Week 30 Overview
A change in Russian rhetorics, political instability in Ukraine and a rush for infrastructures in Europe made the headlines of the 30th week, reminding that the current tensions will not come to an end any time soon. This is a warning to Brussels, which has to be aware of the fact that the current crisis is not like the gas dispute in 2009. It is not a matter of pricing. It is much more serious.
The point is that U-turns and the abrupt changes in the relation between Moscow and Kiev are so erratic that the European Union has to take consistent decisions to maintain energy security and gain credibility on an international level: the onus is on the EU to show that Kiev can be stabilised. Building infrastructures in the Old Continent can be the right card to play, but the time is running out. The winter is coming, in Kiev and in Brussels.
UKRAINE
“It’s a global conflict, and it is a global threat. Russia is on the dark side. And our priority is a key priority of the whole world: to stop Russian aggression", former Ukrainian Prime Minister Arseniy Yatsenyuk said on Monday.
Yatsenyuk, who then resigned on Thursday, tried his best to lead the country out of the Russian sphere of influence. His government tried to capitalise on the current embarrassment of Moscow in relation to the downing of the Malaysian airliner, seeking the moral authority and the diplomatic recognition it needs to bargain better conditions at a European level.
Ukraine Deputy Minister for Foreign Affairs Sergiy Kyslytsya met with Director of the Directorate General of Programmes of the Council of Europe Verena Taylor on Wednesday.
‘The sides discussed the current issues of cooperation between Ukraine and the Council of Europe, particularly, regarding the implementation of existing and preparation of new Council of Europe Action Plan for Ukraine for the period until 2017,’ reads a note released on Thursday.
But that was not enough. Despite these attempts, or probably because of these attempts, Yatsenyuk’s coalition broke up and the PM had to resign.
“It's not the best Government in the country’s history. God grant, probably, in the future Ukraine had an exemplary Government, if Ukraine still exists and if we go through this period of terrible challenges,” he said on Thursday, announcing this resignation.
According to him, the government’s breakdown has to do with the Government’s attempt to strengthen Ukrainian ties with Europe and America.
“The worst thing for me, personally, … is that today, when in fact the coalition broke up, you have failed to pass the law on the GTS… For the first time, we wanted to decide to allow only genuine European and American companies, and only with the consent of the Verkhovna Rada of Ukraine, to take part in the management of our gas and transport system, and it is only 49%. The pipe remains in state ownership, the state has a controlling block of shares. And even this decision has been failed,” Yatsenyuk said to the Parliament, adding that “there is no possibility to store up gas in order to give opportunity to spend this winter, to finally break free from Russian gas dependence.”
RUSSIA
Things started deteriorating also in Russia, as diplomatic and political twists are often going hand in hand with financial tensions. It is now clear that Moscow has to bear the brunt of the confrontation with the West. Three factors clearly hint at some structural problems in Russia.
Firstly, the Russian government appeared more gentle in its declaration since the downing of the Malaysian airliner. After opening challenging Western methods, Moscow tried to embrace them over the last days.
“We cannot tolerate anyone supporting their economies at our expense or to our detriment, or – which also happens today – introducing protectionist measures in the interest of specific companies under the guise of sanctions. And this is happening in violation of WTO commitments. Just like any other WTO member, Russia is entitled to use the WTO mechanisms to protect its interests. All the more so, as the road to WTO membership was rocky for us. We must learn to use this right in full. Frankly, so far, we haven’t mastered this tool properly,” Dmitry Medvedev said on Thursday.
It is quite ironic that Russia is now appealing to the WTO, which was viewed an instrument to maintain and perpetuate American influence.
Secondly, Gazprom’s dominance of Russian gas industry could be soon reduced. According to Vedemosti, President Vladimir Putin did indeed sign an order that would open the doors of pipelines in Siberia and Far East to other companies.
At the same time, several reports have started hypothesising a Gazprom’s recapitalisation.
The company also agreed with its Austrian partner Centragas Holding to liquidate RosUkrEnergo, a Swiss gas distribution company focused on Russian gas supplies.
These factors suggest that changes to Gazprom’s future maybe in the near future. And that is really relevant, as a change in the dominance of the largest producer of natural gas in the world would immediately imply a change in the Russian industry. Is there linkage to the present crisis?
Thirdly, the Russian central bank raised interest rates on Friday. The decision was unexpected and suggests that Moscow is preparing for further Western sanctions.
‘Inflation risks have increased due to a combination of factors, including, inter alia, the aggravation of geopolitical tension and its potential impact on the ruble exchange rate dynamics, as well as potential changes in tax and tariff policy,’ reads the document released by the Bank of Russia on Friday.
Does the ‘aggravation of geopolitical tension” imply that Ukraine will go through an unprecedented crisis? How is the decision related to Ukrainian political instability? These questions remain. It is increasingly evident that Ukraine will pay the price of the crisis, but Russia will follow suit.
EUROPEAN INFRASTRUCTURES: EUSTREAM, TAP AND LITHUANIA
The long-waited interconnection projects in Europe are advancing ar proceeding (albeit well behind original intentions), renewed by fears of diplomatic and economic tensions that might further endanger European energy security.
‘Slovak gas transmission system operator Eustream is progressing in implementation of its long term strategic plans to secure gas infrastructure interconnections with Hungary and Poland. The new interconnection point Budince with Ukraine is also on track as envisaged in the Memorandum of Understanding with Ukrtransgaz,’ reads a note released by Slovakia’s Eustream.
According to the company, an interconnection between Hungary and Slovakia is almost ready, with testing operations set to begin in September.
‘Polish-Slovak Interconnector – being on the priority EU PCI list and forming part of European Energy Security Strategy - is in the phase of preparatory works… It is envisaged that the project could be operational in 2018. Eustream also welcomes that the project also enjoys support of both countries‘ presidents,’ Eustream wrote.
Eustream is also working on the Vojany pipeline from Slovakia to Ukraine.
‘The project is on track and the contracted booked capacity shall be ready for the shippers on September 1st, 2014 with pre-commissioning testing towards the end of August 2014.’
Similarly, the Trans Adriatic Pipeline (TAP) is moving on with its plans, issuing a contract notice in the Official of the EU. The project has momentum and solid political and commercial footing.
‘The scope of this particular Supply Contract will include manufacturing, testing and delivery of large diameter ball valves: approximately 8 of 36 inch (class 900) valves and 46 of 48 inch (class 600) valves. The potential suppliers need to demonstrate their ability to meet TAP’s quality requirements and supply necessary volumes in accordance with the pipeline’s development schedule,’ reads a note released on Friday.
Finally, Lithuania, which will be the 19 member of the Eurozone from January 2015, intends to follow this renewed interest for infrastructures. Vilnius did indeed approve the National execution plan to trigger investments in electricity and natural gas projects.
“After the plan was approved by the government, we can immediately start to implement the key electricity and natural gas transmission projects by using the EU structural support funds. This plan also ensures that the EU structural support funds will be invested wisely and that the necessary financial support will be guaranteed for the key energy projects” Minister of Energy Jaroslav Neverovič commented in a note released on Tuesday.
The are several gas projects that are in the list of European Union’s Project of Common Interest (PCI): capacity enhancement of Klaipėda–Kiemėnai pipeline (second filament construction of pipeline Klaipėda-Kuršėnai), gas connection between Poland and Lithuania, capacity increase of gas connection between Lithuania and Latvia and some projects on natural gas transmission system security and reliability.
EUROPEAN WELLS
On Monday, Lundin Norway and Det norske announced that drilling of appraisal well 7120/1-4S in the western part of the Gohta discovery in PL492 has been successfully completed. The well confirmed presence of oil and gas in the discovery in the Barents Sea on the Norwegian Continental Shelf.
A few hours later, Egdon Resources commenced drilling operations at the Wressle-1 conventional exploration well in Lincolnshire Licence PEDL 180 located to the East of Scunthorpe.
‘The Wressle-1 well "spudded" at 0300 hours on 19 July 2014. Drilling operations are expected to take around 38 days,’ Egdon Resources wrote on Monday.
But probably the main news came from Poland, where US-based FX Energy plans to be drilling five wells by the end of the year.
‘The company plans to start drilling two wells in August, one well in September and two more wells in the fourth quarter of 2014,’ FX-Energy wrote on Monday.
FUTURE: TURKEY?
Apart from the political destabilisation of Ukraine, Russian major achievement has to do with Turkey. Ankara did indeed give the green light to the South Stream’s offshore section in its waters, approving the Environmental Impact Assessment (EIA) Report presented by Gazprom.
In this sense, the future of Europe has also to do with its ability to foresee Russian strategic alliances that might undermine Brussels' attempts to stabilise Ukraine. That is why, European (German) commitments to take an active role in the crisis have to resolve into an open-minded, all-encompassing geopolitical strategy. Brussels has also to reconsider its diplomatic and business ties with neighbouring countries.
Yatsenyuk was indeed right. It is a global conflict. Russia should find more allies and Europe should foresee this move. In this sense, geopolitics is really similar to finance. It is all a matter of anticipation.
Sergio Matalucci