• Natural Gas News

    Black Sea Basin: Solutions for the Region and Europe



The Black Sea basin has been facing dramatic challenges, in the wake of Russia's annexation and occupation of Crimea and the east of Ukraine.

by: Drew S. Leifheit

Posted in:

Top Stories, Balkans/SEE Focus, Pipelines, Security of Supply, Ukraine, Georgia, Moldova, Romania

Black Sea Basin: Solutions for the Region and Europe

The Black Sea basin has been facing dramatic challenges, in the wake of Russia's annexation and occupation of Crimea and the east of Ukraine, according to Atlantic Council Executive Vice President Damon Wilson, who moderated a session at the Atlantic Council Energy and Economics Summit dedicated to a report on Black Sea Energy Security.

He offered, “This is the region in the Trans-Atlantic space in greater European space, where there's been the greatest degradation of security, and yet we haven't moved very far to update our own strategy about the region.”

That's why the Atlantic Council, he explained, had decided to take a deeper look into security in the Black Sea region, but also to think more strategically about the energy security of the basin – aspects which he deemed “intimately connected.”

The Black Sea basin, said Mr. Wilson, can be seen as a source of solutions both for the region and for Europe itself. “The combination of a real development in gas interconnectors, in diversification of supply, to ensuring regulatory and tax regimes that facilitate exploration and production, to the un-appreciated potential of tapping into domestic production around the Black Sea, and create a fundamentally different environment.”

The publication's author, Ariel Cohen, began by offering some of his key conclusions.

The prosperity of the region, he opined, will come from security – a particular challenge because of the occupation of Crimea and the Russian military build-up, which is a cause for concern for Turkey. “Secondly, the prosperity to the Black Sea area is predicated on abundant, reliable and cheap energy,” he said, explaining that this would come from not only oil and gas, electricity, including nuclear, coal, renewables, etc.

“The region is blessed with that,” said Mr. Cohen.

Georgia, for example, has a lot of hydro, but also has recently had a gas discovery, while Ukraine also has huge potential, reserves that had fallen into the “wrong hands.”

“Still, in Ukraine, there's plenty of gas.”

The challenge, he said, by looking at the intersection of energy and security is overreliance on one big supplier. “And the solution,” said Mr. Cohen, “is diversification. First of all, geographic diversification of the sources of gas, and there's plenty of gas in the Black Sea and in the Black Sea countries.”

He named the Caspian, which is the source of gas for the Southern Corridor: gas from Azerbaijan all the way to Italy. “Nabucco West,” he said, could eventually be revived, and could go through Bulgaria, Romania, Hungary to Austria.

The Atlantic Council publication, he said, reviews all of the north-south interconnectors, including Eastring, Tesla, etc. and names the challenges for the countries in the Black Sea region.

“The challenge for the countries around the Black Sea region, and for broader Europe, is to keep dependence on the Russian gas in check,” explained Mr. Cohen. “Yes, of course, Gazprom is capable of competing on price, but historically, through the disruptions of 2006/2009/2014 we know how connected, how married Gazprom's economic power is to the Russian geopolitical interest.”

Mr. Cohen recalled that at one time he asked Gazprom CEO Alexey Miller whether Gazprom was a company or a government instrument. He answered, “fifty-fifty.”

Of the countries that are 100% dependent on gas from Gazprom, Mr. Cohen rattled off Armenia, Belarus, Bulgaria, Estonia, Finland, Latvia, Lithuania, with others like Czech Republic, Bosnia Hercegovina and others “very dependent.”

“We've made a distinction in the report,” he explained. “Those countries that are loyal to Moscow get a better price, and those countries that are independent in their policies get less good of a price, so while now the prices are low, countries get a break. Historically, gas prices were used as a geopolitical instrument in terms of pressure, of a diktat of foreign policy.”

A safe and peaceful Black Sea region, he said, is vital for Europe, European energy security and for the economic development of markets in the region.

“Georgia and Ukraine, eventually Romania and Moldova, can and should be looking into domestic resources as well as diversification of LNG terminals and interconnectors so that you are not as dependent as you historically were, because of the legacy of the Soviet power in the Cold War – the massive pipelines from the east to the west created a certain scenery that we are now trying to overcome and bypass.”

Happiness, said Mr. Cohen, is multiple pipelines, because they drive prices down and give you options, geopolitically and economically.

LNG terminals like those in Lithuania and Poland, possibly in Croatia and other places, along with development of newly discovered reserves in Georgia, and development of the Southern Gas Corridor will fundamentally change the energy landscape of the region by 2023-25, which can hopefully provide peace and security.

Low oil prices have been a good thing for the world, Europe and the greater Black Sea region, said Steve Nicandros, Chairman and CEO, Frontera Resources, who said that prices of $40-45 will be around for the next couple of years.

He mentioned the “great potential” for oil and gas that exists in places like Ukraine, Georgia and Turkey is low cost to access. Mr. Nicandros explained, “So when we think about a lower energy price, the vast onshore resources that exist throughout this region suddenly become the focus of the industry. It becomes a challenge for Black Sea exploration – it's deep water and, by definition deep water exploration and production becomes challenged.

“But for oil and gas that's found and explored for along the limited shelf of the Black Sea, but predominantly in the onshore regions, it's a tremendous advantage for this part of the world,” he said.

He called it a “good news story” for Europe.

In terms of the importance of interconnections in the region, Mr. Nicandros queried, “Can you imagine reverse flow of gas through the countries of eastern Europe to bring energy from a distance? The storage alone that exists in Ukraine can be a tremendous hub for Europe, and interconnecting to that hub is the problem, but once these bottlenecks are broken a tremendous independence comes with that.”

According to him, there needs to be a lifting of government restrictions on exploration and production in Ukraine for non-conventional resources like shale gas.

“Governments throughout Europe owe it to their people to encourage development of their natural resources in their coutnry, because these resources found domestically are always going to be the cheapest to provide to their people,” he said.

He recalled that a decade ago the world had faced the prospect of “peak oil” by which the world was poised to run out of oil. “In the US we started constructing import facilities for LNG and spending hundreds of millions of dollars for facilities that ultimately never ever going to see the import of LNG.

“It was through the encouragement of natural resource development,” continued Mr. Nicandros, “that there was a revolution of a new wave of hydrocarbon production in the US that today has seen very cheap energy prices for Americans and surrounding markets. I see that same vision for Europe. Our work throughout Eastern Europe is showing that there are vast resources that can be had thanks to more modern technology.”

What was once unconventional, over time, he explained, becomes conventional.

He opined that governments need to encourage the priveate sector to come and experiment to create new sources of energy, accompanied by establishing favorable tax regimes for companies in exploration and production.

“Continental Europe, and all the countries surrounding the Black Sea are blessed with vast amounts of natural resources,” he noted, “mainly oil and gas, that have not been tapped.”

As to whether shale gas had been “played out in Europe,” Mr. Nicandros noted that only a fraction of shale gas exploration wells has been drilled in Europe.

The Czech Republic's Minister of Trade and Industry, Jan Mladek, emphasized that his country is a “consumer country,” producing only small amounts of domestic oil and gas. He said the Czech Republic seeks to continue being a consumer, as it can buy energy more cheaply from the outside world.

He offered, “We have no problem to buy crude oil and gas from Russia, but under one assumption: that there are alternative routes, alternative sources that can replace Russian supplies in the worst case scenario.”

According to him, negotiating positions and prices for deliveries are much easier.

“The Russians,” he said, “can be partners, but they must know that you are not dependent on them – this is basically the message.”

Regarding Nord Stream II, Mr. Mladek reported that the Czech Republic would have access to gas from the pipeline via the Gazella pipeline, enabling to buy gas from Russia outside of the Ukraine route. However, he said his country shared the fear of Slovakia that if Nord Stream is built it will no longer be necessary to transport gas through Ukraine. “We would prefer two routes: one going through Nord Stream, a second going through Ukraine.”

He recalled that in 2009 the Czech Republic had suggested proper metering and separation of the transit in Ukraine, to make sure that the route is maintained. “Europe needs as many routes as possible,” opined Mr. Mladek.

-Drew Leifheit