Russia-Ukraine Gas Crisis: Implications over Energy Security in East Europe

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1 Russia-Ukraine Gas Crisis: Implications over Energy Security in East Europe Dr. Volkan ÖZDEMİR EPPEN (Institute for Energy Markets & Policies) Chairman İzmir, Turkey 7/11/2014

2 ENERGY SECURITY The provision of reliable, clean, diverse and ample supplies of energy at affordable prices and adequate infrastructure to deliver these supplies to the market. THREE PILLARS of the Concept 1. Security of Supply (for importers) 2. Security of Demand (for exporters)

3 PIPELINE POLITICS 3. Transit Security (for all actors!) Importance of Pipelines: Selection of route of transportation confers political muscle on those who have them. Thus, decision-makers observe strategic interests even when commercial criteria would dictate otherwise. However, For transit countries, transit security means economic security (source of income) and national security!

4 UKRAINE GAS INFRASTRUCTURE (Entrance: 280 bcm-exit: 180 bcm-storage: 33 bcm)

5 CAPACITY OF CROSS-BORDER GAS PIPELINES IN UKRAINE Brotherhood (Bratsvo) Pipeline: 90 bcm capacity Trans-Balkan Line: 27 bcm capacity Soyuz (Union) Pipeline: 32 bcm capacity Urengoy-Uzhgorod Pipeline: 31 bcm capacity In theory, all Russian gas to Europe could be pumped via Ukraine!

6 TRILATERAL GAS NEGOTIATIONS: INTERESTS OF INVOLVED ACTORS Europe: Security of Supply --- European countries are interested in stable gas flows through Ukraine Russia: Security of Demand --- Gazprom ensures the flow of its gas through Ukraine and in the future totally avoid the transit risks Ukraine: Transit State --- $ 4-5 billion transit revenue (10 % of State Budget) and gas infrastructure is a strategic asset for national integrity

7 EAST EUROPE IS DEPENDENT ON RUSSIAN GAS SO ON UKRAINIAN PIPES!

8 WHY IS UKRAINE IMPORTANT & FOR WHOM? Total European gas consumption in 2013(including Turkey,Balkans) 500 bcm 30 % of total supply comes from Russia (150 bcm) 16 % of total supply comes through Ukraine (80 bcm) This means over half of the Russian supplies still pass through Ukraine and especially Eastern European countries are dependent on it!

9 PAST GAS WARS AND THE CURRENT SITUTAION! Russia-Ukraine Gas Crisis Russia-Ukraine Gas Crisis Implications were severe! Implications were severe! Russia-Ukraine Gas Crisis (?) Implications are limited and no crisis! Ukrainian transit is not as important as before! Why?

10 TRANSIT SECURITY OF UKRAINE IS UNDER THREAT SO DOES ITS NATIONAL UNITY! In the past, more than 80 % of Russian gas exports were pumped via Ukraine After Nord Stream, Northern Lights and Yamal this declined to 50 % With the full utilization of Nord Stream (55 bcm) will decrease to 30 % With the construction of South Stream, there ll be no need for Ukrainian transit! Ukraine is losing its bargaining power and so its territorial integrity!

11 A NEW GAS CRISIS OR SETTLEMENT? Different from the past a solution was more likely and there is a temporary solution: Naftogaz will pay $ 3.1 billions to Gazprom for its past debts For end of 2014 and 1 st Quarter of 2015 it will pay $ /mcm (an average European price) EU and IMF will help to finance Ukrainian payments However, this is a temporary solution, in the mid-term???

12 EU-RUSSIA GAS DIALOGUE and FUTURE OF SOUTH STREAM: ISSUE AREAS 1) Ukrainian Transit Problems 2) Construction of South Stream Gas Pipeline 3) Application of EU 3 rd Energy Package 4) Price Discrimination 5) Oil indexation vs. Gas to gas competition

13 IMPLICATIONS FOR TURKEY AND SOUTH EAST EUROPE After the Crimea Crisis between Russia/Ukraine and gas negotiations; A new crisis will mostly affect Balkan countries and Turkey. Thus, Realization of new gas pipeline projects have been revitalized Southern Gas Corridor of EU is now highly dependent on success of Azeri- Turkish investment commitments. Future of these projects both in terms of economics (supply & demand) and politics will depend on the situation in the wider Black Sea Region. Turkish energy diplomacy is in a stress test!

14 ENERGY TRIANGLE IN THE REGION: EU-RUSSIA-TURKEY There is an ongoing Turco-Russian energy cooperation but Turkey is also participating into East-West energy projects which bypass Russia. Turkey does not want to position itself a solely energy transit country for EU. On the other hand, in its energy relations with Turkey, the EU is not eager to have another Gazprom in its immediate neighborhood and Russia d not want to see a second Ukraine in its gas transit to European markets. Taking into consideration of these, Turkey should create new alternative sources of supply. Otherwise, it will be severely affected by possible disruption from Western line (14 bcm) which is vital for İstanbul in the future!

15 I LIKE COLD WEATHER BUT STILL I D PREFER A WARM WINTER RATHER THAN A COLD ONE THANK YOU!