Eastern Europe fears winter without Russian gas

By LADKA BAUEROVA and MISHA SAVIC
Bloomberg

As winter approaches, former Soviet satellite nations from Poland to Bulgaria are watching Russia and Ukraine’s stalled gas negotiations with growing trepidation.

The lack of discernible progress is sending a collective shiver down the spine of Eastern Europe, which retains vivid memories of Russian energy cuts during unusually cold winters in 2006 and 2009. The ensuing shortages led to shuttered factories and a return to wood for heating and cooking in rural areas.

Despite the two episodes, little has been done to diversify supplies within a region that remains highly dependent on energy delivery systems dating back to the Soviet era.

“Parts of eastern Europe are still quite vulnerable this winter,” said Emily Stromquist, a Eurasia analyst in London. “The problem is that until recently the relations with Russia have generally been good, so perhaps there was no feeling of urgency to build quickly.”

If Moscow and Kiev don’t reach a compromise before winter and OAO Gazprom fails to restart supplies to its western neighbor, Ukraine may resort to siphoning off gas carried through its territory. As in 2009, that could prompt Russia to cut transit through Ukraine altogether, leaving parts of eastern Europe exposed to severe shortages.

Poland, Hungary and especially the Balkan peninsula would be most affected, according to the so-called “stress tests” published by the European Union on Oct. 16.

Soviet System

Connected to the old Soviet pipeline system that runs through Ukraine and Moldova, the Balkan countries rely on Russia for close to 100% of their needs. Moreover, they’re poorly connected with their neighbors and their underground storage isn’t sufficient to cover demand for the entire winter.

Part of the problem is that, instead of boosting pipeline inter-connectors with each other to improve trading, those countries pinned their hope on Gazprom’s South Stream project, designed to bypass Ukraine by joining Russia directly with Bulgaria through the Black Sea. However, the preparatory work on the 2,446-kilometer (1,520-mile) pipeline was halted earlier this year under intense lobbying from the EU and the US as the conflict with Ukraine flared up.

“Serbia didn’t work on alternatives and focused exclusively on the South Stream project whose construction doesn’t depend on us,” said Zorana Mihajlovic, Serbia’s deputy prime minister who served as energy minister from 2012 to earlier this year. Instead, she said, her country should have been building a pipeline to Bulgaria.

“Other European countries have done much more than us to improve their energy security,” she said.

Limited Buffer

Russia and Ukraine were scheduled to return to the table in Berlin earlier this week before Russia presented a last-minute demand for advance payments for future deliveries. That has deepened the worry of eastern European neighbors, following the talks closely, that the deal won’t get done.

Relying fully on storage isn’t an option for some of the countries. While Serbia’s Banatski Dvor depot is full, it would last the country only about 40 days, according to the energy ministry. Bulgaria’s only facility also offers a buffer of only a few weeks and is still only 88 percent full.

“Nothing has been done in Bulgaria since the last crisis,” said Ivan Hinovski, chairman of the Bulgarian Energy & Mining Forum. “There are some plans, but no new gas inter- connectors or other measures for diversification of supplies are in operation now. A shortage of gas supplies would induce serious economic stress.”

Across the EU gas storage facilities were 94% full on Thursday, according to GTE.

Storage Tanks

Poland, Slovakia and Hungary are better off, with larger gas-storage tanks. Still, they were forced to slow down the pace of injections into storage by Gazprom, which has cut deliveries in the past weeks after those countries began sending gas back to neighboring Ukraine, a process known as reverse flow.

Once the transiting Russian gas reaches EU territory, the countries have the right to send it back to Ukraine. Slovakia, for example, is able to supply Ukraine with up to 10 billion cubic meters/year through the Vojany pipeline. However, Russia has shown it’s willing to use gas supply as a political tool. After Vojany became operational in early September, Gazprom cut deliveries to Slovakia by 50%.

Most Expensive

Liquefied natural gas (LNG), viewed as the most expensive solution, is an option for Poland and Lithuania, both of which are building LNG terminals on the Baltic coast to receive gas, primarily from Qatar. Still, they will make only small difference this winter: while the Lithuanian station is scheduled to open in December, the Polish one won’t start receiving shipments until the middle of next year.

Eastern Europe’s shortcomings stand in contrast to Germany, Gazprom’s largest customer in Europe, which has depended on Russian gas since the 1970s. The construction of Nord Stream, the direct link from Russia under the Baltic Sea, means that since 2011 Europe’s largest economy is largely insulated from disruptions to gas flows through Ukraine.

In turn, Gazprom depends so much on revenue from Germany it’s keen to avoid breaks in supply there.

Some parts of eastern Europe have made progress in diversifying their gas supply. Hungary and Slovakia are about to finish an interconnecting pipeline. And, thanks to Nord Stream, the Czech Republic can now import enough from Germany to cover all its needs.

However, it may be difficult to supply countries farther east and southeast if supply through Ukraine stops, according to Pavel Solc, Czech deputy minister of industry and trade who is in charge of the country’s energy policy.

“Thank God we are in the safe part of Europe, and we may even have enough reserve capacity to supply Slovakia,” he said. “But with every other country further south it becomes more and more problematic.”

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