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Energy Sector

Regional Energy Indicators:

Electricity Generation (TWh) 440.7
Electricity Consumption (TWh) 411.3

Energy Consumption per Capita (kgoe/cap) 1786
Energy Import Dependence (%) 61%
CO2 Emissions per Capita (kg CO2/cap) 5231
Note: kgoe – kg oil equivalent

Cyprus Looks to Rebuild Economy with Ambitious Energy Sector Investments

Balkanalysis.com Editor’s note: with all eyes presently on the disintegrating Middle East and the rampage of Islamic fundamentalists across Syria and Iraq, few have been focusing on developments happening in the relative tranquility of a country just offshore from the chaos- the Republic Cyprus. This comprehensive article details the country’s plans to rebuild its damaged economy by the help of multi-billion-dollar energy investments.

By Ioannis Michaletos and Chris Deliso

Apart from the well-known natural gas offshore exploration by the US Noble Energy in the Levantine Basin (revealed two years ago, and covered in depth by Balkanalysis.com here), further explorations are currently being conducted by the Italian-Korean consortium ENI/KOGAS. In addition, the French Total is about to launch in the coming year its own research project in Cypriot waters.

Cyprus is estimated to have approximately enough gas deposits to secure its own domestic needs for the coming decades, while projections are that it could be able to export amounts either with a joint venture with Israel, or towards Western Europe via Greece.

Nevertheless, there are also some other key developments concerning Cyprus’s energy potential that have passed largely unnoticed, although they do play a major role for the economic prospects of the country. Cyprus’ economy was severely battered in 2012-2013 by a financial and banking crisis that caused a recession, resulting in a loan rescue package to be dispensed by the EU-ECB-IMF troika. Cyprus plans to rely for growth on energy-related investments in the future.

Specific Energy Sector Developments Ahead

The first significant energy investment in Cyprus, which will commence operations by the end of this year, is the VTT Vasiliko oil and fuel terminal station. This is a $450 million project that aims to supply vessels in the East Mediterranean Sea routes- both those coming from Suez to Gibraltar and those coming from the Black Sea and continuing either to the Atlantic or the Indian Ocean (via Gibraltar and Suez, respectively). The Cypriot government in 2013 issued a Master Plan (.PDF) for developing Vasiliko.

Due to its favorable geo-economic position, Cyprus was selected by the Dutch company VTTI, an affiliate of the energy giant Vitol, and the Malaysia International Shipping Corporation, Berhad.

The first preparations for this investment – one that constitutes around 2% of Cyprus’ GDP – started back in 2010, and were not put on hold, despite the ongoing economic crisis. In fact, Cyprus actually benefited in the aftermath of the so-called ‘Arab Spring’ that has destroyed Libya and Syria, while causing political shifts in Egypt and unrest in Lebanon, with no one knowing what further ramifications will occur in the region, with the continuing rampage of Islamic State militants right on Turkey’s southern flank.

All of this upheaval has boosted Cyprus’s chances of being the ideal ground for such an important oil station. Being a non-Muslim EU member, in the Eurozone, and having a stable political outlook, it is largely immune to the tremors shaking the Muslim world just ashore from it.

Moreover Cyprus has, in the Vasiliko region where the terminal is located, deep-water facilities that can accommodate large tankers, available human resources to fill the necessary work placements and very flexible and non -bureaucratic taxation and state regulation policies.

The Cypriot state estimates that from 2015 onwards it will reap $25 million in tax money, just from ships handling oil loads. Additionally, the country’s biggest consortium company, J&P, was awarded a $350 million construction contract that secured 500 job placements. The total number of oil tanker vessels to approach the facilities per year would be around 600 ships that will also make occasional orders for food and water supplies, as well as necessary equipment. This will thus create secondary sectors of economic activity.

The investment will total 40 oil tanks with 860,000 cm of capacity. Ships of up to 160,000 tons could be served. The grand plan of Nicosia is to develop the Vasiliko area, which already hosts the country’s largest electricity plant, as the main energy hub in the East Mediterranean.

The Cypriot government seeks to do this by also creating a $2 billion LNG terminal that will exploit the country’s newly found gas offshore gas deposits.

Concurrently another Dutch energy giant, tank storage provider VOPAK, has been eyeing the local market since 2012. In the Vasiliko area, it seeks to construct its own oil storage terminal. This $700 million investment could create 1,500 construction jobs and more than 500 permanent ones in both operation and secondary activities.

The ‘Grand Plan’: an Israel-Cyprus-Greece Undersea Energy Cable and Gas Pipeline

Furthermore, Cyprus, along with Greece and Israel, have since 2013 been pursuing a grand plan named “EuroAsia electricity interconnector”; this proposed 1,100km cable will link these three countries via Cyprus, becoming the world’s longest undersea power cable. The total investment would be around $2 billion, of which $750 million would go to the Israel-Cyprus link and installations, capable of a power rating of 2,000 MW.

Another project in the preparation stage is the Israel-Cyprus-Greece (East Med) gas pipeline. When completed, this will have a 1,700km length and aims to transfer 8 billion cm of gas per annum. Its cost, as assessed by the Greek gas company DEPA, would be $7 billion.

Here, a 150km-long underwater section connecting the gas deposits to Vasiliko on Cyprus, and a 650km-long underwater section from Vasiliko to the shore of eastern Crete, will absorb some 40% of the total construction costs.

As mentioned previously, Cyprus is also eying an alternative investment: the establishment of an LNG terminal in Vasiliko, preferably in cooperation with Israeli companies that already manage that country’s neighboring offshore reserves.

Some Concerns: Israel’s Needs, Turkey’s Threats, EU Capability and Market Issues

Although all plans mentioned above have been already selected by the EU Commission as “Projects of Common Interest “(PCI) meaning they are entitled to Brussels-sourced funding and backing, there are a number of other important variables to be assed in this regard.

First, it is to be seen what is the real interest from Tel Aviv. It seeks to find how and where to exports its own gas, which is going to be critical in order to satisfy economies of scale for such massive investments that are both long-term and costly for all countries involved.

Secondly Turkey seems to be increasing its pressure via naval forces positioned against Cyprus, while diplomatically condemning any Cypriot export without Ankara’s involvement or permission. Since the beginning of the sensational discovery, the Turkish government has been furious that the Greek Cypriots will benefit from these energy developments, and has no leverage other than the threat of its continued illegal military occupation of the northern third of the island. The Sept. 24 shadowing of an ENI-KOGAS drillship by a Turkish Navy vessel indicates the kind of behavior that has elicited public condemnation from Nicosia. Nevertheless, the companies say that drilling will continue regardless of the Turkish intimidation.

Also, the EU itself has not come up with a stable and coherent plan on how and if to exploit the newly found riches in the East Mediterranean, having multiple energy security plans in mind but without any specific timetable. As we have seen recently, EU energy policy is complex, with different states’ interests muddying the waters and potential for regional crises (as with Russia and Ukraine) having the capability to radically and suddenly transform policy. It should be remembered that like any huge bureaucracy, the EU works slowly and is incapable of making its long-organized projects always keep up with the pace of local realities.

Moreover, it will take at least a couple of years until the exact amounts of gas to be found offshore Cyprus are known definitively. This will of course require additional services from a host of related industry officials, from surveyors to equipment manufacturers to other experts.

So for any major multinational to be able to commit long-term investments, during a period of rather depressed natural gas prices worldwide, will remain uncertain until the full data is in and, perhaps, until the market becomes more amenable to investment.

Other Energy Supply Plans: Air and Ship Oil Refueling

Nevertheless, it has to be noted that Cyprus is an ideal location for significant air fuel supply between the booming East Asian air market and that of Western Europe, as well as the CIS countries. Jet fuel is a valued commodity and demand for it in the long-term, and on the spot market, is always high. In such a manner and bearing in mind the advantage so far the country enjoys, it can be estimated that further such investment are expected for Cyprus’ airports. And there are also investment plans for substantial yachting fuel supply services, which will in a few years turn the island antion into one big oil station for yachts crossing the entire Mediterranean.

Cyprus’ Economic Future May be in Energy, not Banking

After the 1974 Turkish invasion, Cyprus suffered a 50% drop in GDP almost instantly. Yet it quickly recovered, due in large part to the massive transfer of wealth that occurred in the Middle East because of the 1975 Lebanon War, and the destruction of Beirut’s position as the supreme financial center in the MENA region. The newly reconstituted Cyprus thus began its new, modern incarnation as a financial hub.

Then, the Iran-Iraq War in 1980 further accelerated capital flights towards Cyprus, helping establishing the country’s robust banking system. And this in turn was further boosted after the collapse of the Soviet Union and its Eastern Bloc, from 1989 and through the ‘transition’ period of the 1990s, as well as the disintegration of Yugoslavia in 1991.

Although much remains unresolved, most crucially, the future success of the Islamic State and Turkey’s own host of problems, that might affect its ability to maneuver on Cyprus, it appears that the ongoing collapse of state order in the Middle East, will once again save the Cypriot economy. But this time, considering the recent financial crisis and strict conditionally from the Troika, the rebirth of the Cypriot economy may have to be facilitated by energy-sector projects.

The Levantine Basin: A Mediterranean Hydrocarbon Saga Begins for Greece, Turkey, Cyprus and Israel

By Vlad Popovici

The Eastern Mediterranean has never been considered a promising hydrocarbon region, except for the Nile Delta area offshore Egypt. Moreover, most of the countries in the region, such as Cyprus, Lebanon and Israel have historically been heavily dependent on primary energy imports.

This story changed quickly, however, when huge offshore natural gas fields started to be discovered, one after another, offshore Israel and Cyprus, in what is called the Levantine Basin. Estimates show that the region could have oil and gas reserves that are comparable to the prolific oil and gas exporting Nile Delta region to the south.

The exploration and development of these reserves will be challenging not only from the technical and financial point of view, but because of the conflict-laden geopolitical landscape of the region. Although geographically distant from the Balkans, the new energy hot spot in the Levantine Basin already is already having an impact on the Southeast European countries.

Frontier Exploration in the Eastern Mediterranean

On 29 December 2010, Noble Energy, a US-based oil and gas company, announced a significant natural gas discovery at the Leviathan prospect in the Rachel exploration block about 130 km offshore the Israeli city of Haifa. Noble Energy has been leading since 1998 various exploration consortia in the offshore exclusive economic zone (EEZ) of Israel and started producing natural gas from the Mari-B field in 2004, the first offshore gas produced in the country.

The relatively small Mari-B field, with initial recoverable reserves of about 35 billion cubic meters (bcm) of gas, was followed in 2009 by the much larger Tamar discovery, with 255 bcm of natural gas reserves and the smaller Dalit field, with a bit more than 14 bcm of gas reserves. According to Noble Energy, Tamar was the world’s largest deepwater natural gas discovery in 2009.

Still, it was the Leviathan discovery, announced at the very end of 2010 that confirmed the discovery of a major new hydrocarbon production frontier. Noble Energy announced in December 2011, based on the appraisal work executed during the course of the year, that the Leviathan field has estimated recoverable reserves of 481 bcm. To put these discoveries into perspective, Tamar, Dalit and Leviathan have total gas reserves of 750 bcm, while Romania, the largest natural gas producer in the Balkans, currently has only 630 bcm of gas reserves!

Just before Leviathan was announced in December 2010, Israel and Cyprus signed an agreement delineating each country’s exclusive economic zone (EEZ) and their common maritime border. This agreement was necessary as the Leviathan field is located close to the agreed maritime border.

The Cyprus government had already awarded an exploration license to a consortium led again by Noble Energy for the 3,240 square km Block 12 in the Cyprus EEZ, bordering the Rachel block that includes the Leviathan field. At the end of summer 2011, the consortium started exploration drilling on the Cyprus A prospect in Block 12.

Very recently, on 28 December 2011, Noble Energy announced that the Cyprus A field has a reserve range of 142-228 bcm of natural gas, with a probable mean of 200 bcm. Moreover, the Cyprus government has also announced a second offshore exploration licensing round that is expected to be launched by early 2012. The Cyprus exploration moves have infuriated Turkey, because of the unsettled question of Northern Cyprus. As soon as the Cyprus A drilling started, Turkey sent a ship to carry out geological surveys off northern Cyprus and warned that any resources discovered in the Greek Cyprus EEZ belong to all Cypriots.

Balkanalysis.com originally reported on Cyprus’ plans for energy exploration back in 2007, when Turkey also responded in an aggressive manner. This fits a similar pattern of responses that goes back to 1987, when Greece and Turkey briefly went on a war footing over energy exploration plans in the Aegean, as an upcoming Balkanalysis.com review will discuss.

The Levantine Basin: High Stakes, Many Players

This is probably just the beginning of a wider regional push for offshore hydrocarbon exploration in the offshore geological region that is called the Levantine Basin.

Lebanon strongly opposed the exploration activities offshore Israel since the beginning, based on the lack of a maritime border agreement between the two countries. However, pragmatism prevailed and a 2012 offshore licensing round is now being prepared by the Lebanese government, with smaller independent oil and gas companies already expressing interest. Lebanon was also approached by the Cypriot government during fall 2011 to discuss their exclusive economic zones (EEZ) and common maritime border.

Syria, which has an EEZ that covers parts of the Levantine Basin, had announced an offshore licensing round in March 2011 as well, but put it on hold due to the internal political turmoil there.

The stakes are high: the Levantine Basin could contain yet-undiscovered technically recoverable reserves of 3.465 trillion cubic meters of gas and 1.7 billion barrels of oil. This could radically change the geopolitical landscape in the region and could provide the much-touted energy independence to countries, such as Cyprus and Israel which are heavily dependent on primary energy imports. Starting in November 2011, according to press reports, Israel started boosting naval patrols around the Tamar and Leviathan fields, replicating the security approach used for the Yam Thetys production facilities in the Mari-B field.

2012 will be a decisive year for proving that the Levantine Basin is a viable new hydrocarbon production region that can overcome the technical, financing and –most importantly – political challenges of producing hydrocarbons on a large scale.

Further exploration work in the region will hopefully improve the understanding of the real gas (and maybe oil) potential of this region. The gas resources discovered offshore Israel are more than the country can consume for the foreseeable future, and thus open the door to potential future exports; the same is the case for Cyprus, as the Block 12 exploration results have proven.

Consumption and Export Estimates, and LNG Terminal Options

Engineering and long lead time procurement is ongoing for Tamar, which is supposed to be commissioned by the end of 2012. The consortium partners have also started assessing production and export options for Leviathan, which should come online sometime around 2016-17. Even with increased gas consumption in Israel, between 5 and 10 bcm of gas would be available for export once all the major fields (Tamar, Dalit and Leviathan) are online.

As reported by press, Cyprus (where there is no natural gas market yet) would not consume more than 1 bcm of gas per year. Industry experts estimate that this would allow Cyprus to build an LNG export terminal with a capacity of 15 million tonnes of LNG per year (the equivalent of 20-21 bcm/year); the caveat is that building such a terminal would require almost a decade and would cost from 18-24 billion USD for an onshore LNG export terminal; therefore, a floating LNG terminal with a smaller capacity might turn out to be a better and cheaper option. The main gas export options from the region will be through floating LNG terminal(s), onshore LNG terminal(s), pipelines or a combination of LNG terminals and pipelines.

Pipeline export can give the exporter an advantage, since pipelines are usually built based on long-term export contracts, but are not flexible in case the exporter wants to diversify its customer base or the importer reduces the imported volume.

LNG terminals offer flexibility to the exporter in terms of the destination of the exports, but sometimes LNG exporters are forced to sell the gas on the spot market. Further, the above does not include any potential reserves yet to be found, not only in Israel and Cyprus, but also offshore Lebanon and Syria.

Turkey’s Role and Concerns

Turkey is one of the countries directly concerned by the offshore oil and gas potential in the Eastern Mediterranean. It is clear already that starting in around 2017 there will be significant natural gas volumes (5-25 bcm/year) available for export from the Levantine Basin. And, as exploration continues, the companies involved believe that there will be more gas and potentially oil discoveries in the same area. As the Leviathan gas field is very close to the Cyprus A field, a common export infrastructure might be developed for the two fields.

Turkey is very interested in natural gas, both as a customer and as a transit country to European markets. According to the BP Statistical Review of World Energy 2011, natural gas consumption in Turkey has rapidly increased from 14.6 bcm in 2000 to 39 bcm in 2010, most of it imported as the domestic production is still marginal.

In the future, gas consumption is expected to increase as more regions in Turkey are connected to natural gas distribution networks and new gas-fired power generation capacity continues to be installed in the country.

Most of the gas is currently imported by pipeline from Russia and Azerbaijan, but Turkey also has 2 LNG import terminals. On the transit side, virtually all of the various pipeline projects planned to move the Caspian natural gas to the European markets involve Turkey as a transit country – Nabucco, ITGI, TAP, SEEP, the Trans-Anatolian Pipeline newly announced by Azerbaijan’s SOCAR, even South Stream (its offshore portion would pass through the Turkish EEZ in the Black Sea).

In this context, Turkey cannot turn a blind eye to the Levantine Basin and its future gas export potential. As the combined European gas markets constitute the second global market in the world, due to the relative proximity of the Levantine Basin, it is clear that the developers of the region’s gas fields are looking at Europe as a primary target.

Current Consortium Preferences

At the present time the Leviathan consortium seems to prefer a liquefied natural gas (LNG) export solution. The main options currently being assessed are: a floating LNG export facility close to the fields; a pipeline to the Cyprus coast where a new LNG terminal would liquefy and export the gas; pipelines to either or both existing Egyptian LNG export terminals (Egyptian LNG and SEGAS LNG); a pipeline to a new LNG terminal on the Israeli coast where some of the gas would be liquefied and exported, the rest being sent by another new pipeline to the Israeli Red Sea coast, where a second new LNG terminal could export the gas to the Asian markets avoiding at the same time the transit through the Suez Canal.

Turkey, Israel and Cyprus: Cooperation Unlikely

In an ideal world, there would be another option, one that would have an impact on the Balkan region. The Levantine Basin gas could complement the Caspian Sea gas for some of the above-mentioned pipeline projects going to Europe.

In such a case, a relatively short offshore export pipeline (400-500 km) would be built from the Leviathan/Cyprus A fields to connect to the Turkish gas transmission network in Ceyhan, Mersin or the Antalya region and from there would be moved towards Western Turkey and Europe.

Politics makes the real world, unfortunately, far from ideal and the Eastern Mediterranean region even less so. Turkey’s relations with the government of the Cyprus Republic remain a powder keg over the Northern Cyprus issue. Moreover, the traditionally good relations between Turkey and Israel have soured since 2010 and the Gaza flotilla incident, and no one knows when and if they will get back to where they were. Under these circumstances, any gas export and transit cooperation scheme between Turkey, Cyprus and Israel seems highly unlikely.

Gauging Turkish Strategy

It will be interesting to follow Turkey’s strategy in this complex geopolitical context. The initial steps taken by the Turkish government were to vocally oppose the Cyprus/Israel common maritime border agreement in December 2010. Due to conflicting maritime claims and the Turkish Cyprus issue, Turkey has not concluded any EEZ or maritime border agreements with Greece and Cyprus).

A second tactic was the exploratory drilling in the Block 12 offshore Cyprus, saying that any exploration by Greek Cyprus violates the rights of the Turkish Cypriots. When the news about the start of the drilling in Block 12 broke in fall 2011, Turkey immediately deployed a geological survey ship, Piri Reis, to conduct offshore surveys in the waters north of Cyprus.

The next step for Turkey was to announce in November 2011 an exploration agreement of the national oil company TPAO with Shell that would cover areas offshore the southern province of Antalya, which is very close to the Levantine Basin. Press reports link this move to the drilling offshore Cyprus in the Block 12 and also quote a Turkish official stating that Turkey is moving its strategic focus from the Black Sea to the Mediterranean Sea.

It is clear that by these moves in the energy exploration sphere that Turkey has acknowledged the potential game-changing significance of the Levantine Basin hydrocarbons and wants to both understand the economically recoverable oil and gas resources of the region, and signal that it should not be left out of any hydrocarbon export scenario.

Seeking Self-Sufficiency: Cyprus and Israel

On the other hand, it is clear that Turkey cannot stop the development of the Levantine Basin hydrocarbon reserves. For Cyprus and Israel, having reliable natural gas domestic supplies is a vital issue, much more important even than creating a long-term gas export revenue stream. Cyprus is fully dependent on imports for its primary energy needs and on highly-polluting oil-based fuels, which are politically unacceptable according to the European Union climate-change policies. Moreover, its main power generation asset, the Vassilikos power plant, was badly damaged in the July 2011 catastrophic explosion at the nearby naval base.

Israel started developing its gas-fired power plant capacity with the commissioning of the Mari-B field in 2004. However, 40% of the country’s needs are already covered by gas imports coming from Egypt, and Israel’s consumption will more than double in the next 5-7 years, as the country is building new gas-fired power plants and is switching most of the existing ones from coal and oil fuels to natural gas.

Unfortunately, there is a risk that the Egyptian gas deliveries, coming through an onshore pipeline that crosses the northern Suez peninsula, could become less and less reliable in the future or could even stop; in less than ten months since the regime change in Egypt in February 2011, the pipeline has been attacked no less than ten times and subsequently shut down for days and even weeks. As seen above, both Cyprus and Israel have very strong incentives to develop the Levantine Basin hydrocarbon resources. Therefore, Turkey will be motivated to be involved in these developments, both as a potential customer, and – perhaps – as a transit country.

Greek Ambitions

Greece is the other Balkan country that is directly concerned by the Levantine Basin hydrocarbon discoveries, due to its desire to become a major energy transit link on the way to European markets and, not least, due to its cultural, political and economic links to Cyprus. As Balkanalysis.com reported in December 2011, the country has an extensive portfolio of energy exploration projects for the future, though its financial crisis has put a damper on these for now.

Greece’s domestic natural gas consumption is also steadily increasing- from 2 bcm in 2000 to 3.7 bcm in 2010 according to the BP Statistical Review of World Energy 2011, most of the gas being imported by pipeline and the Revithoussa LNG terminal.

Greece is involved in most of the gas pipeline projects mentioned above that are aimed at bringing Caspian (and potentially Middle East) natural gas to the European markets.

Greece also realized quickly the huge potential of the Levantine Basin, and therefore started discussions with Israel in early 2011 to explore opportunities for transiting Israel’s natural gas exports to Europe. Media sources have even started talking about a Cyprus-Israel-Greece energy triangle.

This is an interesting concept, but hardly feasible without some sort of participation or at least tacit agreement from Turkey. Beside the question of distributing the gas and the export revenues between Greek and Turkish Cyprus, a direct pipeline from Cyprus to Greece would have to be very long in order to avoid any Turkish territorial waters, or waters under conflicting claims. Turkey and Greece have no agreement on their long maritime border and have conflicting claims in many areas.

Such a pipeline would also be very expensive, as it would partially be installed in very deep waters (more than 2,000 m), at least until it reaches the shallower waters of the Dodecanese archipelago.

Although it is very difficult to estimate costs at this early stage, a Cyprus-Greece pipeline would probably be twice as long as the offshore portion of the South Stream gas pipeline in the Black Sea which would carry natural gas through deep waters as well, and which could cost 25-30 billion euros, according to industry estimates.

The other option would be to export LNG from the Levantine Basin to the Revithoussa LNG terminal in Greece. That currently has a capacity of a slightly more than 5 bcm/year, but these exports would only cover the import requirements of Greece, and potentially the import needs of some of the smaller Western Balkans countries neighboring Greece.

Therefore, mass re-exports from Revithoussa to further European markets would not make sense, as they would be more expensive than gas coming through one of the previously mentioned transit pipelines or by LNG in one of the Italian, French or Spanish terminals.

Treading Carefully

Greece has no choice but to tread carefully in its energy discussions with Cyprus and Israel so that Turkey does not feel excluded. Otherwise, Turkey could retaliate by delaying or blocking the existing pipeline project plans that include Greece, such as ITGI, TAP or even South Stream in favor of those that leave Greece out, such as Nabucco or the South-East European Pipeline (SEEP) recently proposed by BP.

One possible strategic approach for Greece and Cyprus would be to raise awareness in the European Union regarding the future gas exports from the Levantine Basin as a new supply source contributing to improving EU energy supply security, an objective much-touted by the Union.

The next step would be to get the EU to include on its priority gas projects (as part of the Southern Gas Corridor) a pipeline from the Leviathan/Cyprus A gas fields or from Cyprus to the Turkish coast, further feeding into the pipeline that will be chosen to carry the Caspian gas to Europe- Nabucco, or a reduced version of it, such as SEEP or the Trans-Anatolian Pipeline proposed by SOCAR.

This option would be cheaper than a direct Cyprus-Greece offshore pipeline and would ensure the cooperation of Turkey, while maintaining the viability of other projects in which Greece is interested, such as the TAP and ITGI pipelines. Such a pipeline would also develop a natural gas market in both Greek and Turkish Cyprus and would create value for Turkey through new gas imports and transit fees, hopefully contributing to a general improvement in the complex political relations in the region.

The European Union and the Levantine Basin: Strangely Quiet

The European Union has been strangely quiet on this major discovery, and the future of the Levantine Basin hydrocarbon resources, though it is very vocal about diversifying its gas imports away from Russia by strongly pushing the Southern Gas Corridor pipeline projects that would source their gas in the Caspian Region.

The problem is that the main gas pipeline project supported by the EU, the Nabucco pipeline, was planned – at 31 bcm/year capacity – around the assumption that gas would be supplied not only from Azerbaijan, but also from Turkmenistan and the Middle East (mostly Iraq, as Iran is not currently an option).

However, a closer look shows that the Nabucco project in its current configuration will not be economical, as it would work much under its design capacity. The main reasons are that Nabucco’s only probable source of gas at this point would be Shah Deniz II (not more than 10-15 bcm/year would be available for Europe starting in 2017).

Iraqi gas exports seem to be feasible only in a more distant future, while gas exports from Turkmenistan to Europe could be challenging, as a pipeline would have to carry it first across the Caspian Sea to Azerbaijan, and neither Russia or Iran have any interest in agreeing to such a project. As a reminder, the status of the Caspian Sea waters remains hotly debated, as it is not considered a sea from the international maritime law point of view and its riparian countries have conflicting views of how to share it. At present, it is much easier – politically and economically – for Turkmenistan to export gas to Iran, China or Russia.

These assumptions have been confirmed by recent events – such as BP and SOCAR proposing, in the fall of 2011, pipeline projects to Europe that would be smaller than Nabucco (10-16 bcm/year) and mainly supplied by the second stage of the Shah Deniz gas field in Azerbaijan.

Other Players at the Table

On the other hand, the gas fields in the Leviathan and Block 12 area could by commissioned by 2017, around the same time as Shah Deniz II. The estimated volume available for export from the Levantine Basin would be up to 25 bcm/year, based only on the fields that have already been discovered and appraised. This would complement Shah Deniz II nicely to fill the Nabucco pipeline at design capacity.

Otherwise, Nabucco, which continued too lose steam throughout 2011, could lose the race to be the first pipeline of the Southern Gas Corridor to be commissioned. As a side note, the other Balkan countries that are participating to the Nabucco project, Bulgaria and Romania, could benefit from the Levantine Basin gas being connected to Nabucco. This project is their main chance to benefit from the Southern Gas Corridor initiative, as most of the other projects proposed as part of the initiative, such as TAP or ITGI, would leave them out.

The EU should take a position with regards to the Levantine Basin gas as soon as possible, especially if the Union still considers Nabucco a viable project. As a next step, if interested in importing gas from the region, the EU should include any connected infrastructure projects on its priority energy project list, which would mean significant political and financial support for the development of the Levantine Basin resources.

Otherwise, EU countries will probably have to buy the Levantine Basin gas as liquefied natural gas on the spot market – usually, priced higher than pipeline gas – or see it all go as LNG to the markets in Asia. The clock is ticking, as the Block 12 exploration advances and the Leviathan consortium will select the best development option by end March 2012 [PDF].

At a regional level, most if not all of the Balkan countries have a vested interest in seeing the Levantine Basin gas flowing through one of the Southern Gas Corridor pipelines, as this would diversify their gas imports and bring some of them transit revenues: Nabucco and SEEP for Turkey, Bulgaria and Romania, ITGI for Turkey and Greece, TAP for Greece and Albania.

The year 2012 could prove to be a decisive year for the future of the Levantine Basin hydrocarbon resources. In a last twist that only highlights the complexity of this Mediterranean hydrocarbon saga, media reported in October 2011 that Russia is interested in exploration and development licenses in the Levantine Basin, and that it supports Greek Cyprus in its exploration approach.

Moreover, Russia in November 2011 sent an aircraft carrier to the Eastern Mediterranean region for joint naval exercises with Israel, close to the Leviathan gas field, and it intends to develop the Tartus maintenance and supply base it has been leasing from Syria since 1971 to serve as a base for guided-missile cruisers and even aircraft carriers.

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Reducing Energy Transit through the Turkish Straits: Solutions Postponed?

By Vlad Popovici

Balkanalysis.com editor’s note: In Turkey, issues of public safety, disaster response and structural capabilities were brought to light again in the recent tragic earthquakes in the eastern Anatolian town of Van. However, these issues are also very relevant when it comes to maritime traffic in the heavily congested Bosporus and Dardenelles Straits. In the following detailed overview, Balkanalysis.com Energy Sector Editor Vlad Popovici discusses the problem and possible solutions to it, as well as the negative effect vessel congestion is having not only for safety and the environment, but for industry profit too.

When new restrictions concerning the nighttime vessel transit through the Turkish Straits were introduced by the Turkish authorities in late September 2011, a mini-crisis ensued. Because of transit delays apparently caused by the new regulations, the oil tanker rates in the Mediterranean soared and some shipping companies temporarily reduced their services in the region. This is just another crisis in a long list of similar recurrent events that point to an issue that is still looking for a long-term sustainable solution – the rapidly growing energy transit through the Straits that increases the environmental, public safety and economic risks for one of the busiest global shipping lanes. Although alternatives have been proposed, it looks like nothing will change for a while. But the clock is ticking.

A Strategic Location

The Black Sea’s only connection to the world’s oceans is through Turkey’s Bosporus Straits and the Sea of Marmara. The Black Sea is connected by the Bosporus – a 30 km strait, in places as narrow as 700 m – to the Sea of Marmara, which in turn is connected by the Dardanelles – almost 70 km long and as narrow as 1,200 m – to the Aegean Sea.

Istanbul, the most populous city in Turkey, straddles both sides of the Bosporus. The Turkish Straits are also considered the geographical border between Europe and Asia. Because of their strategic location, the Straits have historically been a critical trade route between Europe and Asia, but also the focal point for numerous conflicts since Antiquity.

The 1936 Montreux Convention Regarding the Regime of the Turkish Straits gave Turkey control over the Bosporus and the Dardanelles and guaranteed the free passage of civilian vessels during peacetime. The Convention remains in force today, although with amendments – for example, it was amended in 1982 to allow Turkey to close the Straits (in both peacetime and wartime). Subsequently, the Turkish authorities have adopted other regulations aimed at improving transit safety in the Straits, without touching the free passage principle of the Convention.

Restrictions in the Straits

At a time when the global shipping industry seems to be in the middle of a worse downturn than during the 2008 financial crisis, caused by an oversupply of vessels coupled with increased vessel operating costs and reduced global demand for goods as a consequence of the sluggish global economic growth, Energia.gr reported in mid-October 2011 that the tanker freight rates in the Mediterranean soared almost 30% in just one week.

The cause of the increased tanker freight rates was, according to a Platts report, the introduction by the Turkish secretariat for maritime affairs of new traffic regulations stipulating that vessels of over 200 meters carrying dangerous goods – including container and roll-on/roll-off ships – would only be allowed to pass through the Bosporus and the Dardanelles during daylight hours, which is when most crude tankers also travel through the straits.

The increased daylight traffic has caused average transit delays for oil tankers to go up from 1 day at the introduction of the new regulations in late September 2011 to 7 days two weeks later, delays that in turn caused the freight rates to soar.

Due to the traffic backlog created by the new rules, as well as to the strong pushback from the shipping industry and customers, the regulations were modified in mid-October to allow large vessels carrying certain dangerous goods to pass through the straits during the night in order to ease some of the congestion. As a result, the oil transit tanker delays dropped to 4-5 days and the tanker freight rates eased by as much as 16% only several days after the regulations’ reversal.

The mini-crisis in October 2011 is just another one in a long list of similar events that have either slowed down the Turkish Straits transit or completely shut it down. At about the same time that the above nighttime restrictions were announced, the Bosporus was closed to all transit passages during 28-29 September 2011 in order to carry out the largest emergency intervention exercise ever executed in the Turkish Straits, reported Turkish daily Hurriyet.

According to the exercise scenario, a 250-meter, 95,000-deadweight crude oil tanker collided with a passenger ship in the Bosporus and caused an oil spill. Going back in time, press reports talk about similar instances. For example, in the fall of 2002 other newly-introduced tanker transit regulations caused delays of up to three-and-a-half days.

The new procedures prohibited nighttime passage for ships more than 200 meters long and require vessels carrying dangerous cargoes – including crude and petroleum products – to request transit 48 hours in advance. Previously, night passage was only banned for ships longer than 250 meters and there was no requirement for advance notice. There was also a requirement for one-way only traffic while ships of 250-300 meters or vessels carrying liquefied natural gas or liquefied petroleum gas are passing through the Straits. The Straits can also be closed during periods of inclement weather, especially in winter, which can also cause significant delays and additional demurrage costs that run into $50-100,000 per day for an oil tanker.

All of these temporary or permanent restrictions are aimed at protecting the public safety and cultural heritage patrimony on the Straits’ shores and reducing the risks of major accidents in one of the most challenging maritime passageways in the world. In order to cope with the Turkish Straits’ many and abrupt course changes, narrow shipping lane, intense local cargo and passenger ferry cross-traffic (around 1,000 ferry crossings each day) the Turkish authorities have put in place an advanced Vessel Traffic Service that monitors and directs traffic through a radar network.

However, accidents continue to happen in the Straits – 141 since 2006 – and the risk of a major accident remains too high in the context of rapidly increasing transit traffic. The transit in the Turkish Straits increased ten-fold since the times of the Montreux Convention – in 2009, according to Turkish Coast Guard figures reported by SeaNews, over 50,000 ships, including more than 9,000 tankers, passed through the Bosporus.

An Energy Bottleneck

Increasing global trade has also dramatically increased the seaborne transportation of goods, creating at the same time several chokepoint or bottlenecks around the world. As a 2008 European Commission report notes, these chokepoints are narrow waterways used for transit of large volumes of international sea trade, including oil. The concerns related to chokepoints can be different: geopolitical in the case of transit through potentially unstable areas, security, in connection to possible terrorist attack, environmental, in particular in relation to damage from an accident, or economic if transit through a chokepoint requires long waiting times.

Both the above-mentioned Commission report and the February 2011 World Oil Transit Chokepoints report of the US Energy Information Administration (EIA) mentions the Turkish Straits (Bosporus and Dardanelles) as one of the global oil transit chokepoints, in the same category with other famous maritime transit bottlenecks such as the Strait of Hormuz, the Malacca Strait, the Suez Canal and the Danish Straits (connecting the Baltic Sea to the North Sea).

According to the EIA report, an estimated 2.5 million bbl/day (or 125 million tonnes/year) of crude oil transited through the Turkish Straits in 2009, in addition to another 0.4 million bbl/day (or 20 million tonnes/year) of oil products. This represents 3% of the annual global oil trade, compared to 18-20% that passes through the Strait of Hormuz.

Environmental and Public Safety Risks

Thousands of tankers transit the Turkish Straits annually, the vast majority of them headed southbound (from the Black Sea towards the Aegean Sea). The oil transit exponentially increased in the 1990s, when Russia began to open up new export markets for its oil, as well as export routes that bypass Ukraine, including mainly tanker exports through the Black Sea and Baltic Sea ports.

The increasing oil tanker transit creates significant environmental, public safety and economic risks for the city of Istanbul and the entire length of the shores of the Turkish Straits, as well as higher costs for the tanker owners and customers caused by transit restrictions during nighttime, weather and other factors.

The southbound crude oil transit from the Russian ports through the Turkish Straits peaked in 2004 at 3.1 million bbl/day (or 155 million tonnes/year), and has since decreased, in 2009 falling to the 2.5 million bbl/day (or 125 million tonnes/year) mark mentioned above. This was apparently caused by Black Sea Russian crude oil exports being shifted towards the Baltic port of Primorsk through the Baltic Pipeline System 1 that was inaugurated in 2001 and reached its 1.3 million bbl/day (or 65 million tonnes/year) capacity in 2006.

Oil tanker transit pressure in the Turkish Straits could further decrease in the near future, given that the 1-1.5 million bbl/day (or 50-75 million tonnes/year) Baltic Pipeline System 2 could be inaugurated during early 2012. The new pipeline will transport oil to the Baltic export terminal in Ust Luga, but will divert initially, according to press reports, only 100,000 bbl/day (or 5 million tonnes/year) of crude from the Black Sea export ports.

Indicators of a Future Increase in Maritime Transit

However, there are some drivers that could increase again both the southbound and northbound energy transit through the Turkish Straits during the next decade. Southbound, as Azerbaijan and Kazakhstan increase their oil production, the Black Sea and the Turkish Straits will be one of their export outlets to complement the Baku-Tbilisi-Ceyhan (BTC) pipeline.

For example, the Caspian Pipeline Consortium (CPC) carries Kazakh oil exports from the Tengiz oil field to the Russian port of Novorossiysk at the Black Sea. Earlier this year, Chevron officially launched its $5.4 billion project to double the capacity of the CPC oil route to 1.34 million bbl/day (or 67 million tonnes/year) by 2015.

Azerbaijan is also looking for alternative export routes for its natural gas, through pipelines or liquefied natural gas (LNG) exports from terminals on the east coast of the Black Sea. Although most of this LNG would be sent to re-gasification terminals in Ukraine, Romania or Bulgaria, some could find its way southbound through the Turkish Straits.

Bulgaria and Romania have also been in contact with LNG exporters outside the Black Sea, such as Qatar, to discuss potential LNG imports, which would create northbound LNG traffic through the Bosporus and the Dardanelles.

Finally, increased northbound crude oil transit is also possible, as some Black Sea countries are trying to shift their oil imports away from Russia – according to a recent online note by Ukrainian Journal, Ukraine will make a test-run shipment of Venezuelan crude through the Odessa-Brody pipeline to Belarus sometime in November 2011. The crude will definitely have to transit the Turkish Straits to get to the Black Sea port of Odessa. All these drivers point to a sustained and potentially increased oil and gas transit through the Turkish Straits for the foreseeable future.

Alternatives- Pipeline Projects

The Turkish authorities have expressed many times their concern regarding the significant risks created by the energy transit through the Bosporus and the Dardanelles and have taken, whenever possible, measures to increase the transit safety. Some alternatives, aimed at diverting a sizeable part of the energy transit from the Turkish Straits have been proposed.

Pipelines are a natural alternative to tanker transportation, especially over a relatively short distance and in regions with a challenging maritime navigation configuration, like the Turkish Straits. As discussed above, the Baltic Pipeline System 1 and 2 have already diverted part of the Russian crude transit through the Turkish Straits, but have only switched the problem to another oil bottleneck and environmentally-sensitive region – the Baltic Sea.

Several other Straits-bypassing pipeline routes have been promoted during the last decade. Two such projects would be built in Turkey. The Trans-Anatolia pipeline is a 560 km project that would carry 1-1.4 million bbl/day (50-70 million tonnes/year) of Russian crude from the Black Sea port of Samsun to the Mediterranean port of Ceyhan. Initially promoted by the Italian energy group ENI and the Turkish Calik Holding, the project got a boost in October 2009, when Russia signed a MoU with Italy and Turkey for the construction of the pipeline and the supply of crude that would involve the Russian companies Rosneft and Transneft.

However, as reported by the Energy in the Balkans – the Balkanalysis.com 2010 Annual Review, the discussions around the Samsun-Ceyhan pipeline project stalled in September 2010 and there have been no major progress news during 2011.

The other pipeline proposed to bypass the Bosporus and the Dardanelles through the Turkish territory, the Trans-Thrace project would transport up to 1.4 million bbl/day (70 million tonnes/year) of crude on a 280 km route from Saray on the Black Sea coast through the Marmara Sea port of Ambarli to Saros Bay at the Aegean Sea. This project, promoted by a Turkish oil and oil product storage and distribution company, has been dormant for several years now.

Two other pipeline projects are aimed at transporting Caspian crude oil to the European markets while bypassing the Turkish Straits. The AMBO pipeline (or Burgas-Vlore) oil pipeline project, would carry 0.75 million bbl/day (or 37.5 million tonnes/year) for 890 km, from the Bulgarian Black Sea coast through Macedonia to the Albanian port of Vlore.

The project is supported by the Bulgarian, Macedonian and Albanian governments, and though there were no major updates regarding the project in 2011, Platts notes in a recent interview with some of the AMBO promoters that the project team is currently focused on defining the financing sources in preparation for new crude oil export volumes expected to be shipped from the existing and new Caspian oilfields.

The Pan-European Oil Pipeline (PEOP) is the other pipeline project aimed at carrying Caspian oil to the European markets while also avoiding the Turkish Straits. The 1,856 km pipeline would carry 1.2-1.8 million bbl/day (or 60-90 million tonnes/year) of oil from the Romanian port of Constanţa at the Black Sea through Serbia and Croatia to the Italian port of Trieste.

Although the project has been supported by the European Union, it was postponed sine die in September 2009 as Croatia shifted its focus to other priority energy projects along the Adriatic Coast.

Finally, the only pipeline project aimed at bypassing the Turkish Straits that has moved forward during 2011 is the Trans-Balkan or Burgas-Alexandroupoli pipeline. The 279 km pipeline is mainly promoted by the Russian pipeline monopoly Transneft – with the Bulgarian and Greek governments as minority shareholders – and would carry 0.7 million bbl/day (35 million tonnes/year) of Russian crude from the Bulgarian Black Sea port of Burgas to the Greek port of Alexandroupoli at the Aegean Sea.

After three rejections, as noted by Novinite.com,  Bulgaria’s Environment Ministry issued on 4 November 2011 a positive ruling on the Environmental Impact Assessment (EIA) documents submitted for the Trans-Balkan Pipeline. Although received with excitement in both Bulgaria and Greece, the decision is not a final approval for the construction of the pipeline, but instead allows the evaluation process to advance to the public consultation stage. The project has been slowed several times to the heated opposition of municipal leaders and citizens along the Black Sea coast, who fear that the presence of such a pipeline would destroy their livelihoods- the tourism industry. It is clear however that even this project will take years before becoming a real alternative to the oil tankers transiting the Turkish Straits.

A Turkish Canal?

Another interesting alternative for diverting part of the Turkish Straits traffic was presented early this year. As reported by SeaNews, at the end of April 2011 the Turkish Prime Minister Recep Tayyip Erdoğan presented for the first time the idea of a new shipping canal west of Istanbul that would take over part of the Bosporus traffic.

Although the exact location and costs have not been mentioned, the Istanbul Canal would be 45-50 km long, 150 m wide and 25 m deep, and would connect the Black Sea to the Marmara Sea. The tentative completion date that was announced is 2023 to coincide with the Republic of Turkey’s 100th anniversary.

It is still too early to make an assessment of the proposed canal project; however, it is clear that the costs and the engineering challenges will be huge. Initial public reactions noted by online sources express reservations about the huge project: the environmental impact of building a new canal, it is being argued, could nullify the positive impact of reducing Bosporus traffic; it could be difficult to divert traffic from the Bosporus – where there are no transit fees – to a canal that charges a transit fee; as the Turkish Straits are the only maritime outlet towards the world’s oceans of the Black Sea countries, all of them will have to be consulted on the new canal project; finally, the status of the new canal vis-à-vis the Montreux Convention will have to be clarified.

Is There a Definitive Solution?

The easiest way to assess the best options for diverting part of the Turkish Straits energy traffic may be to look at what has been done to ease the pressure on other global energy transit chokepoints.

In the Persian Gulf, the Abu Dhabi Crude Oil Pipeline (or Habshan-Fujeirah pipeline) was finalized in March 2011. The main objective of the 360 km long pipeline that crosses the United Arab Emirates is to move 1.5 million bbl/day (or 75 million tonnes/year) to the Gulf of Oman by avoiding the busy Strait of Hormuz. Although the pipeline’s current capacity is small compared to the 15.5 million bbl/day (or 775 million tonnes/year) of crude that transited the Strait of Hormuz in 2009, the new pipeline is a viable alternative to tanker transportation and its capacity can be increased in the future. The SUMED pipeline (or Suez-Mediterranean pipeline) runs for 320 km in Egypt from Ain Sukhna at the Red Sea to Sidi Kerir on the Mediterranean Sea, and its 2.3 million bbl/day (115 million tonnes/year) capacity provides an alternative to transiting the crude oil through the Suez Canal, especially appealing for vessels larger than the so-called Suezmax size (i.e. larger than 200,000 deadweight tonnes).

The SUMED oil transit alternative could become even more useful in the future, as the LNG traffic through the Suez Canal has increased from 430 tankers in 2008 to almost 800 in 2010, and is expected to grow significantly in the future as Oman and Qatar increase their LNG export capacity.

Finally, the Panama Canal, though a relatively minor energy transit bottleneck at the global scale (just 800,000 bbl/day (or 40 million tonnes/year) of oil and refined products transited the Canal in 2009) has a pipeline alternative as well. The Trans-Panama oil pipeline was built in 1982 and runs 130 km from the Atlantic to the Pacific with a maximum capacity of 600,000 bbl/day (or 30 million tonnes/year). Although the pipeline has in general been underused because of the relatively low oil transit volume it still provides a viable alternative to the Panama Canal tanker transit, especially for new Latin American oil producers, such as Colombia, that might wish to send their crude oil to be refined on the US Gulf of Mexico coast. All these examples show that pipelines can indeed be realistic alternatives to tanker transit.

Conclusion: A Problem Likely To Linger

As we have seen above, the Turkish Straits are and will probably remain one of the bottlenecks of the global energy trade, along other hot spots such as the Strait of Hormuz or the Malacca Strait, with the unfortunate distinction of being the only one that has a flourishing metropolis right on its shores – Istanbul – while being extremely narrow and treacherous to navigate.

Thus, the unique local realities of the Bosporus and the Dardanelles are creating a sense of urgency for easing the straits’ energy transit that is more acute than for the other global transit chokepoints.

However, though some alternatives for diverting some of the energy transit away from the Turkish Straits have been proposed and look feasible, it looks like for the time being, at least, the status quo is still the preferred option, with all the significant environmental, public safety and economic risks that it entails and the recurrent crises caused by increased traffic, bad weather or various temporary and permanent restrictions.

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Energy-Sector Progress and Setbacks for Balkan States Noted in the EC 2011-2012 Enlargement Strategy Package

By Vlad Popovici

In November 2010, Balkanalysis.com compared several aspects of the European Commission’s annual enlargement strategy document released at the time. This yearly document, which describes the main objectives of the enlargement process for the next year, is accompanied by progress reports on all the candidate countries during the previous year. The 2011-2012 enlargement strategy package, which was released earlier this month, gives interesting updates on the main changes in the energy sector of the EU candidate countries since the publication of the previous package in November 2010 and makes recommendations regarding the next energy sector restructuring and reform steps.

The Latest Report

On October 12, the European Commission published the Enlargement Strategy and Main Challenges 2011-2012 document (PDF), detailing its enlargement policy objectives and challenges during the next twelve months. Just as in 2010, the new strategy document is accompanied by the progress reports for each candidate country, all of them (except Iceland) being countries from Southeast Europe – Albania, Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, Montenegro, Serbia and Turkey.

The progress reports assess the capability of each country to assume the obligations of EU membership according to various political and economic criteria. The negotiations with the EU candidate countries are structured in chapters that are negotiated separately, each containing a major political or economic topic. Once all the negotiations chapters are closed, the country is ready to become an EU member.

Energy is discussed in Chapter 15, although some critical energy infrastructure aspects are discussed in Chapter 21 (Trans European Networks), together with transport and communications infrastructure. Further, Chapter 15 concerns the EU negotiations with the candidate countries on several critical energy aspects – security of supply, internal energy market, renewable energy, energy efficiency, and nuclear energy, nuclear safety and radiation protection.

Two countries were singled out this year, as the European Commission was requested to give an opinion on accepting the accession of Croatia to the EU in 2013 and on the award of “candidate country” status to Serbia. We will therefore start our review with these two countries.

Croatia

Croatia has been negotiating to become an EU member since October 2005 and, based on the advanced status of the negotiations, the EU Commission has given in the 2011-2012 enlargement strategy package its favorable opinion regarding the accession of the country to the EU in 2013.

Overall, according to the Croatia 2011 Progress Report (PDF), the level of alignment of the country with the European acquis communautaire in the energy sector is high. The Commission notes however that more efforts are needed, especially in the opening of the electricity and gas markets, developing renewable energy, simplifying the administrative procedures for renewable energy, and meeting EU targets for energy efficiency.

Croatia has signed bilateral agreements for storing mandatory oil stocks with Germany and Hungary. A gas interconnector was inaugurated between Croatia and Hungary in August 2011 and construction continued on the gas transmission corridor towards Dalmatia; this will be connected to the future regional Trans-Adriatic Pipeline (TAP).

In addition, preparations are currently being made for the construction of a liquefied natural gas (LNG) import terminal on the island of Krk. The new double 400 kV Ernestinovo-Pécs power line is already operating on a trial basis. All these projects will improve the level of energy supply security for Croatia.

With regards to the internal energy market evolution, the electricity and gas markets continue to be dominated by single suppliers. Several relevant pieces of legislation have been amended – the Oil and Petroleum Market Act, the Energy Act and the Act on the Regulation of Energy Activities.

However, progress on the renewable energy side has been slower, even though legislation on the incentives for cogeneration, renewable energy generation, and biofuels has been improved. Croatia has to simplify and improve the renewable energy administrative processes in order to achieving its 2020 target of 20% of energy consumption from renewable sources. Although progress has been made in the energy audits of buildings and the training and accreditation of energy audit experts, Croatia’s administrative capacity remains insufficient for the promotion of energy efficiency and renewable energy.

Serbia

Almost two years after Serbia submitted an application for EU membership in December 2009, the Commission published in October 2011 its recommendation for giving Serbia the status of EU candidate country.

In the Commission’s opinion document (PDF) energy is one of the sectors in which Serbia can align to the EU acquis more easily than other sectors, such as agriculture or financial control. Overall, the Analytical Report (.PDF) that accompanies the opinion document on Serbia concludes that more efforts have to be made to improve the level of oil, gas and electricity security of supply. Serbia still lacks competitive electricity and gas markets, and more efforts have to be focused on promoting renewable energy generation, and energy efficiency. A new national energy strategy has to be adopted and administrative capacity in the energy regulation sector has to be reinforced.

Although domestic resources still cover 60% of the primary energy consumption in Serbia, 78% of the gross energy consumption is represented by coal and oil. Other than the projects already mentioned in the 2010 progress report, a second gas underground storage is planned in relation with the future South Stream regional gas pipeline.

Serbia is also focusing on the new electricity interconnection with Macedonia, and the construction of the power line section from Leskovac to the border is under construction. Other electricity interconnections with Montenegro and Bosnia & Herzegovina are at the pre-feasibility study stage.

Although the level of Serbia’s emergency oil stocks are classified as a state secret, a new law is being prepared for de-classifying these stocks in accordance with EU legislation. An Energy Law that foresees the unbundling of the gas and electricity distribution and supply, as well as wider prerogatives for the Energy Agency of the Republic of Serbia (AERS), was adopted in July 2011.

Although the electricity transmission is covered by Elektromreza Srbije (EMS), the power generation, supply and distribution are still vertically-integrated in Elektroprivreda Srbije (EPS), while all the electricity customers are supplied at regulated tariffs – that are below market prices – until the end of 2013. The gas market is still controlled by the vertically-integrated Srbijagas.

Serbia is currently preparing a 2020 target for the development of renewable energy in the country’s gross energy consumption and has to adopt a National Renewable Energy Action Plan. Renewable energy – mostly hydropower – represented only 8% of the total primary energy production in 2008. While feed-in-tariffs (FIT) are in place and the country has untapped renewable energy resources, the licensing process and network connection process have to be improved.

Finally, a lot of work has to be done to improve and promote energy efficiency, as Serbia’s economy consumes 2.7 times more energy per unit of output (GDP) than the OECD average. A framework energy efficiency law – covering energy efficiency of buildings, labeling of domestic appliances, etc. – has been drafted but has still to be approved.

Albania

Overall, the Albania 2011 Progress report (.PDF) concludes that progress in the energy sector has been very limited over the last year. There was some progress made in improving the security of supply, as the law requiring mandatory emergency oil stocks of 90 days of consumption entered into force on 1 January 2011 and a new 400 kV interconnection with Montenegro became operational in April 2011. Preparations for the new Elbasan-Tirana power line have advanced.

However, the domestic electricity generation is dominated by hydropower, which increases the system’s vulnerability to negative hydrological events, such as droughts.

The state generation and wholesale power company KESH has not been unbundled and is still allocated the majority of the transmission and distribution capacity. The current Power Sector Law is not in line with the EU acquis.   Electricity distribution losses are still significant and the bill collection levels remain relatively low at 77%. Albania does not have yet a gas market and further efforts are needed to strengthen the energy sector regulator ERE.

The report contends, further, that there has been no progress made in renewable energy – administrative obstacles and no harmonized costs for connection to the power transmission grid hinder power generation from renewable energy sources. The country has not adopted yet a renewable energy target for 2020 and a National Renewable Energy Action Plan as requested by the EU acquis. The Energy Efficiency Law is not in line with EU requirements. Whereas in the 2010 progress report Albania was considered to have made good progress in the energy sector, advances in 2011 have been slow.

Bosnia & Herzegovina

The chronic political instability in Bosnia & Herzegovina, as discussed in an October 2011 article by Balkanalysis.com’s Lana Pasic, seems to have a negative impact on the reforms in the energy sector. The Bosnia and Herzegovina 2011 Progress Report (PDF) concludes that the country is still at an early stage of implementing the EU energy acquis and that progress during the last year was virtually inexistent.  The lack of cooperation between the country’s Entities blocks the development of a functioning energy market and any significant supply security improvement.

The country does not have a comprehensive Energy Strategy to promote, among other things renewable energy and energy efficiency and the required law on mandatory emergency oil stocks, while the new Electricity Law was not adopted. The country has a power transmission company only in name, as the company has no financial resources, business plan and only executes minimal maintenance tasks. The electricity tariffs have been increased, but remain below market prices, hampering investment.

Further, there is no national Gas Law  yet for Bosnia, and the Entities use different gas market legislation packages, none of them aligned to the EU acquis. The development of an energy efficiency law has been delayed and the renewable energy feed-in tariff and other legislation pieces are not harmonized at a national level, discouraging investments in power generation from renewable energy sources. Finally, the national government administrative resources dedicated to energy issues remain insufficient and weak.

Kosovo

Kosovo is also considered by the EU enlargement strategy as a potential candidate for EU membership. However, because of the country’s difficult relationship with Serbia linked to the recognition of Kosovo as an independent country, the Kosovo 2011 Progress Report (PDF) concludes that the energy sector continues to suffer serious problems that hinder reform adoption and implementation.

Power cuts continue to occur due to the worsening financial position of the national power monopoly, Kosovo Energy Corporation (KEC), caused by distribution losses, billing issues and low collection levels. Electricity tariffs have not increased and the government has maintained the direct subsidies to KEC, delaying the creation of a functional electricity market. The electricity distribution and supply are still unbundled in KEC and the privatization of these functions has not advanced.

However, work on the development of the new coal-powered Kosovo Power Plant has advanced and the government has sent the final request for proposals to four qualified bidders, while production at the Sibovc coal mine, which will supply the new power plant started at the end of 2010. In March 2011, KEC started implementing the action plan for the decommissioning of the remaining power generation units at the Kosovo A power plant in order to comply with the EU legislation.

Still, there is no oil emergency stocks law. Nevertheless, an Energy Efficiency Law was adopted in June 2011 (though the accompanying Action Plan has yet to be adopted). And a Heating Strategy was adopted in September 2011.

Finally, some progress has been made in renewable energy. A simplified Renewable Energy National Action Plan was drafted. Three foreign investment groups have shown interest in developing the 300 MW Zhur hydropower plant. 15 applications for small hydropower plants with a total capacity of 128 MW have been registered and the first wind energy capacity (1.28 MW) started production, with additional licenses awarded for the development of 126 MW of wind power.

Macedonia

One of the countries that, according to the 2011 progress reports have made good progress in the energy sector is the Republic of Macedonia. The FYROM 2011 Progress Report (.PDF) notes that the Directorate of Compulsory Reserves of Oil and Oil Derivatives continued to implement the action plan that aims to take the level of national emergency oil stocks from the current level of 33 days of average consumption to 90 days as requested by the EU.

The preparations for the construction of a 400 kV power interconnection with Serbia continued and a memorandum of understanding was signed with the Albanian power transmission company for the development of a new 400 kV interconnection between the two countries (Bitola-Elbasan).

A new Energy Law that is compliant with the EU requirements has been enacted. The law requires the full opening of the national electricity market (non-household customers) by mid-2012 and it strengthens the prerogatives and independence of the Energy Regulatory Commission (ERC). Electricity tariffs increased by 5% in 2011, but the government has continued its vulnerable customer subsidy program. Also, a dispute between the government and the private owner of the electricity distribution system has been settled. The new energy law also stipulates the unbundling of the natural gas supply from the transmission function, but this has still to be done.

Progress has also been made in renewable energy and energy efficiency. Feed-in tariff incentives were adopted by decree. A renewable energy target of 21% for 2020 and a simplified National Renewable Energy Action Plan have been also adopted. Although new generation capacity from renewable energy sources are under construction – 8 small hydropower plants, okys the Bogdanci 50MW wind farm, Macedonia is still in the early stages of using its renewable energy potential.

A National Energy Efficiency Action Plan was adopted in April 2011. Energy efficiency labeling, eco-design and high-efficiency cogeneration guidelines have been enacted. Finally, although Macedonia does not have a nuclear energy sector yet, the feasibility of building a nuclear power plant as an option for meeting the domestic electricity demand after 2020 is currently under study.

Montenegro

The EU Commission has also presented in October the Montenegro 2011 Progress Report (PDF) that assesses the country’s progress in the energy sector. Significantly, a national Energy Strategy until 2030 was adopted in March 2011. There was also progress in the development of energy networks. A new 400 kV electricity interconnection with Albania started operation.

Further afield, an agreement between the Montenegro government and the Italian company Terna for the construction of a submarine power transmission cable, signed in November 2010, foresees trans-Adriatic energy supply. In this ambitious project, a new 400 kV power line will be built between the Adriatic coast and the north of the country (Lastva-Pljevlja) with financial support from the EC Infrastructure Project Facility.

In addition, in May 2011 Montenegro signed a Memorandum of Understanding and Cooperation with the Trans-Adriatic Pipeline (TAP), part of the EU’s Southern Gas Corridor, which aims to bring Caspian natural gas to the South and Southeast European countries. However, the national gas transmission system has to be upgraded and a national gas distribution strategy, as well as a Gas Law has to be developed. Moreover, Montenegro also has to adopt the mandatory emergency oil stocks legislation required by the EU.

The country’s energy market legislation is not yet compliant with the EU’s third internal energy market package. The Energy Regulatory Agency has become more active, but has to be strengthened. The electricity market is still dominated by the state-controlled Montenegrin Electric Enterprise (ECPG). Electricity prices are regulated and do not yet cover the costs, which blocks the development of a functional electricity market. There was no progress in unbundling the distribution and supply functions of ECPG; in a vertical integration counter-trend, the Pljevlja coal mine could be integrated in ECPG.

Progress in renewable energy and energy efficiency has been limited. The country has to focus more on using its renewable energy potential and creating incentives for renewable energy investment. A National Energy Efficiency Action Plan was adopted in December 2010. Finally, the country has to strengthen its administrative capacity in the energy sector in order to advance faster the restructuring and reform processes required by the EU.

Turkey

Turkey opened accession negotiations with the EU in October 2005. Although the negotiations have stalled during the last couple of years due to political reasons, Turkey has continued to restructure and reform its energy sector. The Turkey 2011 Progress Report (PDF) concludes that progress in the energy sector has been uneven during the last year, with advances having been made in opening up the electricity market and renewable energy, though more efforts will be needed on implementing cost-based electricity tariffs, developing a competitive natural gas market and strengthening the independence and capacity of the energy regulatory authority.

With regards to security of supply, the interconnection of the Turkish power grid with the Continental European Synchronous Area was initiated and the second stage of non-commercial trial exchanges is currently being executed with the Greek and Bulgarian transmission system operators.

Turkey is also giving priority to projects that contribute to the development of the priority links 4 (Greece-Balkan countries) and 9 (Mediterranean electricity ring). The Project Support Agreements (PSA) for the Nabucco, the main link in the EU’s Southern Gas Corridor that would bring Caspian gas to the European markets were signed by all the transit countries in June 2011. Turkey is a critical transit link in any future project bringing natural gas from the Caspian or Middle East to Europe and has, therefore, been involved in other regional gas transit projects, such as the Interconnector Turkey-Greece-Italy (ITGI). On the other hand, no progress was realized concerning the national emergency oil stocks law and organization.

Progress on opening up the electricity market was more positive, however. The Energy Market Regulatory Authority (EMAR) has streamlined the procedures for consumers willing to change electricity suppliers. The threshold for allowing consumers to change supplier has been reduced to correspond to a theoretical power market opening of 75%.

The privatization of Turkey’s power generation capacity has started and the privatization of the power distribution assets has to be finalized, the report adds. In the gas sector, the eligibility threshold for consumers willing to switch to a new supplier has been reduced. Tendering activities for gas distribution continued during the past year.

However, the national gas company BOTAS continue to control 86% of the gas imports and the supply and transmission functions of the company continue to be unbundled and to enjoy a virtual monopoly status. The planned new natural gas market law and natural gas strategy have not been developed.

There were positive developments in the renewable energy sector. Feed-in-tariffs have been introduced, as well as additional incentives for manufacturing renewable energy equipment in Turkey. By the end of 2010, 26.4% of Turkey’s electricity was produced from renewable sources, mostly hydropower. New regulations on buildings’ energy efficiency and energy eco-design entered into force. However, the energy efficiency legislation has to be improved – an energy efficiency strategy was drafted, but not yet adopted, and the existing legislation has to be aligned to the EU acquis.

Finally, in the nuclear energy sector, Turkish alignment with EU legislation is in the early stages. A framework nuclear law has yet to be adopted and Turkey has to ratify the Joint Convention on the safety of spent fuel management and on the safety of radioactive management.

In related events, a law regarding Turkey’s cooperation with Russia for building the country’s first nuclear power plant in Akkuyu has now entered into force and a memorandum of understanding was signed with Japan for building a second nuclear power plant in Sinop – a town situated in an earthquake-prone area on the Black Sea coast – although the discussions have temporarily stalled after the Fukushima nuclear crisis in Japan.

Conclusion

Expanding energy networks in these EU candidate countries is a critical objective listed by the Enlargement Strategy and Main Challenges 2011-2012 document. Interconnecting the Balkans candidate countries’ energy networks with the EU energy networks promotes sustainable economic growth, trade, employment and living standards.

The documents also mention the potential of Turkey –with its geographic location between Europe, the Middle East and the Caucasus – of becoming an energy hub and the support that the EU should provide Turkey to achieve this status.

Finally, the Energy Community, which includes the EU countries, as well as the Western Balkans candidate countries and other countries, such as Ukraine and Moldova, will play an increasing role in establishing an open regional energy market.

The Energy Community legislation already covers the internal energy market, renewable energy and energy efficiency EU acquis and will be extended to cover other energy aspects, such as mandatory oil stocks. As the EU has rencently been focused – and will probably continue to be focused for some time – on solving the debt challenges of some of its members, particularly Greece, it will be interesting to follow the progress of the Balkans countries in implementing the EU energy acquis during the next year.

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The Danube and the Energy Future of the Balkans

By Vlad Popovici

The European Union Commission has adopted in early December the EU Strategy for the Danube Region. This new regional strategy focuses, among other things, on energy aspects, and is more than relevant for South-East Europe, as six of the fourteen countries covered by the new macro-strategy are in this region.

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The Danube River was for centuries one of the most important trade routes connecting Central Europe to SE Europe, and Europe in general to other regions, such as the Caspian region or the Near and Middle East. It provided cheap transportation and an avenue for not only economic, but also cultural, religious and political exchanges.

During the 20th century, however, the Danube lost its interregional corridor status, becoming more of a closed, impenetrable border, sometimes between countries, and sometimes between the opposed ideological camps of the Cold War. River transportation significantly declined and cooperation initiatives focused on the Danube – in business, culture, tourism, the environment and so on – virtually stopped.

EU Strategy for the Danube Region

The European Union launched in 2009 its first macro-regional strategy targeted at the Baltic Sea Region.  The strategy’s main objective is to create a long-term development and cooperation framework for the region. Encouraged by the positive reaction of the region’s governments, businesses and general public and by the strategy’s early implementation success, the EU wants to use a similar policy approach for the Danube region.

In June 2009, the European Council asked the EU Commission to prepare a strategy for the Danube region. The Danube region includes, from the EU’s perspective, the entire river’s basin: Germany (Baden-Württemberg and Bavaria), Austria, the Slovak Republic, the Czech Republic, Hungary, Slovenia, Croatia, Serbia, Bosnia and Herzegovina, Montenegro, Romania, Bulgaria, the Republic of Moldova and Ukraine ( but only the Ukrainian regions that have tributaries of the Danube).

Eight of these fourteen countries are member states of the EU. Six of them are in the Balkans – Croatia, Serbia, Bosnia and Herzegovina, Montenegro, Romania and Bulgaria. The main objective of the strategy is to create a sustainable long-term development and cooperation framework in the region. The strategy has four main pillars (PDF):

  • to improve connectivity and communication systems (covering in particular transport, energy issues and the information society);
  • to preserve the environment and manage natural risks;
  • to reinforce the potential for socio-economical development;
  • to strengthen the local governance systems and improve public security in the region.

The first step in developing the strategy was to launch a public consultation in February 2010, aimed at defining the main challenges in the region, as well as the priority issues to be addressed and the most important projects to be promoted and financed along the four mentioned pillars.

In parallel with the public consultation, the EU organized a series of conferences and debates in different cities along the Danube that ended in June 2010. As part of the new EU Strategy for the Danube Region and based on the information gathered during these two steps, the European Commission has prepared a Communication (PDF) document and an Action Plan (PDF), which were adopted by the Commission on 8 December 2010. Implementation of the Strategy will start following endorsement by Member States during the Hungarian Presidency of the EU around April 2011.

The Danube Strategy and the Energy Sector in the Balkans

Energy was mentioned as a priority in all the country contributions and position papers that were sent to the Commission during the information-gathering stages. Moreover, energy is not only a small part of the above-mentioned connectivity and communication pillar of the future strategy – without a sustainable energy sector in the region, none of the four strategic pillars can hold.

Focusing on the energy sector of the six Balkan countries that are part of the Danube region initiative, we discover a very diverse landscape, partially resulting from the economic and cultural diversity of the region, as well as different historical evolutions. However, some common features are noticeable among the six countries, be it an EU member country like Bulgaria or a non-member like Montenegro.

All these countries are increasingly dependent on primary energy – gas, oil, coal – or power imports and sometimes – as it is the case for natural gas – these imports come exclusively from one source.

Domestic production of fossil fuels – oil, gas, coal, uranium, mainly from conventional sources, is non-existent or in a state of terminal decline, while the development of renewable energy resources is generally still underdeveloped.

Power and heat generation facilities in the region, most of them built four or five decades ago, are obsolete, inefficient and highly polluting. A large part of the region’s energy transportation and distribution infrastructure – pipelines, power lines – has reached or gone beyond its design life and is in dire need of major rehabilitation or replacement.

In the same context, the national energy transportation networks have few interconnections and most of them are not bi-directional (do not allow reversible energy flows), which makes them vulnerable to supply crises like the winter gas crisis of early 2009 caused by the Russian-Ukrainian gas transit conflict.

The Balkan countries of the Danube region still have relatively low energy efficiency in all the sectors – from industry to household energy consumption. Energy poverty, the lack of or insufficient access to affordable energy (power and heat), is still a widespread social phenomenon in the Balkans, and is mainly caused by either low levels of income that negatively impact the energy affordability or by the lack of power and heat distribution networks in certain areas. Finally, other important issues are the general lack of cooperation in energy matters among the countries in the region and the absence of functional regional energy markets.

Opportunities for the Future

Although one of the requirements for the new EU Strategy for the Danube Region is to be budget-neutral – that is, to use the existing EU financing programs – and to avoid creating new institutions, the strategy can encourage better coordination among the participating countries for the use of the existing financing schemes and create momentum for existing regional and national projects.

In the energy sector, the six Balkan countries covered by the future strategy for the Danube region have the chance to define and promote their priority energy projects, to be developed at a national level or in cooperation with other countries.

The contribution papers sent by the Balkan countries to the EU Commission in preparation for the Danube region strategy highlight the priorities of the energy sector in this region. The two Serbian contribution documents list a series of energy projects such as developing a new hydropower plant on the Danube: Djerdap III (Djerdap/Porţile de Fier I and II have been built in cooperation with Romania); a new hydro-power plant in Novi Sad; the construction of the Banatski Dvor underground gas storage facility; the rehabilitation and development of the gas distribution network; the construction of an pipeline transportation network for oil products, as well as the construction of the regional Pan-European Oil Pipeline (PEOP).

Croatian energy priorities listed in the preliminary contribution document include: increasing the security of energy supply by developing the domestic production of primary energy; the development of interconnections with neighboring countries (such as the Ernestinovo-Pecs power transmission line or the Donji Miholjac-Dràvaszerdàhely gas pipeline, both of them connecting Croatia to Hungary); the use of renewable sources of energy, and increasing energy efficiency in the public sector.

Bulgaria is interested in jointly updating with Romania the assessment of hydro-power potential for the Danube segment that the two countries share; developing energy network interconnections with neighboring countries (a Bulgaria-Romania gas interconnection is under development) and regional energy transit infrastructure (Bulgaria is currently discussing its participation in regional pipeline projects such as Nabucco, South Stream and the Burgas-Alexandroupolis pipeline; expanding the power and gas distribution networks; increased use of renewable energy sources, as well as improved energy efficiency.

The first Romanian contribution document (PDF) lists priorities such as the development and expansion of the energy infrastructure; the promotion of energy production from renewable sources; the continuation of the Romanian nuclear energy program, and support for the thermal rehabilitation of buildings.

Romania also has a special interest in the creation of a regional energy market. In this context, the country’s proposal of including the Energy Community in the EU Strategy for the Danube Region is very interesting.

The next 18-24 months will prove critical for the success of the new EU initiative for the Danube region. For the Balkans, this is a unique opportunity to enhance regional cooperation between EU member countries and countries still outside of the EU, and to promote the most important projects for the development of the regional energy sector.

As the EU starts sanctioning some or all of these energy priority projects, significant short and long term business opportunities will be created in the Balkans, both for local companies and foreign investors.

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Energy in the Balkans: The Balkanalysis.com 2010 Annual Review

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.

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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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Energy in the EU 2010 Enlargement Progress Reports: How Balkan Countries Compare

By Vlad Popovici

Each year, the European Union publishes an enlargement strategy document describing the main objectives of the enlargement process for the coming year, as well as progress or opinion reports on all the candidate countries and potential candidate countries. The EU’s 2010 strategy and progress report provides several interesting updates concerning the main changes and reforms implemented in the energy sector of the reviewed countries (most of them from Southeast Europe), and makes some recommendations regarding the steps that should be taken by them in the future.

So far, the EU strategy document’s findings are too fresh to have created
any significant response from private or public stakeholders. Nevertheless,
a quick analysis of the document can prove valuable for assessing how the
different countries are performing in the energy sector relative to each
other, and from the EU’s rather rigid perspective. And what the EU
perceives will in time have ramifications for larger energy developments
within the region.

For their part, private companies already know the issues of the energy sector in Southeast Europe, where themes such as state dominance and corruption continue to be mentioned. The EU’s progress reports, though somewhat benign in their phrasing, are commonly understood as a means of putting pressure on the governments in the region to carry out reforms- while also serving as an external benchmark that can be cited when governments seek to compare themselves favorably to their neighbors. in the ongoing competition to attract foreign investment and technologies.

On November 9, 2010 the European Commission adopted and published the Enlargement Strategy and Main Challenges 2010-2011 (PDF) document, explaining its enlargement policy objectives for the next year. The strategy document is accompanied by a series of country progress reports for the candidate and potential candidate countries, all of them (except Iceland) being countries from Southeast Europe – Albania, Bosnia and Herzegovina, Croatia, Kosovo, the Republic of Macedonia (referred to by its provisional UN name, FYROM), Montenegro, Serbia and Turkey.

Both the strategy document and the progress reports are extensive documents covering political and economic criteria, as well as a thorough assessment of the ability of each country to assume the obligations of EU membership. Although energy is just one of the topics covered in these vast reports, an analysis of these reports reveals some important milestones reached by each country, as well as some guidelines regarding the path forward.

Albania

Albania submitted its application for EU membership on 28 April 2009 and is still a potential candidate country, as no accession negotiations have started. Albania is already a contracting party of the Energy Community and as such has to implement the acquis communautaire in the energy sector.

The Albania 2010 Analytical Report (PDF) notes that the current national energy strategy is not compliant with the EU acquis, and a new strategy is thus currently being prepared. Albania depends almost exclusively on hydropower for electricity generation, but has very limited power and no gas and oil interconnections with its neighbors, which can create risks for its security of supply.

In Albania, gas production and the gas market itself are very limited, though domestic oil production is growing with the involvement of foreign investors. The report concludes that energy efficiency and renewable energy require further attention and alignment with the EU acquis. The country also has to focus on diversifying its energy supplies and strengthening the role of the electricity and gas regulatory authority. Overall, the Commission states that Albania has made good progress and will have to make further efforts to align its legislation to the acquis and to implement it effectively in the medium term.

Bosnia & Herzegovina

Bosnia and Herzegovina signed a Stabilization and Association Agreement with the EU in June 2008 – thus becoming a potential EU candidate country – and is a contracting party of the Energy Community as well.

The Bosnia and Herzegovina 2010 Progress Report (PDF) notes that overall progress in the field of energy has been slow. The electricity and gas markets are not unified yet at the Federation level, and the lack of coordination between the Federation Entities blocks the development of functioning energy markets, and so continues to create supply security risks. The regulated electricity tariffs remain below market prices, providing little incentive to consumers to change suppliers.

The implementation of the internal energy market EU legislative packages for Bosnia is still in its early stages. The country has to develop a Federation-level energy strategy, including promotion of energy efficiency and renewable energy sources. However, the Federation Entities are working separately on developing their gas markets and infrastructure, as well as gas interconnections with the neighboring countries. They also provide limited feed-in tariffs for renewable energy and have long-term plans to develop hydro and wind power generation capacities.

Croatia

Croatia is an EU candidate country, having started accession negotiations on 3 October 2005. On 5 November 2010, three more negotiation chapters were closed, bringing the total to 25 provisionally closed chapters (out of 33 chapters). The country is without doubt the most advanced of the group on its path to EU membership.

The Croatia 2010 Progress Report (PDF) notes that the country adopted a new national energy strategy, planning through the year 2020, in October 2009. The country has made progress in increasing its oil stocks according to EU legislation. However, the electricity and gas markets are still dominated by single suppliers and the prerogatives and independence of the energy market regulator can be improved.

As requested by the Renewable Energy Directive, Croatia in June 2010 adopted a National Renewable Energy Action Plan, and has in place feed-in tariffs for power generated from renewable sources. However, the Commission notes that the administrative procedures related to the renewable energy need to be streamlined.

Finally, it was noted that Croatia has made progress on the energy efficiency front as well. The country’s first National Energy Efficiency Action Plan was adopted in April 2010, and a document on the national cogeneration potential was also drafted and approved in January 2010. Overall, the Commission now rates Croatia’s level of alignment with the EU acquis in the energy sector as high.

Kosovo

Kosovo is also considered by the EU enlargement strategy as a potential candidate for the EU, though the process of developing the relationship with the Union is just starting.

Some energy aspects are noted in the Kosovo 2010 Progress Report (PDF) developed by the European Commission. The energy sector continues to face challenges, with frequent power cuts and a low level of electricity tariffs collection. Kosovo does not have yet an oil stocks law and a gas market, though it is interested in participating in some regional projects that might connect it to gas import sources. The Kosovo government has also adopted a Framework Law on gas.

In October 2010, a series of energy-related laws were passed to align Kosovo to the EU’s second internal energy market package. Plans for the development of a new lignite-fuelled power plant in Kosovo have been revised and will be implemented. The distribution and supply functions of the Kosovo Energy Corporation (KEK) will be unbundled at the end of 2010.

Progress was also reported by the EU as having been made in hydropower (with plants planned on the Zhur River), while small wind power projects have already been authorized. Overall, the European Commission concludes that though progress has been made, major efforts have to be dedicated to creating a sustainable framework for the energy sector.

Macedonia (referred to by the EU as FYROM)

The Republic of Macedonia became an EU candidate country in December 2005, and the EU commission recommended in October 2009 the opening of accession negotiations. Macedonia is also a contracting party of the Energy Community Treaty.

Energy is part of the FYROM 2010 Progress Report (PDF) as well. The government has adopted a Strategy for Energy Development (2008-2020). Mandatory oil stocks are planned to reach 90 days of consumption for the period 2010-15, while a comprehensive new energy law aligned with the EU acquis has been adopted by the government (in September 2010) and has been sent for approval to the Parliament.

Although electricity prices for households have increased and a subvention program for vulnerable customers has been launched, electricity tariffs still do not reflect costs and power bill collection levels are still low.

Further, the electricity market is partially open, but natural gas supply has not yet been unbundled from the transmission function as required by the EU natural gas directive. An energy efficiency strategy and a national action plan have been finalized and adopted, but the administration still lacks resources for effectively promoting energy efficiency and renewable energy.

The Macedonian government has also adopted a renewable energy strategy and set a 21% target for the renewable energy share of the total energy consumption by 2020. Concessions have been signed for 19 small hydropower plants and a pilot wind farm is planned. Overall, the Commission concludes that some progress has been made, but more work is to be done in implementing the new energy legislation, increasing the independence of the energy regulator and adjusting power tariffs to reflect costs.

Montenegro

Montenegro’s Stabilization and Association Agreement (SAA) with the EU entered into force in May 2010. In its enlargement strategy and progress report package of 9 November 2010, the EU Commission announced that Montenegro is ready to become a candidate country, though more progress is needed in some areas before accession negotiations can be launched. Montenegro is also a contracting party of the Energy Community.

The EU Commission has prepared an Analytical Report on Montenegro (PDF) that includes details on the energy section as well. In April 2010, the Montenegrin government adopted an Energy Law that creates the framework for further alignment to the acquis, and that will be complemented by further implementation legislation.

Although the new Energy Law requires a national oil stock of 90 days of consumption, it does not give a timeframe, nor implementation conditions; therefore, further legislation will be needed in this field. Since 1 January 2009, about 40% of the electricity market has been considered ‘open,’ with the first license for electricity trading and supply to a company other than the national electricity company EPCG issued in December 2009.

Electricity transmission in Montenegro was unbundled in 2009 with the creation of Prenos, but electricity distribution is still part of the national utility company. The energy market regulator, Regagen, is active, but its independence has to be strengthened.

Montenegro does not have a natural gas market yet, but does intend to import gas in the future, meaning that gas legislation will have to be developed. Plans for developing large and small hydropower plants are well advanced, but the country still has to develop a national strategy and targets for renewable energy. A law on energy efficiency was adopted in May 2010 and the national action plan is currently being revised in light of this. Overall, the report concludes that, despite recent legislative advances, Montenegro will have to focus more on aligning itself with the EU energy acquis and on effective implementation in the medium term.

Serbia

Serbia submitted its application for EU membership in December 2009 but is still a potential candidate; the Commission will give its opinion on Serbia’s membership in its enlargement program update next year. Serbia is a contracting party of the Energy Community Treaty.

Energy is part of the Serbia 2010 Progress Report (PDF) as well. Emergency oil stocks remain below the EU-mandated level of 90 days of consumption and the relevant oil stock legislation has not yet been developed. More progress is noted in the report, however, on gas storage (a new underground storage facility was built in Banatski Dvor). Gas interconnections with other countries are limited, but a joint interconnection pipeline project with Bulgaria is advancing (Nis-Dimitrovgrad) and Serbia has been active in the South Stream pipeline project as well. A new power link with Macedonia is under construction, and one with Romania is planned.

Serbia’s electricity transmission has been transferred to a new company and non-household electricity and gas markets are now formally liberalized; the energy market regulator AERS, it is reported, has been working well.  However, electricity tariffs are not yet reflective of costs. Electricity supply and distribution are still bundled. The national gas company Srbijagas is still vertically integrated and includes gas supply, transmission and distribution.

Citing these issues, the report adds that little progress has been made in the energy efficiency and renewable energy sectors, despite the existence of a national energy efficiency action plan (adopted in July 2010) and preliminary renewable energy legislation (adopted in November 2009); these plans include some feed-in tariff incentives for energy from renewable sources.

Overall, the Commission concludes that Serbia is moderately advanced in the implementation of the EU energy acquis. Further progress needs to be made to open the energy markets, advance the functional separation in the electricity and gas markets (unbundling) and liberalizing energy prices along with strengthening the energy market regulator.

Turkey

Turkey obtained candidate country status in December 1999, and opened official accession negotiations with the EU in October 2005.  Turkey also has observer status in the Energy Community.

The Commission included its energy sector assessment in the Turkey 2010 Progress Report (PDF), with an overall conclusion that Turkey has made good progress in some areas, such as the security of supply, electricity market, renewable energy and energy efficiency, though more remains to be done in other sectors, such as natural gas or nuclear energy and safety.

Turkey has been active in some of the major regional pipeline projects, such as Nabucco (gas) or Samsun-Ceyhan (oil) and has negotiated a natural gas transit agreement with Azerbaijan. Private companies actively invest in new power generation capacities and the new balancing and trading market accounts for 75% of the electricity wholesale trade already.

Three private companies started to operate in electricity distribution and the government has privatized distribution for five other distribution regions. Although two private companies have started importing LNG in Turkey, there was no progress in unbundling the national gas company BOTAS according to the EU natural gas directive. Good progress is noted in the renewable energy and energy efficiency areas as well, with an amended administrative licensing process that allowed private investors to become very active in installing new generation capacity from renewable sources. Finally, Turkey does not yet have a framework nuclear law to address nuclear safety and other EU-required nuclear energy legislation, though it has been very active in advancing its national nuclear energy program, by ratifying in October 2010 an agreement signed with Russia for a new 4800-MW nuclear plant in Akkuyu on the Mediterranean coast. Similarly, Turkey in June 2010 also signed a protocol with a South Korean company for a second nuclear plant to be built in Sinop, on the Black Sea coast.

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Energy Conferences and Trade Shows: Enhancing Regional Investment Potential

By Vlad Popovici

As with any other industry, countless events around the world – conferences, forums, seminars, symposia and tradeshows – are dedicated each year to the energy sector. Some of them are general in scope and audience; others are extremely specialized and attract a targeted audience.

During the fall season, this event activity seems to reach its annual peak, followed closely by the spring event season. By assessing the main themes and conclusions of the major energy events, such as the ones discussed below, we can get a picture of the current challenges and ongoing trends in an increasingly globalized sector, and their implications for the Southeast European energy sector.

Selecting the most important or consequential energy conference or tradeshow of the year is a very subjective and probably impossible task. However, among the many energy events of the peak fall season, three major events are representative of the current status of the energy sector. These events have a significant following and are relevant for the energy sector in Southeast Europe. To avoid any controversial ranking, we are going to discuss them chronologically.

Globalization before the Gates

The World Energy Council (WEC) is a global energy forum founded in 1923, which brings together governments, industry and other energy-related organizations to provide thought leadership for the development of sustainable energy supply and use around the world.

Every three years, the WEC organizes a World Energy Congress; this event is an impressive gathering of ministers, company CEOs, executives from international organizations and other energy sector leaders. This year, the World Energy Congress took place September 12-16 in Montreal, Canada.

More than 3,500 delegates from nearly 100 countries attended the 2010 World Energy Congress in Montreal to network, discuss and listen to 200 speakers coming from 52 countries and covering all imaginable energy-related topics. Among the hundreds of presentations and plenary sessions, the delegates tried to define three main issues at work on the global level – future priorities of the energy sector, constraints and opportunities relevant to the energy world, and the next steps for adjusting energy policies around the world and fostering international cooperation in this sector.

The future priorities of the energy sector sound very familiar for the Balkan region: they include security of energy supply, environmental protection and climate change, energy poverty and rapid urbanization. Addressing any of these issues will require new and clean technologies to be developed and implemented on a large scale. Energy policy and global trade were also widely discussed.

Another relevant topic for the Southeast Europe region is energy policy. While most governments around the world are developing and implementing energy strategies and action plans with 5-10 year timeframes, the real timeframe of energy policy, especially if a transition to new technologies or a radical fuel mix change is targeted, is much longer – major energy infrastructure projects need 5 to 15 years to be conceived, approved, financed and built and the infrastructure (power plants, pipelines, etc.) will ideally then be usable for 30 to 60 years. This discrepancy has led to countless energy policy and investment failures.

Globalization of the energy markets was another hot topic at the Montreal Congress. Suppliers of equipments, products and services for the energy industry are pushing for the opening of the national markets but are often facing, as discussed by Mr. John Krenicki, President and CEO of GE Energy, strong headwinds, especially in the renewable energy sector – custom tariffs, limits on personnel movements, local content and “buy national” requirements, lack of pricing mechanisms for carbon, pollutants, water, etc.

The same complaints come from those interested in the globalization of the energy trade. To confirm that the march towards globalization has started, Mr. Pascal Lamy, Director-General of the World Trade Organization (WTO), has discussed how WTO works with WEC, other organizations and its member countries – including those from Southeast Europe – to develop more predictable and transparent trade rules in the energy field that would benefit both energy producing and consuming nations.

As Mr. Pierre Gadonneix, Chairman of the World Energy Council, stated in the WEC 2010 Declaration presented during the closing ceremony: “sustainable growth is no longer an option – it is a necessity. While the goal is clear, finding the best path to reach it will be a challenge for all.”

Blowing in the Wind

A second key autumn energy-sector event, HUSUM WindEnergy, is the world’s most important international wind energy trade fair, organized every two years in the German city of Husum. The HUSUM WindEnergy 2010 took place from September 21-25 and attracted 33,000 visitors from more than 80 countries. The exhibitor list was impressive as well, with 971 companies from 28 countries.

The trade show’s audience covered the entire wind energy value chain – wind turbine manufacturers and component suppliers, wind farm operators and utilities, financial services, wind farm engineering companies, power network operators, industry associations, and new technology research.

Several grand themes were at the center of attention in Husum this year. Although its growth rates are still impressive – the amount of electricity produced by wind farms roughly doubles every three years, according to the World Wind Energy Association (WWEA) – the wind energy sector has evolved and, as mentioned at the tradeshow by Mr. Christian Kjaer, CEO of the European Wind Energy Association: “Nobody can dispute that the wind energy sector has become a mature, global industry and a mainstream source of power.” Its focus is now shifting towards new technologies that could reduce the electricity supply variability, such as future innovations in wind electricity storage.

The industry is now looking more and more at the offshore wind potential that comes with different technological challenges, compared to onshore farms. In terms of global wind capacity installations, 2009 seems to have been a peak, while in 2010 the installation activity is going to be more subdued, due to the impact of the protracted global economic uncertainty, disappearance of some of the big wind project financing organizations (such as Lehman Brothers), and to the end of some of the significant government incentive programs: in the US, the incentives for the wind sector under the economic recovery program are coming to an end in December, while in Germany the feed-in pricing system for wind energy is currently being re-negotiated.

The sustained growth of wind energy projects in the future will also depend on easier access to the national grids, and on major investments in the strengthening and expansion of the transmission grids needed to accommodate new wind generation capacity.

All of the above topics are increasingly relevant for Southeast Europe countries, as most of them are just starting now to embark on introducing or expanding their wind energy capacities. While there still is a strong interest in promoting and financing wind projects in the region’s countries, some of them, such as Bulgaria and Romania, still have to heavily invest in upgrading and expanding their power networks to give access to the new capacities. They also must reform regulations and administrative steps required to license new projects and bring them online.

Moreover, those Southeast Europe countries interested in developing a sustainable renewable energy sector have to start investing in the other segments of the value chain, such as – in the case of wind energy – suppliers of turbines and turbine components, or wind farm engineering and construction companies.

Fall at the Black Sea

The last energy event that should be mentioned is the Black Sea Energy & Economic Forum, which aims to develop best-policy solutions to help the region become a center for economic cooperation, investment and trade, and to promote energy security, economic growth and political stability in one of the world’s energy and economic crossroads region.

A much smaller event than the ones already discussed, the second edition of the Black Sea Energy & Economic Forum (held in Istanbul from 29 September to 1 October 2010) brought together the region’s top politicians and corporate executives, with strong support from the EU and the US.

The agenda of the forum was more pragmatic than exciting, the main topics being: the development of a strategic vision for the Black Sea region as an energy and economic hub; the impact of the global financial crisis on the energy sector of the region; facilitating energy investments and trade; the future of the regional nuclear sector; climate change and emerging technologies in the energy sector (such as renewable energy and unconventional energy resources); and of course the Southern corridor for natural gas exports to Europe.

This event also assumed more political connotations, with discussions about the future role of Turkey as an energy transit corridor between Asia and Europe. Political and media observers, as noted by the Turkish daily Hürriyet, commenting on the absence of Russia from the forum.

Some Southeast European countries are naturally involved in the Black Sea Energy & Economic Forum as riparian states, but this initiative is extremely relevant for the entire Balkan region, as it is currently emerging as a significant energy player, both in terms of energy supply – especially as one of renewable energy, but also potentially as an unconventional energy production center – and in terms of energy consumption. More than just in the Black Sea’s immediate vicinity, the entire region between the Black, Adriatic and Mediterranean seas is the prize in the competition for new energy transit corridors, including the currently competing South Stream project and Southern corridor projects – Nabucco, Trans-Adriatic Pipeline and the Italy-Greece Interconnector – that were discussed at the Istanbul forum.

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The Hidden Benefits of Southeast European Pipeline Projects

By Vlad Popovici

South Eastern Europe could become in the near future a very important energy transit region. Various oil and gas pipeline projects have been aggressively promoted during the last several years in the region. Beyond energy flows and transit fees, these major infrastructure projects could offer other significant economic benefits for the countries in the region.

One of the major strategic objectives of the European Union in the energy sector is to increase the long-term security of energy supply for its member countries.

However, the domestic production of oil and gas in the European Union is declining and, as a consequence, the EU dependence on energy imports is still increasing – according to the 2010 edition of the EU energy and transport in figures (PDF) statistical pocketbook, the EU was in 2007 importing 53.1% of its primary energy sources, compared to 44.5% back in 1990.

One of the few ways to increase the long-term security of supply in the context of increasing import dependency is to diversify import sources. New energy infrastructure linking the hydrocarbon-rich exporting regions to the European markets thus has to be built – pipelines, LNG and oil terminals. This is very good news for South Eastern Europe, as it could soon become a very important energy transit corridor.

Competing Pipeline Projects

Several oil and gas pipeline projects that would transit South Eastern Europe have been aggressively promoted during the last decade. Projects like Nabucco or South Stream are commonly mentioned in the media these days, but the list of regional pipeline projects is longer.

It includes other oil pipeline projects, such as the Burgas-Alexandroupolis (or Trans-Balkan) project, Burgas-Vlore (or AMBO) project and (though some consider it defunct) the Pan-European Oil Pipeline (or PEOP) from Constanţa to Trieste.

As for gas pipelines, we have the Trans-Adriatic Pipeline (or, TAP), Bulgaria-Greece Interconnector, the White Stream project (or, the Ionian-Adriatic Pipeline project).

Because all of these projects have the same potential oil and gas suppliers (the Caspian and Middle East regions) and user markets (primarily European Union member states, though some of the oil and gas would certainly be used in the transit countries as well), it is clear that not all of them will be built at the same time, as that would create an over-capacity situation.

Therefore, though all the promoters publicly state that their project is complementary to the other planned pipelines, the reality is one of fierce competition among them – to contract guaranteed long-term supply and demand, to get financing for the project, to negotiate transit rights and political and/or financial support from the transit countries and, most importantly, to be the first to put their own new pipeline in service.

Perhaps the best example of such chronic and politicized competition is that between the Nabucco and South Stream projects. To better understand the stakes involved in this game, one must first examine what the main benefits of a major pipeline project would be.

Direct Benefits for Transit Countries

The direct benefits of a pipeline project are more obvious – the exporters gain long-term customers and revenue from the oil and gas flows, the consumers get a long-term guaranteed supply (pipelines are usually designed for 25-35 years of service, but are often used for much longer than that), while the pipeline operators gain revenue from the transportation fees.

The direct benefits for transit countries are also easy to grasp. They have access to new flows of oil and gas on their territory that they can use; this could increase the availability of these resources in regions that had previously no access to them.

The pipeline operators are going to pay transit fees to the transit countries for the right to use their territory for transit. Transit countries can also gain a profit and dividends if they are involved – through state-owned or private companies – in the pipeline operating company.

To give just one example, around 450 km of the Nabucco gas pipeline will transit Romanian territory. The Romanian government plans to use the pipeline as a backbone for distributing gas to regions that do not yet have access to gas, and to diversify its imports, since they currently come exclusively from Russia.

Transgaz, the Romanian national gas transmission company, owns 16.67% of the pipeline operating company Nabucco and estimates that its annual revenue from transportation fees will reach 120 million EUR for the first 25 years of pipeline service. There are no estimates yet regarding the transit fees that will be charged by the Romanian government.

Indirect Benefits for Transit Countries

The indirect benefits of a pipeline project are the benefits derived from the construction and maintenance of the pipeline. The largest pipeline construction cost categories are represented by materials – pipe, protective coatings, compressors, etc – and labor, each of the two representing around 30-35% of the total construction cost.

Since most of the pipeline length will lie in the transit countries in South Eastern Europe, this represents a major business opportunity for these countries’ industrial sector: increased production for existing large-diameter pipe mills or even investing in new pipe mills; new protective coating plants in the region; increased revenue for local gas pipeline construction and operating equipment manufacturers; more revenue for local pipeline construction companies.

The second largest benefit opportunity is the maintenance of the pipeline – usually, the annual maintenance costs of a pipeline are around 3-5% of its construction costs, which creates new repeat business opportunities for local pipeline maintenance companies and pipeline maintenance equipment manufacturers in the transit countries.

To appreciate the true scale of business opportunity created by a real project, we can look again at the 450-km long Romanian portion of the planned Nabucco pipeline. The construction of the Romanian segment is conservatively estimated to cost 1.1-1.3 billion EUR, with the required 300,000 tonnes of 1,420 mm steel pipe alone costing between 200 and 300 million EUR. Compressor stations would cost another 150 million EUR. Protective coatings for the steel pipe would cost 6-10 million EUR.

Finally, Transgaz estimates that the construction of the Romanian segment would create 600 permanent and 7,000 temporary jobs in the country. Maintenance of the Romanian segment would cost annually between 30 and 65 million EUR. All these costs represent potential revenues for local companies.

Similar calculations can be developed for all the planned projects and transit countries in South Eastern Europe. No one doubts that the indirect benefits represent a huge business opportunity, one that is most of the times hidden behind the direct benefits of the projects.

The good news is that the transit countries in South Eastern Europe could get the lion’s share of these indirect benefits, as most of the pipeline routes transit their territory and they can negotiate local content clauses for the construction and maintenance of the pipeline.

The bad news, however, is that the majority of Southeast European countries are not currently able to maximize these indirect benefits because they either have no industrial capabilities to actively build the pipelines transiting their territory, or because their internal pipeline industry has been decimated after decades of slow business.

In the Nabucco example above, Romania risks losing most of the pipeline project’s indirect benefits. For example, Romanian pipe mills cannot manufacture 300,000 tonnes of 1,420 mm pipes in the required 2-3 years without significant investments; there are no large capacity protective coating plants in the country; the pipeline construction and operating industry has been virtually dismantled; and the local pipeline construction companies would hardly have the combined capacity to build the Romanian segment of the pipeline.

Companies in South Eastern Europe still have time to position themselves for the upcoming major pipeline projects that will transit their countries by upgrading existing or creating new capacity and finding reliable partners outside the region that can complement their capabilities.

Their task would be made easier if the local governments would provide not only political and financial support to the pipeline projects, but also a project-by-project industrial strategy aimed at increasing the local content during the construction and maintenance of the planned pipelines.

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The South Stream Pipeline and the Environmental Factor

By Ioannis Michaletos
The South Stream pipeline project is a complex technical endeavor which entails a wide array of factors, including that of environmental protection.
The present assessment concerning South Stream’ss environmental impact reveals opposing views from multiple actors vying for answers, concessions and influence alike.

Furthermore, the South Stream project in terms of environmental research lacks any detailed scrutiny, from either state authorities or civil organizations. This lack could be attributed to the fact that the project is still in the early stages of preparation.

The president of the Committee of the Black Sea Regional Energy Center (BSREC) and also director at the Center for Energy Policy & Development in Greece, Prof. Dimitris Mavrakis, holds an optimist view concerning the environmental viability of the project.

According to him, “Laying pipelines in the sea bed, either for developing subsea fields or for natural gas transportation is a common practice in our days.”

Moreover, he explains that “the exploitation of North Sea natural gas reserves has led to the development of a dense network of subsea pipelines, without negative environmental implications, and the same applies for the Mediterranean Sea”.

Mavrakis’s overall final conclusion is that “South Stream does not include any environmental risks, as experience has shown from previous pipelines already deployed’.

The Italian partner in the project, ENI, has already released a press report underlying that the “strictest environmental criteria and the most advanced technologies will be carried out in cooperation with Gazprom”. The Italian branch of Greenpeace, according to the local media, hasn’t rejected the project in terms of its environmental prospects, though no definite report has been made by any Italian environmental organization so far.

On the other hand, there are those who objecting to the above by keeping a critical stance. According to the Moscow paper Kommersant, the press service of the Ukrainian Environmental Ministry has expressed that “the pipeline would require a close study and the conduct of a large-scale ecological assessment”.

For the moment, further information has not been made available by Kiev, though diplomatic sources in Athens confirm that Ukraine will bring up the environmental issue in the future, and that this will certainly exacerbate strains in its relations with Moscow.

Further, the Polish member of the European Parliament, Mrs. Urszula Gacek, has made her country’ss reservations public by drafting a relevant question to the Commission in early 2008, stating that “South Stream [Pipeline] may have negative consequences concerning [the] Black Sea’s ecosystem”. The question was aimed at exploring the probabilities of an EU hand-out for South Stream, a development that hasn’st occurred so far.

In Greece in early September 2008, when the South Stream agreement was voted on by the Parliament, the Left-wing party of Syriza voted against it, citing environmental reasons and more specifically “Physical degradation of the environment in places where the pipeline is going to cross, including the internationally protected “Natura 2000″ zones”.

Already the local authority of the scenic coastal Perdika region in Western Greece has proclaimed in an adamant manner that the construction of the pipeline traversing their territory, in combination with the creation of a natural gas compressor station, will “ruin their natural environment and damage extensively their well-formed tourist infrastructure”.

The members of the municipal board have claimed that the existence of a preparatory report concerning the environmental consequences by a faculty member of the Athens National Technical University, though the authorities of the School were not able to verify such for the time being.

The WWF branch in Greece agrees in principle that “Natural gas should be encouraged as an alternate form of energy in comparison to lignite, oil or stone coal,” but adds the caveat that the construction of the South Stream Pipeline should be “carefully assessed and become part of a public energy debate”.

Bulgarian NGO’s involved in environmental protection have not expressed their view on the project, but there are numerous weblogs, mostly by young university activists, calling against the construction of pipelines in general, citing environmental reasons. Similar resentment has largely come from residents of the port of Burgas, from where both South Stream and the Burgas-Alexandroupoli oil pipeline are projected to pass.