Though Norway in June overtook Russia in total exports of natural gas to Europe, the balance of Russian gas to Europe comes through Ukraine, which itself is dependent upon Russia for 60% of its current gas consumption.
While Ukraine controls the transit of 90% of its gas to Europe, Russia is consistently trying to use its gas exports to Ukraine to gain greater control of the Ukraine transit system, which itself deems a strategic asset. The struggle for control of export to Europe and Ukraine's own struggle to increase domestic production and move closer to Europe, with an European Association Agreement set to be signed in November this year, has put extreme stress not only on the energy independence of Ukraine but of Europe as a whole.
From an energy geostrategic standpoint, Europe needs Ukraine to move closer to Europe, “but for all its planning, Europe also knows retribution, in the shape of an energy squeeze, is likely from Russia.
Moscow, which has a long-standing disagreement with Ukraine over gas, has said it will raise Ukraine's gas prices and officials do not rule out it doing the same for the EU, which gets nearly 40% of its gas from Russia. “The EU should not look at Ukraine as a business opportunity alone, particularly in light of currently lagging gas demand, but should examine the long-term future of European energy security and the key role Ukraine will continue to play in it. Partnership with the EU is not a silver bullet for the troubled Ukrainian energy sector, but it is certain to reduce the volatility of future pricing disputes and is perhaps the only solution that does not leave Ukraine's fate entirely in Russian hands,” according to anarticle by Richard B Andres and Michael Kofman.
Ukraine has also done much in the past 18 months to increase its energy independence. Recent shale tenders with Royal Dutch Shell plc (NYSE:RDS.A) (NYSE:RDS.B) and Chevron Corporation (NYSE:CVX) and with Exxon Mobil Corporation (NYSE:XOM) for the development of the Ukrainian Black Sea have the potential to greatly reduce the dependence Ukraine has on Russian exports and potentially for Europe as well. “While the full picture of unconventional gas is expected to be assessed in the coming years, the key to success, as is the case of Ukraine, is infrastructure. If the future of shale gas exploration is to be bright, a new infrastructure will have to be built to link the sources of unconventional gas with the grid to allow for the commercialization of the gas.
“To ensure that the Energy Community brings results, once operationalized the shale gas opportunity should be extended to the Eastern Neighborhood. It would allow the Eastern Neighborhood, in particular Ukraine, to create stronger bonds between the EU and the region and, as a result, galvanize stronger energy interdependence between the EU and Russia by stabilizing Ukraine's internal energy supply,”according to a policy paper from the Black Sea Trust for Regional Cooperation (BST).
Coup in the Making?
In the past five years, there has been significant growth in Europe's LNG import capacity; however, high LNG prices driven by Japanese demand, and the higher oil-linked price that LNG receives in Asia has diverted much of this supply from the European market.
An agreement between Ukraine and turkey for the transit of LNG through the Bosporus, as the gateway to the Black Sea, would be a major coup for European energy security. It would put downward pressure on current LNG prices due to the high demand and premium paid in Asia and would eventually provide Europe with cheap shale gas through a viable alternative marketplace.
It's an idea developed by Robert Bensh , energy advisor to Ukrainian Vice Prime Minister Yuriy Boyko, managing director of Pelicourt Limited and senior advisor for Cub Energy Inc (CVE:KUB), which operates in both Ukraine and Turkey.
The potential for LNG exports to Europe without a deal between Turkey and Ukraine for liquefied natural gas (LNG) through the Bosporus will fall flat, and Russia will continue to provide at least 30% of Europe's natural gas through 2023.
“The European Union can and should play a more active role in shaping the Black Sea security environment. As a full regional player, it should promote cooperation on an equal footing, and refrain from acting as a sponsor as it does, for instance, in the Mediterranean. As a privileged partner of all countries of the region, the EU should use its bilateral relations with each of them, including Russia and Turkey, to contribute towards the emergence of a cooperative security environment in the Black Sea region,” according to a European Parliament briefing .
A CRS Report for US Congress agrees, stating: “Development of more liquefied natural gas (LNG) transport and reception facilities from distant suppliers, such as Nigeria, into Europe could be another course of action. Coupled with the development of new oil and gas pipelines could be an offer from NATO (and/or EU) members to provide security for energy infrastructure in periods of unrest or conflict in supplier and transit countries.
For both Ukraine and Turkey, such a deal would also be a political and economic coup of vast proportions, Bensh says.
For Ukraine, LNG is the key to energy independence. For Turkey, LNG is the key to becoming one of the most important energy hubs between the Middle East and Europe. In combination with the Trans-Anatolian Pipeline (TANAP), which will bring Azerbaijani gas from Shah Deniz through Turkey on to European markets, controlling the LNG segment through the Black Sea would give Turkey broader leverage than any other player in Europe. For both Ukraine and Turkey, it would mean greater access to the economic benefits of the European Union, control over Europe's LNG market and a level of political leverage over the continent that would render both world-class strategic players.
The benefits to Ukraine and Turkey are significant:
Benefits to Ukraine
- Independence from Russia
- Greater access to the European Union, with Kiev able to be assertive on the terms
- Political leverage in Washington, which is keen to see a Turkey-Ukraine LNG deal put through, especially one focused in part on Qatari gas as opposed to Iranian gas
- Control of the European market for LNG
- Economic prosperity by giving an edge to heavy gas-reliant industries
- Strategic positioning and leverage that goes beyond Europe and into the Middle East/Gulf and especially between competitors Qatar and Iran
Benefits for Turkey
- Control of the European LNG market
- Rise as an energy hub between the Middle East and Europe, not just an energy transit country
- Political leverage over Europe and access to the EU on Ankara's terms
- Political leverage with Washington
- Strategic positioning as an energy hub that renders Turkey the decision-maker from Europe to the Middle East/Gulf
- Diversification of supplies, with less reliance on Russian and Iranian deliveries, including from emerging African powerhouses such as Angola and Ghana
Timing is important, and the window of opportunity should be taken advantage of before new pipelines come online and while two of the world's biggest gas players—Qatar and Iran—are in a desperate race to grab the European market. If an LNG agreement is solidified within this timeframe, it will dictate rather than serve as an afterthought to Europe's gas future.
In this respect, Ukraine and Turkey together already have a certain amount of leverage at the negotiating table, particularly with respect to Qatari supplies, which are very eager to get to the wider European market. Timing is critical as Iran, suffering under economic sanctions that has caused widespread unemployment and a recession (the under 35 age group is thought to have unemployment of over 40%; a sobering thought in a period of Arab Springs) is attempting to have access to markets from which it currently is cut off from; and there is no better indication of this than the British government's current reconsideration of the embargo on BP's joint venture with the Iranian National Gas Company in the Rhum field. One additional factor in the conflict in Syria was, Qatari-versus-Iranian plans to run a pipeline through the country to Turkey, eyeing the European market.
In terms of critical timing, Ukraine and Turkey would be better positioned strategically were they to strike an LNG deal before the beginning of Phase Two production at Azerbaijan's Shah Deniz field, and before TANAP begins operations. The price of LNG is more volatile due to the Asian market, and it would be more beneficial for LNG to secure this market, while natural gas futures for Shah Deniz supplies, which have already been contracted out for 25 years to nine European companies.
Another Black Sea LNG project—the Azerbaijan-Georgia-Romania Interconnector (AGRI) project—is also being delayed due to the perception that European demand is not ready for this project. This is a false perception that is driven by the Asian-driven LNG price spikes and the diversion of cargoes