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September 28, 2014

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What's your opinion of the whole South Stream issue with Bulgaria and EU's issues with needing separate holdings?

Umm....in your title for this post did you mean how Putin "yields" (i.e. surrenders/gives up) Russia's energy weapon or how Putin "wields" (i.e. uses) Russia's energy weapon?

Hmm...in the long run then Ukraine is screwed, because by 2017 if it continues being a bad customer and attempting to hold other customers (the rest of Europe) hostage in order to get better rates and free gas for itself, then by 2017 with Russia no longer strictly needing Ukraine to export to parts of Europe, then the European interest in Russo-Ukrainian gas disputes will be vastly diminished and the Europeans will no longer have a stake in ensuring that Russia continues supplying Ukraine in order to ensure their own supplies.

Plus if the attempts at reverse flow become more widely established then it is the Europeans who may eventually have to deal with Ukraine as a bad customer who doesn't pay for what she gets. That would be rather ironic actually....a potential 2018 European-Ukrainian gas dispute over tardy payments or non-payment for gas from Slovakia, Hungary, Poland and Romania.

If that happened, then the Europeans would actually end up being on the same side as Russia in regards to gas and Ukraine. Won't surprise me then if there ends up being more support in Europe and Russia for a Blue Stream 2 and South Stream 2 by 2017-2019.

J.H.: Me is properly castimagated an will change letter when at proper keyboard.

My mother: "My son speaks two languages! Sadly, both of them badly."

Shah8: It's a serious issue. Basically, Gazprom has run afoul of E.U. competition laws, which mandate that gas production and transportation be split. There are two workarounds for that -- (1) Gazprom could divest; or (2) They could jump through a legal loophole and declare that since South Stream will carry some Bulgarian gas from an offshore field, then it is actually a "field" pipe and exempt from the rules.

They are working on option (2). Problem is, there is now a lot of understandable anti-Russian sentiment going around. So the European Parliament is trying to kibosh the workaround. Adding insult to injury, it turns out that a sanctioned Russian oligarch, Gennady Timchenko, owns the Bulgarian construction contractor.

My gut feeling is that unless the E.U. explicitly decides to ramp up the sanctions on Russian again, the issues will be resolved and the pipeline will open on time. Moreover, even if it doesn't, the Nord Stream expansions should be enough to let the Russians do as they will with Ukraine without disrupting their exports to Europe. (I'm not 100% sure of that; it depends on the growth of the Belarussian offtake.)

But it is a serious problem. I'm glad you mentioned it.

Well once South Stream comes online and with Gazprom now acquiring Europe's largest underground gas storage facility in Rehden, Lower Saxony (under an agreement between Gazprom and the German company BASF) then by 2019 Europeans will have almost no stake in trying to ensure that Russia does not cut off gas flows to Ukraine, since Russia could now ensure that all of its European customers are fully supplied without Ukraine stealing their gas as it transited (I've even come across Ukrainians on the internet who saw nothing wrong with this when Ukraine did it during past gas disputes...shocking really).

This would make any Russo-Ukrainian gas dispute after 2019, very interesting because at that point it would be about as important to Europeans as the 2009 gas dispute between Turkmenistan and Russia (which received far less attention than the 2009 Russo-Ukrainian gas dispute and had Turkmenistan halting gas shipments to Russia). Without the EU feeling forced to support Ukraine in order to ensure it's own supplies of gas, Ukraine would be more isolated and might more readily accede to Gazprom's demands for Ukraine to honour its contractual obligations. Or it could end up being the end of the line for Ukraine when it comes to gas and we see a Maidan 2.0 or Maidan 3.0 (something like the Third or Fourth Ukrainian Revolution) if enough Ukrainians end up without gas....

The interesting thing, from my POV, for circa 2019: the Yanukovich signed a number of contracts prior to the Maidan going boomski to start fracking. A large part of that was in the Donbass and Crimea(*), but not exclusively. The other part was in western Ukraine. The estimates I remember reading was for 30 years worth of gas for Ukraine's current and projected needs. Those numbers are probably squicky.

*. Interesting coincidence that.

Well, in the news today there is now a new gas deal between Russia and Ukraine with the EU (and IMF) acting as guarantors....

So now Russia no longer has to worry about Ukraine being a bad customer as Russia will now be paid by the Europeans, who as I suggested earlier might well end up having to deal with the headache that is getting money from Ukraine for gas....

And with the IMF involved, it won't be pretty for Ukraine in the future if attempts to do to the IMF and EU what it used to do with Russia in regards to payments as consistently skipping out on payments would raise the possibility of Ukraine being temporarily shut out from IMF lending and EU aid.

The total EU/IMF package is worth $4.6bn and Ukraine will now pay $378 per 1,000 cubic metres to the end of 2014, and $365 in the first quarter of 2015.

This is the halfway mark between the price Gazprom had set ($485 per 1,000 cubic metres) and the price Ukraine was willing and hoping to pay ($268 per 1,000 cubic metres; rather unrealistically I might add given that this was a case of wanting to have your cake and eat it too as they overthrew the corrupt regime that negotiated that deal but still wanted the deal to remain in place). It's also on the lower end of the $350-450 per 1,000 cubic metres price range that European countries tend to pay for gas.

Oh and Ukraine will still apparently have to pay up front (or pre-pay) for new deliveries of gas.

Any thoughts on the recently announced scrapping of the South Stream pipeline by Putin in favour of a new gas pipeline (with the same capacity as South Stream) to Turkey and for a new gas hub to be built in Turkey?

This almost sounds like Russia is converting the South Stream project into a second Blue Stream pipeline......

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