. This has been the subject of a lot of friction between Russia and Ukraine, and of course, the Ukrainian oligarchy that benefit from this, are not willing to obey to the orders of central government which turns a blind eye when the taker is on the right side.

However the most saddening picture appeared from the consumers that is our own European Union. Each European State has up to now negotiated alone with Russia often with more than one company per state.  First Mrs. Merkel showed how limited European she is in Energy issues, following the policy of Mr. Schroeder, at present Chairman of the of the Russo-German consortium for the Baltic underwater gas pipeline Russia to Germany, which will be operational in 2011. The same duet was performed between Russia and Gaz de France and the Southeastern States received the Russian assurance that the South Stream pipeline which will be operational in 2012 will solve all existing problems.

It is to be noted here that it is surprising that Turkey which is fed by the Blue Stream was not obliged by the Russians to provide Greece and Bulgaria with some quantities. It is to be noted here that Turkey which is fed gas by Russia, Azerbaijan and Iran, found the timing suitable to cut off supplies to Greece and Bulgaria, showing how obsolete they are in their understanding of their obligations, to their European Neighbors.

The disintegration of the European Union was made apparent when the only thing that Mr. Baroso could recommend to the member States is to take Russia and Ukraine to court, like a weak third rate state that is being pushed by a stronger one and screams for International Law.
 
We reached such a state of affairs, that the Russians recommend to us, to form a consortium of consumers to negotiate with them, and the European Union that has the buying strength, to be called by Moscow to go there, to hear how it will buy gas in the future.

The results up to now, under the poor Czech presidency, are disappointing but more disappointing is the image of a discordant and uncoordinated Union, without leadership, and unable to negotiate dynamically from its position of buying power with the Russians, who if they do not sell their gas in the next months will have a bigger problem than Europe. The Russians however can afford to do this being a society of power, which the European Union definitely is not.

It was suggested that the Americans were behind President Yushenko in his obstructionism, so that a freezing Europe would understand the need to disengage from its dependence of Russian Gas. I do not think, particularly in this period of power transition in the White House, that a sadistic American is needed to try and freeze Europe, when Europe achieves this by itself, when Russia fractionalizes us by offering to each one the Russo-German pipeline, the Russo-Greek pipeline the Russo-Bulgarian pipeline and so on, so that Europe forgets that 61% of its needed gas today is imported and Russia covers more than 25% of Europe’s needs.

As if the above was not enough, Europe reached the Nadir of each negotiating capability with the Technical Gas.

The Technical Gas is the gas needed to fill the pipeline network in the required high pressure before the Gas starts flowing to the consumers. This gas was removed from the network and was consumed by the Ukrainians. The quantity of this Gas is very important because it concerns thousands of kilometers of pipeline network and represents in its totality a value of the order of 100 million Euros.

This Gas was supplied up to now from Russia for free and was owned by Russia. Now Russia requires Ukraine to pay for it and Ukraine refuses. Russia demanded and obtained that this Gas will be paid by a Consortium of European Companies for the time being, which Consortium will negotiate subsequently on the issue with Ukraine. How the price of Gas is agreed between Russia and Ukraine does not concern the present lecture.

There is however a great question outstanding, once the above have been taken care of.

How reliable is Russia as the Major supplier of Europe in Natural Gas.
Three things are certain.
I. In the next ten years only Europe will be the great solvent buyer of massive quantities of Russian Gas.
II. Europe must import more and more gas from abroad as its own sources mainly in the North Sea are being depleted.  The European needs are of an order of magnitude of half a trillion cubic meters yearly and in 2010 about 65% must be imported and in 2020 about 80% must be imported.

Even if we discard the brutal way that Gasprom i.e. the Russian State is conducting its transactions, the basic question remains. Is Russia capable to supply Europe’s increasing needs, at a reasonable price and continuous unimpeded flow?

The answer is NO.
Russia can cover some of the present but not the future cross needs of Europe.

As far as production is concerned Russia reached this year its maximum. It cannot produce more Gas.  More important than this is the fact that the whole infrastructure of production and transport of Gas is old and about to collapse at many points. Investments to the order of two trillion Euros are urgently required in the next twenty years to keep the system to a condition that it keeps supplying the present quantities, and hopefully with a small increase.

The same is valid for the Central Asian states, mainly Turkmenistan, from which Russia extracts important quantities which are subsequently sold to Europe. Existing Russian gas fields are been depleted.

New Russian Gas discoveries will not necessarily be directed to Europe. The Sakhalin findings for example will go to Japan.

Russia to the great disappointment of Europe does not invest at present the required sums for the maintenance and improvement of the system. Gazprom  this state that plays the company, buys newspapers, television stations,, football teams, real estate but invests inadequately in the maintenance of the System, and in the finding of new fields, which admittedly becomes more and more expensive.

Thus, we are in a double cul de sac. Not enough amounts are invested for the discovery and preparation of new gas fields to supply Europe and not enough amounts are invested to maintain the system in a condition to supply with certainty the present quantities.

This situation will get worse when the present gas prices will drop further as a result of the general drop in the prices of hydrocarbons, which is of course linked to the present economic crisis which will last, according to the experts until 2010. Russia now is trying to do in Gas what it refused to do in oil. To create a cartel of Gas.

It influences in Gas matters a number of countries and is in discussions with a number of Arab and Asiatic countries for the creation of this cartel. All this to keep high the price of Gas.

The proposal for the creation of a Consortium of the consumers of Russian Gas is done with a hidden purpose. To have this consortium pay and bear the cost for the modernization of the network system, partly or wholly. It is a genuine example of protocapitalism where the depending user will pay not only the operational cost and price but also the cost of existence of the system which is needed, without the owner of the system needing to do anything else but pocket the necessary sums and Europe unable because of its dependence to use those sums to increase its real safety of supply.

It is obvious that such a state of affairs cannot last forever. It will hold however for the next ten years because nothing is possible to be done earlier either from the consumer or the producer side to replace either seller or buyer.

Until then some other moves must be done, without referring to the need for alternative sources of energy which is not a subject of this lecture.

Europe and most particularly Greece must increase the storage spaces for Gas because Revithousa that stores liquefied quantities of Gas, although absolutely necessary, is not enough. I will not tire to repeat that the empty field of Southern Prinos is the ideal space for storing important quantities of gas that can create a reserve of three months needs and subject to negotiations can cover certain Bulgarian needs and can act as a buffer to stabilize also the Caspian – Turkish – Greek – Italian pipeline.

Europe, and particularly our country has every interest to establish a contact with Iran for the supply of quantities of Gas and transport it through Turkey – Greece – Italy – W. Europe.

The theocracy of Iran is unpalatable in the West but other countries that supply us with oil are not exactly model parliamentary democracies either.

This will require also some “westernization” of approach from Turkey which has to understand that blackmail is not the best way to become an energy partner.

The new sources of supply for Europe must come through from Africa and the Arab peninsula and specifically Qatar and Saudi Arabia. The passage Qatar – Saudi Arabia – Egypt – Greece – Italy is not bigger than the passage. Turkmenistan – Kazakstan – Russia – Ukraine – Poland – Germany that functions today.
 
There are solutions.

Russia daily proves that it does not hesitate at all to protect its perceived interests. It remains to be seen if Europe is in a position to stop its lack of cohesion in Energy issues and to organize its political economic, technical and human resources that has in abundance and of high quality to cover its energy interests.
 
Two are the prerogatives, Cohesion and Leadership. 

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