Europe’s Reaction and Prospects of Russian Gas Pipeline Project

By Eva Lukas

Recently announced gas pipeline project “Yamal – Europe 2” has already obtained scandalous color. The decision of the Prime-Minister of Poland Donald Tusk to fire the Minister of State Treasury of Poland, who was responsible for fuel-energy complex – is the first clear reaction of Europe on this project. The reason for such decision was the signing of the memorandum between “Gazprom” and ”EuRoPolGaz” on the intention regarding the construction of  the gas pipeline “Yamal-Europe-2”. The experts state – this project is of propaganda and blackmailing character. The objective is to force Ukraine to cooperate in gas-transporting sphere on the conditions of “Gazprom”. However, there are also other reasons to lobby the new project –  growing energy and political significance of Russia for Europe. 


The participation of Ukraine in trans-European projects of gas supplies are traditionally observed by Gazprom as the threat to its strategy of strengthening in Europeans gas market. And as the threat of the accomplishment of the strategy of accumulation of geopolitical power of Russia, based on the factor of energy dependence of the EU from Russia.  That is why prevention of inclusion of Ukraine into alternative to Russian projects on gas delivery to the EU is observed today by Gazprom as the task of priority. Declaration of potential construction of Yamal-Europe-2 should have prompt Ukraine to treat Russian offers on joint use of Ukrainian gas-transporting system (GTS) with greater focus and urgency. 


Gazprom’s policy in relation to Ukraine is logical. It is imposed to the highest gas prices in Europe for a long period, kabala terms of the contract with obligatory payment the maximum prices for gas scopes, which significantly exceed the demands of the country, fine sanctions for non-use of surplus of Russian gas – in the background of financial pressure – persistent callings to give Russia Ukrainian GTS.


In December 2012 Ukraine purchased insignificant gas scopes in Poland, since April 2013 it has started purchasing gas from Hungary. Gas supplies are planned through Slovakia. As well as gas for underground storage in winter period is planned to be purchased from the EU. In January 2013 the President of Ukraine signed in Davos a contract with Shello company on joint development of shale gas in Ukraine. There are plans on the participation of Ukraine in Baltic-Adriatic system of interconnectors for LNG delivery. All listed activities are the measures for the accomplishment of new energy strategy of Ukraine, presented in summer of 2012.


Despite relatively low scope of gas supplies from the EU transactions and yet hypothetic character of the prospects of development of Ukrainian shales and NLG transportation, this not only significantly reduces the chances of Gazprom to control Ukrainian GTS but also is a prove of failure of Gazprom strategy in Europe. That is why Gazprom needs at least to create an illusion that it still has the levers on Ukraine. There has been actualized already seemed to be forgotten plan of “Yamal-Europe-2” construction. 


Yet there is only an order of Putin to assess commercial expediency, expenses, probable sources of financing, market outlets, recoupment, etc of the project. The memorandum of mutual understanding, signed with Gazprom by the Head of EuRoPolGaz also suggests the estimation of the construction of the second branch of Yamal-Europe of capacity less than 15 billion of gas annually to be supplied to Poland, Slovakia and Hungary and reduction of expenses by its transportation. The substantiation of the project should have been prepared in half a year. As it is the project “Yamal-Europe-2” shall be able to operate only as a blackmailing argument and the mean of potential power demonstration.


Together with that, the experts consider, Gazprom can lobby the project “Yamal_Europe-2” pretty actively except for the “factor of Ukraine”. Gazprom with a group of construction organizations intends to get supraprofits exactly for the account of major gas line piping. In general in Russia construction is the most attractive sphere for state business.


To stop the reduction of Gazprom capitalization, the group of companies exactly now should  demonstrate that the prospects of its development are quite optimistic, despite the line of Ukraine, troubles with the “South Stream”, refusal of European consumers from payment for gas surplus, increase of competition in European Gas market, etc.


Current strategy of the Kremlin on increase of the significant of Russia in European policy with the help of Gazprom has already managed to reveal its weak points. The period of high prices on oil and gas raw materials has significantly enhanced the attractiveness of European as well as the world gas market, which naturally has increased the attractiveness of investments into the sector, including with the target of new technologies development, infrastructure development, etc. respectively, the indexes of competition have grown in European gas market, which inevitably leads to the reduction of a specific weight of Gazprom in this gas market and within the world energy market. The reduction of Gazprom role in its turn means that strategic plans of the Kremlin based on shaky grounds, and can’t be accomplished in acceptable scale. 


Some calculations of Gazprom proved to be correct: indeed gas consumption in the EU grew constantly. But simultaneously specific weight of substituting technologies grew: production and supplies to the world market of shale gas, as well as other types of gas. It is enough to tell that since 2009, Russia ceded to the USA the first place in the world in gas production. Except for that a third of gas world trade is given to condensed gas today. 


The growth of the offer of alternative types of gas in the world market has resulted into the growth of competing with Gazprom gas suppliers to Europe. In recent years in the EU gas market the share of natural liquid gas (NLG) has grown. In practice for the last 10 years the share of NLG in gas import to the EU has grown up to 20%. Except for that, two new gas pipelines has started operating – Medgaz and GALSI from Africa to Italy and Spain. Finally, the financial crisis has resulted in the reduction of gas consumption – by 9% in 2011 and more 2% – in 2012. 


The share of Gazprom in the EU market comprised 23% in 2010, 26% – in 2011, 25.5% – in 2012.  But in general, starting from 2000 the share of Gazprom in gas import to the EU has reduced from 38% to 25,5%. Thus, having begun seven years ago an intensive activity to increase the share of Gazprom in the European market, Russia got an opposite outcome. And Gazprom can’t and doesn’t want to change the price policy, update the technologies of production, delivery and selling of gas. 


Gazprom can count on that the additional pipeline shall reduce for the investors the attractiveness of investments into alternative to Russian gas delivery ways. Especially this concerns east-European markets. In the established situation Gazprom realizes that the greatest chances to settle the company has exactly in eastern and central-European markets – Slovakia, Poland, Hungary, Ukraine, Belarus as well as Austria, Czech Republic, Lithuania, Latvia, Croatia and Bulgaria. Respectively, all informational and export policy of the company is aimed at “cutting off” of these countries from alternative ways and alternative suppliers, similar as previous 10 years Gazprom was struggling with alternative supplies of gas to West and South Europe.


Experts think, that the success of the “Yamal-Europe-2” project remains to be transparent. It shall be really complicated to find financing for this project, even if it  is actively lobbied personally by the President of Russia.