In 2021, the energy sector of Ukraine faced myriad threats related to the completion of Nord Stream 2, increasing gas prices and coal shortage just before the heating season. At the same time, green trends require decarbonizing the industry and developing the hydrogen direction.
Kosatka.Media discussed what direction is better for Ukraine, whether it should wait for the protection against Nord Stream 2, and where global green trends could take us, with Dr Thomas W. O'Donnell, international expert and senior energy and geopolitics analyst at GlobalBarrel.com, who participated in the Ukraine Gas Investment Congress held in late October in Kyiv.
One of the key messages at the congress is that whatever the ‘green’ trends are, gas is a transition fuel and we will use it for a long time. Are there any other case scenarios? How should Ukraine act in this situation?
In the long run, we want to have a world that's not dependent on hydrocarbons. The worst hydrocarbon is lignite and brown coal. And that's what people should concentrate on eliminating. Natural gas in fact is a great way to eliminate coal.
It's actually an improvement for Ukraine, not only because of global warming, because of CO2, but also for the health of the people since natural gas does not produce environmental pollution. So, increasing the use of natural gas (or also nuclear energy) in a country like Ukraine is to the benefit of the environment and to the people's health.
However, Ukraine is not a typical European country, it is a country that unfortunately is at war. In such a situation, it has found an intelligent way to access natural gas, which is virtual reverse flow.
“Virtual reverse flow” means that, as Ukraine transits Russian gas towards European countries, traders in Europe who are buying this gas can sell it to Ukraine and tell the Ukraine gas transit pipeline operator (GTSO) to simply remove this gas as it passes through Ukraine. It has thus only “virtually” gone to the European buyer and “flowed back” to a final Ukrainian buyer, without ever actually making the physical round trip to Europe and back. This saves Ukraine money and is a way to get gas. If Ukraine cannot renew its contract to transit Russian gas there is only one physical connection that can now “reverse flow” gas into Ukraine, that being from Slovakia. And, that would probably be Russian gas too, but the gas that would flow from Nord Stream 2 into Germany and eventually into Slovakia.
Now if Russia not only has a war against Ukraine, or for some other reason decides to stop sending this gas through Ukraine, Ukraine will then have to import gas from the European Union countries and this will be much more expensive. And, as this year, the EU can be also short of gas. So, it's vital to produce gas inside Ukraine. This is a complex matter, but it's perfectly possible for Ukraine to do this.
Does Europe feel responsible towards Ukraine, and what do you think about the idea that Gazprom monopolizes the European gas market?
Russia used to send 80% of its gas to Europe through the Ukrainian GTS (Gas Transit System), which greatly constrained the options for Russia to act aggressively towards Ukraine. Putin made a lot of efforts to change this situation and diminish the importance of the Ukrainian and Belarusian (Yamal - Europe gas pipeline – ed.) gas pipelines. He succeeded, initially with Nord Stream 1, completed in 2010, greatly reducing Russian dependence on Ukrainian gas transit, and Ukraine got a war on its territory. However, Russian forces were still quite careful to not bring this war too near to the remaining Ukrainian pipelines filled with Russian gas. Putin wants to end this remaining Ukrainian transit now that he has Turkstream (string 2) operating also; and especially once he has Nord Stream 2 operating.
Germany, in turn, needs gas very badly. All of Europe in reality is dependent on Russian gas. It is about 40% of Europe's imported gas. This makes the German elites nervous: the fuel, since 2014, is flowing through a country at war with Russia.
Unfortunately, the elites made a decision: “Bring this gas directly to Germany, we will distribute it. We can't remove the risk of buying gas from Mr Putin, but we can remove the risk of going through Ukraine”. Some say “I'm sorry, Ukraine.” Some don’t say: "I'm sorry, Ukraine." This is geopolitics.
Many countries in Europe and, of course, the United States do not agree with this decision. We worked very hard against both Nord Stream 1 and 2, and against Turk Stream, but the struggle continues.
Could the issue of gas pipeline certification prevent its launch? How do you assess the chances that Nord Stream 2 will follow the rules of the Third Energy Package?
At the beginning of a struggle, it's difficult to know the outcome, otherwise, it wouldn't be such a real struggle. If everything is done according to the rule of law then Nord Stream 2 will follow the Third Energy Package, the law of the European Union, which is also, therefore, the law of Germany and every EU country.
Under this law, whomsoever owns the gas, should not own the pipeline. but Gazprom is obviously the only company that can put gas into the origin of the pipeline inside Russia; therefore, according to EU law, they should not own the pipeline. The pipeline has to be owned and run by a company that is independent of the Russian government and preferably politically independent of the German government.
If the arrangement for launching Nord Stream 2 does not meet these requirements, the European Union has the right to review the decision of the German Agency.
Hopefully, it will do its job and insist the German regulator revises the rules. If not, then I am sure that, for example, Poland will file a claim with the European Court.
This year, the energy crisis has become a reason to assume that the world's achievements in decarbonization have been made possible only because of the global recession in the industry during the pandemic. Once the world economy began to recover, they levelled off. What conclusions can you draw from the current situation across the global energy sector?
The oil and gas sector is a very complicated energy and economic system. And it's becoming more complicated as the necessary transition to non-carbon energy has begun. There is also the complication of the pandemic.
In the past year, large international companies diminished their investment in gas production for two main reasons. One is the pressure of green trends. For example, the International Energy Agency, the IEA, said all oil and gas firms must end any further investments in hydrocarbon exploration and production (E&P) activity if its “sustainable scenario” is to be met, and 2 degree warming met. However, this scenario is very far from realistic, and it was an unwise and premature call. At the same time, the pandemic shutdowns ended in many states and some countries experienced an economic boom, greatly raising demand for oil and gas as compared to 2020-2021.
As for the present gas crisis in Europe, including in Ukraine, with insufficient gas in storage for the 2021-22 winter season, a number of unfortunate factors have combined.
One factor is that China has been switching many dirty coal-fired power plants to natural gas since 2017, and they also have a rapidly growing demand due to their Covid recovery process. So, the LNG produced in the world at present is mainly going to Asia because they will pay a very high price for it, a price Europe is unwilling to compete with.
For Europe, weather conditions were added to the abovementioned factors. In the winter of 2020-21There was a lack of wind in Europe, and windmills did not produce as much electricity as expected., and it was also colder across Eurasia. As a result, much more gas had to be used than expected. Then, the summer turned out to be hot and many countries began to use a lot of gas to produce electricity for air conditioning. As a result, during the preparation for the winter of 2021-22, Europe began with its gas stocks very low from the previous winter, and the companies were unable to produce gas fast enough to bring storage to its usual level by the end of the pre-winter filing season on 1 October... Meanwhile, Mr Putin and Mr Miller, the head of Gazprom, make threats: to Europe that, if it did not rapidly launch Nord Stream 2, Russia would not be able to supply enough gas into European storage before for the winter.
However, do the Russians have enough gas in the first place? So up until today, Russia has been straining to increase its gas production, and my information is that it is now producing as much as it possibly can, reportedly at record or near-record levels. However, Russia has been forced to divert this largely into its own domestic storage since at least August, as it too was affected by the cold winter and hot summer and had greatly depleted its domestic storage. Gazprom was ordered to increase production and pump 300 mcm/day into domestic storage until 1 November. Until this is accomplished, Russia really doesn’t have any “extra” gas to help Europe fill its depleted reserves. That is, Putin and Miller were only bluffing that they could “save” Europe if Nord Stream 2 is hurriedly put into service.
However, today Russian storages are now 97% filled (October 20 – ed.).
So, after about 1 November, Russia will have to send its further production to Europe, or close the valves and waste the high production levels it has achieved. But, it is really too late to fill European storage to the levels it should have been at on 1 October. If there's no wind again this winter and it's very cold, there will not be enough gas for Europe, and also for Ukraine. There would be a crisis. And Russia, of course, is refusing to send this gas through Ukraine, for its geopolitical reasons, and that will also limit how much gas it can supply to Europe.
What about increasing the transit of gas through Ukraine...?
Mr Putin pointed out recently: “If Ukraine decides to be reasonable, we can do lots of business in the future.” Read: “Just give me Donbas”. In the meantime, Russia prefers not to send anything through Ukraine and I am sure it will do everything it can to avoid signing another transit contract when this one expires, or even simply pay a financial penalty and not fulfil the present transit contract till its scheduled end.
But if all other routes are full, and Nord Stream 2 is not ready, then perhaps he will send gas through Ukraine. Because it is impossible, as many people think, to send West Siberian fas to China from Urengoy, from Yamal. It must go to Europe. Turk Stream is full, Nord Stream 1 is full, Yamal- Europe could quickly become full. Only Ukraine remains as the option for large exports. But if it is really cold, Russia will need gas at home.
Let’s move on. Can the world, given the energy crisis, reconsider its views in favour of nuclear energy?
Yes, there is a slow but steadily growing perception that nuclear power is necessary, especially in the United States, Canada, England, and in Russia and China. This is becoming clear from the last decade of experience with what I should call the “German model”. The “German model” from the German Green party is “100 renewables and no nuclear energy”. We see that even a rich high technology country like Germany is having great difficulties with this model.
Right now, because of the gas crisis and because of the over-dependence on the wind, Germany has had to restart dirty lignite plants. Today the main source of electricity in Germany is once again lignite. So, everybody else should look at the German experiment, perhaps it was romantic.
This year, the world has been talking a lot about hydrogen energy as one of the promising areas of decarbonization. What do you think of the widespread use of hydrogen?
I think the widespread use of hydrogen is very unlikely. There are certain industries, that are difficult to decarbonize where it will likely have a “niche” application. For example, making steel.
In addition, it's very expensive to produce hydrogen. So, it should only be made in certain special cases, for example, by offshore wind farms in cases where it is too expensive to connect them to the country's electrical grid. Therefore, they could be dedicated to producing hydrogen and this hydrogen can be used where it's the only solution. But it's irrational to use such expensive hydrogen in a heat engine to produce electricity or as a fuel for automobiles.
Does Ukraine have any chances to become Europe’s ‘hydrogen hub’ (both a producer and a transit country) since its role as a transit country for Russian gas is questionable?
I would say, look at the needs of Ukraine first, which are to produce natural gas for the needs of its population in a reliable and affordable way.
If Ukraine had some excess wind energy or excess nuclear energy, and somebody in Europe is willing to pay a good price for converting it to hydrogen if it would be a good business, why not? But, not until Ukraine has enough energy, enough natural gas and nuclear power for its own security and prosperity. But I don't believe there will ever be a hydrogen economy in Europe. It's not realistic. Just like there was a plan to have alternative fuels for transport in Europe, more precisely, ethanol. That was an unrealistic plan. It's now used only in a limited rational way. This will be hydrogen's future. I believe, something like that.
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