GAZPROM'S NEW STRATEGY
During the Eastern Economic Forum in Vladivostok at the beginning of September 2015, the Russian gas monopolist Gazprom signed a series of energy agreements with Western energy companies. These included a deal on the construction of the Nord Stream 2 gas pipeline with an annual capacity of 55 billion cubic meters of gas. According to the agreement, the new pipeline would complement the Nord Stream pipeline in operation since 2011. This delivers Russian gas through the Baltic Sea to Germany and then to the other EU countries via the German gas pipeline network. The project will double North Stream's transport capacity. As the new pipeline would bypass the Ukraine, it would significantly reduce the country's importance as a transit country. At the same time, it would strengthen Germany's role in this capacity and make it the largest gas distributor in Europe.
In the light of the Ukraine crisis and the EU blockade of Gazprom's other pipeline project South Stream, this agreement appears to be a logical step in Russia's export policy. Many experts have described it as a triumph for the longstanding German-Russian energy cooperation.
The agreement met with huge outrage from the Central and South East European countries. Poland strongly criticized the agreement, arguing that the agreement had been reached without any consultation with the Polish government and that the new Baltic pipeline could endanger Polish energy security in the future.Bulgaria and Hungary also have reason to be disappointed. Both countries were Gazprom's partners in the South Stream project and hoped to get additional gas deliveries and transit fees from the Russian pipeline.The European Commission has, however, decided that the construction permits for the pipeline on Bulgarian territory were not issued in accordance with EU regulations. It threatened legal proecedures against the Bulgarian government. As a result, Bulgaria stopped the construction work on South Stream in June 2014. Now, Germany and the Czech Republic will profit from the new Russian pipeline.
A major problem for the Nord Stream 2 project is also the position of the European Commission. The main objective of the EU Commission's strategy is the unbundling of natural gas production and supply on the European gas market. Accordingly, pipeline operators have to cede pipeline capacity to third-party providers, except in cases where the European Commission and the relevant national regulatory authorities permit exceptions.
Because Gazprom's Nord Stream pipe would run through EU territory, Russian gas cannot flow through the pipes in full capacity without explicit EU approval. The European Commission has however shown no great interest in Nord Stream 2 so far, stressing that there is no need for a new pipeline that bypasses the Ukraine.
Some experts see economic and political interests as being less important to Nord Stream 2 than the financial interests of the companies involved. According to Mikhail Krutikhin, an energy expert and partner at the consulting firm RusEnergy, this agreement offers Western partners lucrative revenues in the form of transport fees regardless of whether and how much gas will be transported through the pipeline. Since 51% of the Nord Stream 2 shares belong to a subsidiary of Gazprom registered in Switzerland, the transit feed would not be taxed in Russia and would not flow into the Russian state budget.
Gazprom has responded to the ongoing challenges on the European energy market, albeit hesitantly, with a new strategy. Accordingly, North Stream 2 can be seen as a tool that would enable Gazprom to supply gas to the whole European energy market as a single consumer instead of providing individual deliveries to each national market inside the EU. This would be in the line with the strategy of the European Commission. It would supply Europe through an enlarged pipeline via the Baltic Sea and avoid transit countries.
In order to meet the EU's competition rules for the natural gas market, Russia has in recent years increasingly shown a willingess to liberalize its own national gas market. The basis for this is the emphasis on reciprocity in EU rules whereby foreign companies can only receive unlimited access to the EU market if they come from countries that also apply EU competition rules in their domestic markets.
The Russian government has taken steps to loosen Gazprom's control over the Russian natural gas pipeline network and weaken its legal monopoly on gas exports. A law entered into force in December 2013 allowing other Russian gas producers to export liquefied gas LNG.
Currently new regulations are under discussion that would grant other Russian energy companies access to the export pipelines.
At the initiative of Igor Sechin, the head of the state energy company Rosneft and a close confidant of President Putin, the Russian Federal Anti-Monopoly Service has prepared a request to the Presidential Commission for the energy sector proposing to place responsiblity for the pipeline network under an independent company. As a result,Gazprom would no longer be the owner of Nord Stream's connecting pipelines and could use the full capacity from the pipeline operator as a formally independent producer. At present, it is still unclear whether President Putin will support these plans. According to Russian media reports, a decision will be taken shortly.
The current economic stagnation means that one can assume that the demand for gas in Russia will not rise in the near future. Therefore, the importance of gas exports for Gazprom is growing significantly. Gazprom is endeavouring through the TurkStream pipeline project to increase gas exports to Turkey and Southern Europe, while also seeking to gain access to the Chinese market through two other pipeline projects. Here, too, there are significant problems with their implementation.
The liberalization of the European gas market, the Western sanctions against Russia as a result of the Ukraine crisis and the stagnation of the gas demand on the domestic market have led to a reconsideration of the recent energy strategies used by Kremlin. It is trying to adapt to the prevailing reality flexibly and exploit the weaknesses of EU political activity in the energy sphere. It has achieved this with a certain level of success.
The cessation of the South Stream project has created the impression that Gazprom has abandoned investments in the European gas market. In fact, Russia has adopted a new strategy based on the two pipeline projects Nord Stream 2 and TurkStream. With this additional export capacity, Gazprom would supersede supply alternatives to Germany and the Central and East European EU Member States. It would thereby strengthen its position as a main supplier.
According to Gazprom's plans, the TurkStream pipeline will replace the failed South Stream pipeline project. However, the circumstances surrounding this project have became more and more complex over time, impeding its implementation.
Initially, Russia and Turkey wanted to sign the new agreement on TurkSteam in the second quarter of 2015. However, they could not agree on a number of issues, including the gas price and the price discount for the Turkish partner so far.
Furthermore, Gazprom's management were concerned that if the West lifted its sanctions against Iran, Russian gas would compete with Iranian gas on the European markets. This could reduce demand for Russian gas supplies, which would mean that TurkStream would be no longer profitable. The representatives of Gazprom recently announced that the annual capacity of TurkStream will be reduced from 63 bcm to 32 bcm - half of that originally planned - and the construction will be postponed until the end of 2017.
Moreover, Russia's ongoing military operation in Syria could significantly affect the further development of the bilateral energy cooperation, including TurkStream. The Turkish president Erdogan has repeatedly criticized Russia for violations of the airspace above Turkey during the air strikes in Syria. He warned that Russia's behaviour could undo the bilateral energy agreements worth several billion US dollars. If necessary, Turkey would be able to secure the volume of imported gas needed from other suppliers.
The shooting down of the Russian jet by Turkey near the Turkish-Syrian border recently led to the further escalation of the conflict between the two counties, culminating in Russia's single-sided imposition of economic sanctions against Turkey. For the time being, the bilateral energy deals have not been affected or included in the sanctions list prepared by the Russian government.
Gazprom has already invested hundreds of million US-Dollars in the first construction stage of the pipeline network, first of South Stream and then of TurkSream. Moreover, this route and the Turkish energy market have great geopolitical importance his for Russia: Turkey is the second-largest Russian gas importer after Germany. At the same time, Turkey is highly dependent on Russian gas imports as it lacks suppliers that could replace the required gas from Russia in the short and middle-term. We can therefore assume that both sides will attempt to put the gas export-import issues and the TurkStream deal beyond the ongoing conflict and continue to affirm their interest in the bilateral energy projects. Nevertheless, one can expect a postponement of the signing of the TurkStream agreement, making it uncertain whether and when the project will be realized.
Apart from this, Russia is trying to adapt to EU requirements. It is doing this either directly through negotiations with Brussels or indirectly through bilateral agreements with Western energy companies. The extent to which the liberalization of the Russian internal market will fulfil the demand of the EU remains to be seen.
Although in the legal sphere, the relations between Russia and the EU have remained unchanged, the attitudes of the actors involved in energy cooperation is changing. Nord Stream 2 has a higher chance of being realized than TurkStream because the support of all the partners involved in the project, including Germany, has been secured. The realization of these politically motivated projects could, however, last several years, as the crises in the Ukraine and Syria overshadow the negotiations.
At the same time, Russia's gas exports have to be considered in the context of Russia's current weak economic situation, including the one-sided orientation of the Russian economy toward oil and gas revenues and the lack of investment in the exploration of new gas fields. Without Western investment, these problems cannot be solved. Russia still relies on the European market and the interdependence of both sides will continue in the short and medium term.
Both the original Nord Stream and Nord Stream 2, however, cast doubt upon European solidarity in the field of energy security. While the largest European energy companies involved in Nord Stream 2 support the project, Brussels and Central and East European countries express strong criticism and reject it.
Therefore, one can expect that in the future the Central and East European countries will focus more on their own national interests, and confidence in a common EU policy will fall. Consequently, divisions over the issue of energy supply in Europe could continue to deepen. This could weigh down upon the plans for European energy union significantly.
Gazprom's activities in the Caspian Sea region and its negotiations with China show that Russia is increasingly looking for opportunities to strengthen its position in other regional energy markets, even though this is connected with high political and economic costs.
It is still too early for an assessment of how or whether this policy is successful. The implementation of the pipeline projects is highly dependent on other factors, such as changes in the world market prices for oil, geopolitical developments in the affected regions and the willingness of the countries involved in the projects to comply with Russian interests.
However, one can also state that Russia's energy policy is going to be increasingly complex and less predictable because new players with their own corporate strategies and personal interests are becoming involved in Russian gas exports. This will strongly affect activities in the Russian gas industry in the future, both internally and externally.
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