By Vlad Popovici
2010 was an eventful year for the energy sector in Southeast Europe. It is therefore impossible to objectively rank all the incidents, accidents, energy wars and new energy strategies of the year. And it is no easier to see and rank what could be in store for 2011. These disclaimers aside, we can still give it a try and discuss what we see as some of the most consequential events during 2010 that have impacted and/or could impact the Balkans’ energy sector in the future.
Not all of the incidents or events discussed below have happened in the Balkans, but their impact has been and will continue to be significant for the region’s energy sector. In the same context, we have no intention of ranking them in any way; therefore, we will approach them chronologically.
2010 Part 1: Macondo – the Deepwater Nightmare
What happened? On April 20, 2010, an explosion on the semi-submersible drilling rig Deepwater Horizon, at the time completing an exploratory well (the MC252 or Macondo prospect) in the deepwater Mississippi Canyon of the Gulf of Mexico killed 11 rig workers. The subsequent fire on the rig could not be put out, and the rig sank on April 22, while crude oil started to gush from the broken riser pipe.
During the next three months BP, the company that was the majority-owner of the Macondo prospect, tried to stop the oil flow from the damaged well using different technical solutions. The effort was supported by the entire oil industry in the region and took place under the constant monitoring of the different local, state and federal authorities in the US.
Macondo was finally capped and the uncontrolled oil flow stopped during the summer months. The Macondo tragedy is undoubtedly the largest offshore oil spill from a single source in history – an estimated 4.9 million barrels flooded into the Gulf of Mexico waters before the well was capped.
Already compared by some observers to other milestone tragedies such as Chernobyl, it highly likely that the Macondo deepwater oil spill will prove a turning point in the evolution and regulation of an industry that was already struggling to improve its public image, but that is still vital for the global economy. Not to mention the legal wrangling, lawsuits and class actions around the spill that, according to an article in the September issue of Offshore magazine, could go on until 2035!
Why is it important for the Balkans? Southeast Europe is very remote from the Gulf of Mexico, both geographically and in terms of having a developed deepwater oil and gas industry. What, then, could be the impact of the Macondo oil spill on the energy sector in the region?
No country in the Balkan region has a strong deepwater oil and gas industry yet, but this picture could change in the near future. The Black Sea region, for example, has chances to become the next deepwater frontier. Turkey is the most active country in this area and the deepwater potential of the Turkish sector could be huge – Hürriyet quoted the CEO of the Turkish national oil company TPAO as saying that conservative estimates for the Black Sea prospects are 10 billion barrels of recoverable oil and 1.5 trillion to 2 trillion cubic meters of gas.
TPAO has already signed memorandums with Petrobras and ExxonMobil to explore this deepwater region and the first deepwater well, Sinop-1, was spudded by Petrobras and TPAO in February 2010, in 2200 m of water.
One challenge in this context is that there is no clear definition of what ‘deepwater’ means. Some sources mention depths greater than 225-250 m as being ‘deepwater,’ while others consider 1000 m to be the limit between shallow and deep water. If we consider the former definition of ‘deepwater,’ though, other regions in the Balkans that are prone to oil and gas exploration and production could be regarded as deepwater: some areas offshore Romania and Bulgaria, as well as parts of the Adriatic, Ionian and Aegean Seas, such as the deeper areas of the Blocks 2 and 3 offshore Montenegro that could be opened for further exploration in the near future.
In this context, as a direct consequence of the Macondo spill, we can expect that governments in the Balkans with current or future deepwater interests will closely monitor the regulatory changes adopted by the countries with significant deepwater sectors, such as the US, and by the European Union.
As deepwater expertise is limited in the Balkans, and because the countries in the region tend to harmonize their energy legislation and institutions with EU ones, we can expect to see an alignment to any drilling restrictions or new regulations that are adopted at a European level, as well as a clear separation among institutions that promote oil and gas exploration and production – mainly by awarding exploration and production licenses or collecting production royalties and taxes – and those that regulate the safety standards and disaster response measures in the oil and gas industry.
Although it is still unclear how all this regulatory overview will play out in the Balkans, it would not necessarily cancel all the future deepwater projects, but could sensibly increase their costs and perceived risks for the potential investors.
The risk of new regulation and increased monitoring in the deepwater sector could also have indirect effects on the energy sector in the Balkans, such as a stronger interest in conventional and non-conventional onshore oil and gas reserves, something that could be perceived in the future as presenting a lower risk than offshore plays.
For example, this perceived risk could build a stronger business case for heavy oil projects in Albania, or for new shale gas projects. Another already visible indirect effect of the Macondo spill is renewed concern about the increasing oil transit through the Bosporus. Turkey’s Energy Minister has recently called a meeting with major international oil companies to discuss the creation of oil spill fund and different ways to reduce the oil transit through the Turkish Straits – which could create momentum for some of the pipeline projects aimed at diverting part of the oil transit.
2010 Part 2: The Annual Gas War
What happened? Following a script that seems to repeat itself every year in Europe, another gas war started on 21 June, when Russia’s Gazprom started to cut gas supplies to Belarus. At the time, it was stated that these cuts were being imposed because of $192 million of unpaid gas bills, while Belarus claimed $217 million in overdue gas transit fees owed by Gazprom.
The real problem, however, was that about one-fifth of Russia’s gas exports to Europe use Belarus as a transit country. In a sequence reminiscent of the 2006 and 2009 gas wars between Russia and Ukraine, on 22 June the Belarus government was ordered to stop the transit of Russian gas to Europe until the transit debt would be paid. The European Union panicked and asked Belarus to respect its gas transit commitments. Finally, on 23 June Belarus announced that its debt was cleared and everything returned to normal.
Although this time the annual gas war only lasted 3 days, it took place in summer when demand is lower, and had a very limited impact on two EU members (Lithuania and Poland), the conflict also gave the final impetus to new European Union legislation aimed at increasing the security of gas supply during similar gas crises.
After the much more serious winter gas crisis of early 2009, the European Commission had proposed a new Security of Gas Supply Regulation that was aimed at improving the coordination of EU member states during gas supply disruption incidents. It also sought to make sure that effective action will be taken in advance in future, in terms of preparing national emergency plans and having a minimum of gas stored for such situations.
Although the negotiations on the new regulation were long and arduous, the June gas mini-war convinced everybody that it was time to act. The proposed regulation was approved by the European Parliament on 21 September and shall enter into force before the end of 2010.
Why is it important for the Balkans? Although the Southeast Europe countries were not directly exposed to the June 2010 gas war, some of them still bitterly remember the 2009 winter gas crisis, when they lost critical gas supplies in the middle of a cold winter. Moreover, the repeated occurrence of such supply disruptions in the past indicates an elevated risk of re-occurrence in the future.
Therefore, all of the countries concerned, especially those in vulnerable single-supplier contexts (such as Bulgaria and Romania) have started to work towards developing interconnections with the neighboring countries, reversing the flows in the existing pipelines to have access to alternative sources of gas imports, and to increase their underground gas storage capacities.
As the new Security of Gas Supply Regulation is implemented in the EU member states in the Balkans – Bulgaria, Greece and Romania – we can expect an acceleration of current projects aimed at diversifying the gas as mentioned above, as well as the launch of new projects aimed at reducing their dependence on Russian gas supplies- new pipelines, LNG terminals, etc.
On the other hand, all the other countries in the region, except Turkey, are members of the Energy Community, the EU initiative that supports its contracting parties to create a cooperative framework for the regional energy sector.
In agreeing to become members of the Energy Community, the contracting countries have taken on, among other things, a legally binding obligation to implement the energy acquis communautaire (EU legislation, rules and regulations). This means that they will also sooner or later have to implement the requirements of the new EU Regulation; this is especially important as most of them have a non-diversified supply of gas, or are just starting to develop their natural gas markets.
Turkey, which has close energy links with the Balkans and the European Union and is also a significant importer of Russian gas that is partly transited through Ukraine, Romania and Bulgaria, also has a vested interest in adopting the new Regulation, or at least in implementing its most important requirements to avoid future gas supply disruptions.
2010 Part 3: A New Strategy on the Horizon
What happened? The EU Commission published on 2 July a stock-taking document called Towards a new Energy Strategy for Europe 2011-2020 (PDF). At the same time, it also launched a public consultation to involve all the interested stakeholders in assessing the most important energy challenges for the decade 2011-2020, and to establish the main objectives to be reached.
Assessing the results of the previous 2007 EU Energy Action Plan, the Commission estimates that significant challenges still remain: lagging implementation of the European energy legislation at a national level; lack of a European infrastructure framework; under-utilization of the existing energy savings potential, and weak coordination of the external dimension of the EU energy policy.
The public consultation results, published in October 2010 (PDF), show that a new energy strategy is indeed needed and that it should focus during the next ten years on progressing towards a low-carbon energy system, developing modern integrated energy grids, bringing the benefits of EU energy markets to businesses and citizens, showing strong leadership in technological innovation in the energy sector, and developing a strong and coordinated external EU energy policy.
The new Energy 2020 – A strategy for competitive, sustainable and secure energy was officially published on November 10, and will be followed, after approval by the European Parliament, by other auxiliary documents, such as an Energy Infrastructure Package, an Energy Efficiency Action Plan and a 2050 Road Map for the energy sector.
Why is it important for the Balkans? The new Energy 2020 strategy will have a significant impact on the Balkan countries. It has defined five priorities for the energy sector: achieving an energy efficient Europe; building a truly pan-European integrated energy market; empowering consumers and achieving the highest level of safety and security; extending Europe’s leadership in energy technology and innovation; and strengthening the external dimension of the EU energy market. Once approved, both the EU members in the region – Bulgaria, Greece and Romania, and the other non-EU countries, through their membership at the Energy Community, will have to implement the strategic guidelines and action plans in their national legislation.
This will probably translate into revisions of the national energy strategy and action plan documents that most of the Southeast Europe countries have already developed and started implementing, as well as new national energy strategy documents for the countries that still do not have them.
On a more practical level, the Energy 2020 strategy will create the framework that will allow a number of energy projects in the region to move forward. Also, the creation of a new Energy Infrastructure Package will provide financial support for these projects- the document estimates that during the next 10 years overall energy infrastructure investment in the EU of about 1 trillion EUR will be needed in order to integrate all the EU countries in pan-European energy networks.
Some of these projects will probably involve Southeast European countries as well. The EU – and the Energy Community – will also focus on increasing the energy efficiency in the two main sectors of transport and building, which will create business opportunities in the Balkan countries as well.
Finally, the countries in the region will have the opportunity to be proactive participants in the definition and implementation of a potential future common European energy policy.
2010 Part 4: Turkey’s Power Connection to Europe
What happened? On 20 September, TEIAS, the Turkish Electricity Transmission Company, announced (DOC) that the Turkish power system was synchronized, starting 18 September, with the interconnected power systems of continental Europe. Turkey is already connected to the Bulgarian transmission system by two 400 kV lines, and to the Greek system by one 400 kV line.
This event, although overlooked by most mainstream media, is the result of a process that was launched in 2000, when TEAS (a predecessor company of TEIAS) made an application to UCTE (a predecessor organization of ENTSO-E, the European Network of Transmission System Operators for Electricity) for synchronous interconnection and membership.
The parties involved then carried out technical studies and jointly worked on improving the frequency control performance of the Turkish power system, with European partners offering technical assistance, while TEIAS and the Turkish Electricity Generation Company (EUAS) carried out a rehabilitation program of the operation and control systems at the power plants and in the transmission network.
On 18 September this preparatory process was concluded, and a one-year trial managed by ENTSO-E came into effect. It involved the TEIAS experts and the transmission system operators in Bulgaria, Greece, Germany, France, Italy, Serbia and Switzerland.
Why is it important for the Balkans? The objective of this network synchronization is, according to the TEIAS press release of 18 September 2010, to increase the quality and security of electricity supply in Turkey, and to provide the country with access to the European Electricity Market.
As Turkey has a rapidly growing electricity demand that is already close to the installed generation capacity of the country, the next couple of years could bring periods of significant electricity deficit. This deficit will be covered by imports until new generation capacities are built and come online in Turkey.
The synchronization of the power system to the European system and the future participation to the integrated European electricity market will further open the Turkish electricity market to power imports from Europe- starting with the countries already connected, Bulgaria and Greece. Turkey will have in exchange more flexibility in planning and executing its long-term energy strategy. In the long run, Turkey could even export electricity to the European markets, thus increasing the security of supply for Europe as well.
Indirectly, this synchronization could create incentives for the development of further power network interconnections with other European countries. For example, Romania’s transmission system operator has included in its long-term development plan a 400 kV submarine cable to export electricity to Turkey under the Black Sea.
Another potential effect of this synchronization is that it will create a new export market in Turkey for the surplus electricity coming from the increasing number of renewable energy generation projects, such as dam and run-of-river hydro power plants and wind farms that are planned or under development throughout the Balkans, from Bulgaria to Bosnia or Montenegro.
Finally, using the strategic position of Turkey, the synchronization of the power networks could be a first step towards connecting the European, Middle Eastern and even North African electricity transmission systems and markets.
2010 Part 5: The Pipeline (and LNG) Race
What happened? 2010 was again a busy year for the many regional oil and gas pipeline projects that will transit Southeast Europe. No event can be singled out as the most important because the promoters of all the projects raised the level of media noise to flood the interested stakeholders and the general public with press releases, interviews and conferences to ‘prove’ that it is in fact their own particular project that is advancing fastest, and that will be the first to cross the finish line.
To start on the gas front, the Southern Corridor projects supported politically and financially by the European Union include Nabucco, Trans-Adriatic Pipeline and the Italy-Greece Interconnector (also known as the Interconnection Turkey-Greece-Italy).
The Nabucco project company will make the final investment decision in 2011 as it is currently negotiating with Azerbaijan on the potential import of gas from its future Shah Deniz II project.
In the meantime, Iraq is still seen as the primary future supplier of gas for Nabucco. The project company has signed, in the beginning of September 2010, an agreement with a group of banks – the European Investment Bank (EIB), European Bank for Reconstruction and Development and the International Finance Corporation (IFC) – to start the due diligence process for potential financing package of up to 4 billion euros.
The Trans-Adriatic Pipeline (TAP), a 520-km pipeline to transit gas from the Caspian through Greece and Albania to Italy, has attracted a new shareholder, E.ON Ruhrgas, that will join with 15% participation the other two project promoters, Statoil and EGL. The new shareholder has increased the visibility and credibility of the project and will also attract more support from the European Union (Statoil and EGL are both coming from non-EU countries, while E.ON Ruhrgas comes from Germany, a EU country).
TAP targets the Shah Deniz II project for its gas supply as well. Turkey, Greece, and Italy have signed on 18 June 2010 a memorandum of understanding for building the Interconnection Turkey-Greece-Italy (ITGI) pipeline by 2017, which could complement Nabucco in carrying Caspian gas to the European markets.
South Stream, a giant future pipeline that would carry Russian and Caspian gas under the Black Sea to Europe, is still seen by many as a competitor to Nabucco. The main promoters of the project are Gazprom (Russia) and ENI (Italy). There was speculation that Wintershall, a division of the German conglomerate BASF, would join South Stream as a shareholder, but rumors were denied by Wintershall at the beginning of October 2010.
Another interesting trend in 2010 is that South Stream has become a truly Balkan project, as the project promoters have aggressively convinced most of the countries in the region to participate in the project – Bulgaria, Croatia, Greece, Romania, Serbia and, most recently Macedonia – sometimes playing them against each other, as is the case with Bulgaria vs. Romania. Even Turkey has agreed to give the right of passage for a short portion of South Stream through its exclusive economic zone in the Black Sea. Moreover, in September 2010 Serbia started the construction of 52 km of the Serbian portion of the South Stream project.
The gas transit landscape in Southeast Europe became even more complicated during 2010, as several countries in the region started to actively promote competing liquefied natural gas (LNG) projects in the Black Sea. The AGRI (Azerbaijan-Georgia-Romania Interconnector) project aims to bring Azeri gas thorough a pipeline to the Georgian Black Sea coast, liquefy it in a terminal, and to transport it by LNG tanker to Constanţa in Romania, for re-gasification and further transit through the existing Romanian pipelines to the European markets.
In September, Hungary joined the AGRI project, becoming a shareholder of the project company that wants to finalize the 2.8 billion cubic m/year transit project as early as 2013.
The other countries around the Black Sea are also not wasting time. Bulgaria has announced discussions with Qatar and Azerbaijan to supply a potential future LNG import terminal on the Bulgarian coast, while Ukraine may start to construct a Black Sea LNG terminal near Odessa in 2011. And, on a different coast, at the Adriatic Sea, Croatia is pushing forward with its Adria LNG project.
2010 saw a lot of drama on the oil transit front as well, but no conclusions can be drawn as of yet. The Trans-Balkan Pipeline (or Burgas-Alexandroupolis pipeline) would carry Russian oil from the Bulgarian Black Sea coast to the northeastern Greek coast, in order to bypass the dangerously busy Turkish Straits.
Like a dizzying rollercoaster ride, the Bulgarian government announced in June that it will not participate in the project, because it will not bring economic benefits to the country and could damage the sensitive environment (and with it, tourism) in the Black Sea coast region. A few months later, after the Russian and Greek partners in the project declared their continued support, the project seemed to be on track again. In October, the Bulgarian environment ministry received an environment impact assessment (EIA) for the project- only for the ministry to send the EIA back for revision with additional information requests in November.
In a mirror event, the competing project Trans-Anatolian Pipeline (or Samsun-Ceyhan), promoted by Russia, Turkey and Italy seemed to gain some traction during 2010- until the head of the Russian partner, Transneft, stated in September 2010 that “Samsun-Ceyhan pipe talks stalled,”according to an Upstreamonline.com report.
Why is it important for the Balkans? The importance of the above summary of 2010’s key energy sector events is more than self-explanatory when it comes to the Balkans. Southeast Europe has a strong vested interest in seeing at least some of the projects discussed above being finalized. The direct benefits for the region could be enormous, as these projects would bring new oil and gas supplies to cover demand in the region, as well as transit fees.
In addition, the Balkans would gain a new status as a vital transit region for European oil and gas imports. In addition, significant indirect benefits that could materialize in the region, such as revenues for the local companies supplying materials, construction workers and services to these projects are not to be forgotten; this topic was discussed in detail in a previous Balkanalysis.com article.
As the stakes are very high in this game, we expect to see throughout 2011 a continuation of the dramatic 2010 pipeline and LNG race summarized above, though those interested will probably have to wait for several more years before the first projects pass the finish line in this all-out race.
2011 – More Interesting than 2010?
With all this said for 2010, what will happen in 2011? As anything tends to take longer than expected in the energy sector, the events discussed above will continue to impact the Balkans’ energy industry not only in 2011, but for at least the next several years. Moreover, we can already be sure that we are going to witness in 2011 a series of interesting events both in the conventional and the renewable energy sectors.
Without claiming to have a crystal ball, we can be sure that a lot of attention will be dedicated to the position of renewable energy in the region. Most of the renewable energy capacity coming online this year and next year in the Balkans is from wind and hydro projects, and they are already bumping into what could become significant obstacles: opposition from local populations in some of the project areas; lack of access to the national power transmission networks; lack of investment from the local transmission system operators to integrate the renewable power generation capacities, and mundane, chronic corruption that may hinder their development.
In a different context, a new race seems to be to join the ongoing regional pipeline and LNG one: the exploration and development of Europe’s unconventional gas resources – especially shale gas – that could, by emulating the recent astounding success of the US shale gas industry, reduce the continent’s dependence on gas imports.
While the shale gas focus is currently on other European countries – France, Germany, Hungary and Poland – industry scouts are quietly trying to give themselves the “first-mover” advantage in the Balkans as well. For example, we note two developing projects in Bulgaria: a new shale gas exploration project announced in July by Chevron, and the 300-bcm shale gas discovery confirmed in November by a smaller company, Direct Petroleum.
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