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Eastern Europe Shivers Thinking About Winter Without Gas

As winter approaches, former Soviet
satellite nations from Poland to Bulgaria are watching Russia
and Ukraine’s stalled gas negotiations with growing trepidation.

The lack of discernible progress is sending a collective
shiver down the spine of Eastern Europe, which retains vivid
memories of Russian energy cuts during unusually cold winters in
2006 and 2009. The ensuing shortages led to shuttered factories
and a return to wood for heating and cooking in rural areas.

Despite the two episodes, little has been done to diversify
supplies within a region that remains highly dependent on energy
delivery systems dating back to the Soviet era.

“Parts of eastern Europe are still quite vulnerable this
winter,” said Emily Stromquist, a Eurasia analyst in London.
“The problem is that until recently the relations with Russia
have generally been good, so perhaps there was no feeling of
urgency to build quickly.”

If Moscow and Kyiv don’t reach a compromise before winter
and OAO Gazprom (GAZP) fails to restart supplies to its western
neighbor, Ukraine may resort to siphoning off gas carried
through its territory. As in 2009, that could prompt Russia to
cut transit through Ukraine altogether, leaving parts of eastern
Europe exposed to severe shortages.

Poland, Hungary and especially the Balkan peninsula would
be most affected, according to the so-called “stress tests”
published by the European Union on Oct. 16.

Soviet System

Connected to the old Soviet pipeline system that runs
through Ukraine and Moldova, the Balkan countries rely on Russia
for close to 100 percent of their needs. Moreover, they’re
poorly connected with their neighbors and their underground
storage isn’t sufficient to cover demand for the entire winter.

Part of the problem is that, instead of boosting pipeline
inter-connectors with each other to improve trading, those
countries pinned their hope on Gazprom’s South Stream project,
designed to bypass Ukraine by joining Russia directly with
Bulgaria through the Black Sea. However, the preparatory work on
the 2,446-kilometer (1,520-mile) pipeline was halted earlier
this year under intense lobbying from the EU and the U.S. as the
conflict with Ukraine flared up.

“Serbia didn’t work on alternatives and focused
exclusively on the South Stream project whose construction
doesn’t depend on us,” said Zorana Mihajlovic, Serbia’s deputy
prime minister who served as energy minister from 2012 to
earlier this year. Instead, she said, her country should have
been building a pipeline to Bulgaria.

“Other European countries have done much more than us to
improve their energy security,” she said.

Limited Buffer

Russia and Ukraine were scheduled to return to the table in
Berlin earlier this week before Russia presented a last-minute
demand for advance payments for future deliveries. That has
deepened the worry of eastern European neighbors, following the
talks closely, that the deal won’t get done.

Relying fully on storage isn’t an option for some of the
countries. While Serbia’s Banatski Dvor depot is full, it would
last the country only about 40 days, according to the energy
ministry. Bulgaria’s only facility also offers a buffer of only
a few weeks and is still only 88 percent full.

“Nothing has been done in Bulgaria since the last
crisis,” said Ivan Hinovski, chairman of the Bulgarian Energy
Mining Forum. “There are some plans, but no new gas inter-connectors or other measures for diversification of supplies are
in operation now. A shortage of gas supplies would induce
serious economic stress.”

Storage Tanks

Poland, Slovakia and Hungary are better off, with larger
gas-storage tanks. Still, they were forced to slow down the pace
of injections into storage by Gazprom, which has cut deliveries
in the past weeks after those countries began sending gas back
to neighboring Ukraine, a process known as reverse flow.

Once the transiting Russian gas reaches EU territory, the
countries have the right to send it back to Ukraine. Slovakia,
for example, is able to supply Ukraine with up to 10 billion
cubic meters a year through the Vojany pipeline. However, Russia
has shown it’s willing to use gas supply as a political tool.
After Vojany became operational in early September, Gazprom cut
deliveries to Slovakia by 50 percent.

Most Expensive

Liquefied natural gas, viewed as the most expensive
solution, is an option for Poland and Lithuania, both of which
are building LNG terminals on the Baltic coast to receive gas,
primarily from Qatar. Still, they will make only small
difference this winter: while the Lithuanian station is
scheduled to open in December, the Polish one won’t start
receiving shipments until the middle of next year.

Eastern Europe’s shortcomings stand in contrast to Germany,
Gazprom’s largest customer in Europe, which has depended on
Russian gas since the 1970s. The construction of Nord Stream,
the direct link from Russia under the Baltic Sea, means that
since 2011 Europe’s largest economy is largely insulated from
disruptions to gas flows through Ukraine.

In turn, Gazprom depends so much on revenue from Germany
it’s keen to avoid breaks in supply there.

Some parts of eastern Europe have made progress in
diversifying their gas supply. Hungary and Slovakia are about to
finish an interconnecting pipeline. And, thanks to Nord Stream,
the Czech Republic can now import enough from Germany to cover
all its needs.

However, it may be difficult to supply countries farther
east and southeast if supply through Ukraine stops, according to
Pavel Solc, Czech deputy minister of industry and trade who is
in charge of the country’s energy policy.

“Thank God we are in the safe part of Europe, and we may
even have enough reserve capacity to supply Slovakia,” he said.
“But with every other country further south it becomes more and
more problematic.”

To contact the reporters on this story:
Ladka Bauerova in Prague at
lbauerova@bloomberg.net;
Misha Savic in Belgrade at
msavic2@bloomberg.net

To contact the editors responsible for this story:
Will Kennedy at
wkennedy3@bloomberg.net
Alex Devine