SECURITY OF NATURAL GAS SUPPLY IN CENTRAL EUROPE Case Study: Slovakia

Transcription

1 SECURITY OF NATURAL GAS SUPPLY IN CENTRAL EUROPE Case Study: Slovakia Author: Jan Klepac, Executive Director, Slovak Gas and Oil Association Introduction The discussion about EU energy security has changed in the new millennium. We have moved from the government centered system to a market-based system. We are moving from national energy market towards the EU energy market. Energy markets have become more international, the EU has doubled the number of its member states and environmental concerns have been recognized. That s why the European security of supply has been raised to the EU agenda in recent years. Currently, there is no legal definition of security of supply within the European community. Security of supply is a multi dimensional phenomenon with a lot of different aspects. There are various attempts to conceptualize the security of supply. These include: The conditions under which a country and its citizens (or at least most of them) and companies have access to sufficient energy resources at reasonable prices for the foreseeable future without a serious risk of major disruption of service. (Barton 2004) The ability of energy industries, primarily in electricity and gas, to provide their services throughout the EU to a high standard and at a reasonable cost in a competitive, fully liberalized pan-european market. (Cameron 2007) The steady availability of energy supplies in a way that ensures economic growth in both producing and consuming countries with the lowest social cost and the least price volatility. (Alhajji 2008) Compared with the EU oriented definitions, Alhajji`s definition is more global. Various definitions usually combine issues of continuing availability, low or affordable prices and system integrity. Dimensions of the security of gas supply I will not discuss every possible supply risks for the European Union and Slovakia, for they were already discussed in many high-quality monographs and papers. These risks are usually divided into external or source-related threats /reserve depletion, investment in gas fields, insufficient diversification and international competition over gas resources/ and internal or EU-related threats /environmental protection, investment in gas infrastructure, market liberalization and contractual regimes/. It is also clear that the discussion about the energy security is highly exposed to short and long-term trends.

2 I found out by studying of various materials that the threats to the security of supply could mean different things to different people. These are so-called dimensions of the security of supply. Table No. 1 describes different types of concern that may exist around the security of supply. Columns relate to different types of threats and concerns: - Operational concern - it means will there be enough gas in the system to keep me warm or a cold winter day or does our infrastructure have sufficient capacity and integrity to ensure secure supply under different weather conditions or what to do if there is an operational failure in the system or a serious interruption of supply. Firstly, I didn t plan to deal with these questions at all. The Slovak transmission system belongs to the strongest in Europe, Slovakia has concluded 20-year contracts for the gas supply and the country disposes of very adequate capacities of the underground storage facilities. However, due to the gas crisis in January 2009 and the imminent interruption of gas supplies in March 2009 I realized a permanent threat of possibility of the gas supply interruption in the future. But this already means moving from operative to strategic issues. - Strategic concern - in other words how to deal with risk of a serious interruption in supply of gas from one source to Slovakia or the Central Europe or how to deal with the risk of a serious loss of critical infrastructure. - Long-term concern - it means concern about the long-term availability of how to ensure sufficient gas supplies and infrastructure to meet the Slovak demand in Each of these three different concerns has different strategic options. This paper considers different potential options that may either reduce the risk or its impact. I will examine the concern and solutions from the point of view of Slovakia. Table No.1 Dimensions of the security of gas supply Operational Strategic Long-term Capacity Capacity to transport gas to meet defined peak daily demand Supply Supply available to meet both the defined peak daily demand and to supply during a severe period/winter Network supply capacity sufficient to meet peak firm demand in the event of defined loss of infrastructure Ability to meet firm demand in the event of severe disruption to the principal supply source Network expansion designed to met the anticipated demand growth Supply available to cover the future projected demand

3 Conceptual framework This paper has the following aims: To point out the problems concerning measures to enhance the security of gas supplies and to diversify gas supply portfolio in Slovakia; To compare possibilities and solutions concerning the diversification projects and the construction of the new gas infrastructure in Central Europe. This paper wants to give a qualified opinion on these issues and provide recommendations on the energy security strategy for the Slovak Republic. The grounds for writing this paper was the fact that there had been more spoken than done in security of natural gas supplies in Slovakia in the most recent years. There prevailed an extreme belief in the Russian supplier as the only one natural gas resource. The adoption of specific measures aimed at the increase in security of supply was only brought as a result of gas crisis in January The main research question is: What should Slovakia do in order to improve its natural gas supply portfolio and increase security of supply? In order to realize the aims mentioned before, we need to analyze the development of the Slovak gas industry, European gas environment and the Slovak and European energy policy. Theory and instruments of strategic management are further used in this paper to examine the circumstances related to the security of natural gas supply. Strategic management includes understanding the strategic position of an organization (in our case Slovakia) and strategic choices for the future. I compare eight strategic options of increasing the security of natural gas supply in Slovakia and the Central Europe. Slovak Gas Industry Development In 2006, Slovak natural gas industry celebrated its 150 anniversary. Considering the size of the state ( square km and 5.5 million inhabitants), Slovakia has a highly developed gas infrastructure. Despite 150 years of tradition, a real boom of the Slovak gas industry came with a construction of an international transit gas pipeline in First gas supplies then began to flow through this pipeline from the former Soviet Union to the Western Europe. Already in the 60 s, there was the international pipeline Bratstvo going through the Slovak territory with the 700mm pipeline diameter. Bratstvo delivered gas supplies for Czechoslovakia and after 1968 also for Austria. Its capacity and transit possibilities can be hardly compared with parameters of the Slovak gas transit pipeline system built in the 70 s.

4 Since the beginning of it operation in 1972, the Slovak transmission system has been operating as a reliable part of the international transmission network transporting natural gas from the Russian Federation to the countries of the Central and Western Europe. The volume transmitted in 2008 reached 76.2bcm (figure No.1). Basic technical data of the Slovak transmission system are: Length of pipelines (5 lines parallel) km Diameter of pipelines mostly 1200 & 1400mm Max. transport capacity around 94bcm a year 4 Compressor Stations with installed power above 1000 MW. Fig. 1 Slovak Transmission Network In addition to SPP a.s. (Slovenský plynárenský priemysel = Slovak Gas Industry), there are another sixteen companies transmitting gas through the territory of Slovakia (e.g. Gazpromexport, Wintershall, VNG, RWE Transgas, INA, Geoplin etc.). The total length of distribution pipelines is 31537km. There are 6343km of high pressure pipelines and 25194km of local networks, i.e. medium and low pressure pipelines (figures No. 2).

5 Fig. 2 Slovak Distribution Network Source: SPP-Distribucia, a.s. Annual Report 2008 By 31 December 2007, 2227 out of 2891 municipalities in Slovakia were connected to the gas grid - it represents 77% of municipalities inhabited by 94% of the Slovak population. Slovakia s own consumption was 5.883bcm in 2008 (see fig. No.3). 98% of the natural gas consumption is covered by the import from the Russian Federation. Only the remaining 2% come from the domestic production. In 2007, the volume of gas sales in Slovakia recorded a decrease in yearly terms due to mild weather at the beginning of the year and also due to energy saving measures. Fig. 3 Source: SPP, a.s. Annual Report 2008

6 SPP then a gas monopoly - underwent a partial privatization in Consortium of the foreign companies E.ON Ruhrgas and Gaz de France obtained 49% of SPP s shares and the state remained the owner of 51% of shares. In July 2006, the legal unbundling of the vertically integrated gas company was realized by establishment of two daughter companies: SPP Distribúcia a.s. (= SPP Distribution) and SPP- Preprava (= SPP Transmission), from January 2008 eustream, a.s. There is also a complex of underground natural gas storage facilities located in Láb in the West Slovakia, with the total storage capacity of 2.75bcm. Capacity of the storage facilities in possession of the company Nafta Gbely a.s. (40% Eon Ruhrgas, 56% SPP) is 2.13bcm and capacity of Pozagas Malacky a.s. (30% Gaz de France, 35% Nafta Gbely, 35% SPP) is 0.62bcm. Concerning the degree of the gas market liberalization, we can say that there is weak developed gas market in Slovakia. The reasons for that are as follows: Single monopoly source of natural gas and low domestic production; Existence of long-term contracts for gas supply; Long-time existence of Gazprom s so-called Destination Clause for the gas transit through the Slovak territory to the Western and Southern Europe; Long-time existence of the single vertically integrated company SPP; However, Slovakia harmonized its energy legislation with the EU law in 2004 and the Slovak government approved the gas market rules reflecting the EU principles in March It is important to point out that regarding the security of supply, industry and citizens in Slovakia have been accustomed to high level of the security of gas supply already for 35 years; in the past even for very low prices. Energy policy is a part of the Slovak national economic strategy, since ensuring maximum economic growth while retaining its sustainable development is conditioned by reliability of the energy supplies at optimum cost and adequate environmental protection. Slovakia imports almost 90% of the primary energy sources from the non-eu countries. The only substantial domestic energy source is lignite (brown coal), as the domestic natural gas and oil production is insignificant. That s why the importance of the renewable energy sources has significantly increased (e.g. biomass, water, geothermal energy, solar energy, wind energy). According to various analyses, we can expect that in a long-term perspective (up to 2030) the key role in satisfying the consumption will be played by higher utilization of nuclear fuel, natural gas and renewable energy sources. This trend is based on the assumption that due to stricter emission limits coal consumption will be gradually decreasing.

7 The same scenario applies also in case that emission limits would not draw back coal consumption in sufficient volume. Due to replacement of the oil derivatives with bio-fuels, only mild growth of oil consumption is expected, mostly in transportation. Based on longterm forecasts of gross domestic consumption, the following structure of primary energy sources consumption is expected (see fig. No.4): Expected development of the natural gas consumption by 2030 is shown in the table No.2: Total natural gas consumption /bcm/ ,5 6,9 7,0 7,1 Source: Ministry of Economy of the Slovak Republic Fig. 4 Development of primary energy source consumption EUROPEAN ENERGY CONSUMPTION The EU s 27 member states account for approximately 17% of the world s energy consumption. Europe imports about 50% of its energy supply slightly over 80% of its oil and close to 57% of its natural gas supplies. Its dependence on imported energy sources - particularly natural gas - is expected to grow substantially in the coming decades.

8 The European Commission estimates suggest that if current trends continue, Europe will have to import 65% of its energy supplies by Russia, Norway, the Middle East and the North Africa are the largest suppliers of EU s energy sources (see Figures No.5). Fig. 5 Origin of Gas Consumed in the EU27 (2007) Source: EUROSTAT 2007 Forecasts expect the EU s natural gas consumption to double over the next 25 years. Analyses show that gas has rapidly become Europe s fuel of choice for the power generation. European gas consumption currently represents 18% of the world gas consumption. European gas imports are expected to reach over 80% of the total consumption by But due to world financial crisis, EU adopts measures in 2009 to prevent from dramatic increasing of natural gas consumption planned still a year ago. In 2005, EU member states and Norway accounted for just over 50% of the EU s natural gas supply. The other half was imported primarily from Russia (24.3%) and Algeria (10.1%). Several EU member states (especially in the Central and Eastern Europe) are totally dependent on the Russian gas for their domestic energy consumption. Table No.3 illustrates the levels of dependency on the Russian gas in the selected EU nations:

9 Country Dependence on the imported gas Gas imported from Russia Austria 84% 49% Czech Republic 98% 77% Estonia 100% 100% Finland 100% 100% Hungary 81% 60% Germany 85% 36% Italy 88% 27% Poland 67% 48% Slovakia 98% 98% Source: Commission Staff Working Document: Assessment of the Directive 2004/67/EC (2007) PESTEL ANALYSIS Understanding of the strategic position is connected to identification of the impacts of the external environment (in our case Europe), an organization s (in our case Slovakia) strategic capability (resources and competences) and the expectations and influence of stakeholders (in our case the taxpayers). See fig. No.6. Fig. 6 Strategy development in the natural gas business

10 It s important to understand that changes in the European environment are likely to influence Slovak security of the gas supply. The PESTEL framework can be used as a starting point to identify how future trends in the political, economic, social, technological, environmental and legal environment might influence the security of the gas supply in Slovakia. Political factors a) Common (?) EU energy policy b) Coordination of the national regulatory authorities in the field of energy: EU Directive No. 2003/55 established the European Regulators Group for Electricity and Gas (ERGEG) as an official advisory body of the European Commission. c) Russia EU energy dialog: d) Energy dialogue between the countries of Caspian region and EU Economic factors a) Lisbon strategy for growth and jobs b) The fixed inflation rate that must not be exceeded by the EU member states; c) Creation of a single European internal gas market the European Commission wants to continue in its efforts to create a fully operating market. It was decided to create first the regional markets through regional initiatives, since the integration of 27 national markets into a single European market appears to be a problem. The EU countries have been divided into 4 regions. Slovakia belongs to the South-South East region together with the Czech Republic, Poland, Austria, Hungary, Slovenia, Italy and Greece. d) Natural gas prices Socio-cultural factors a) Discontent of European customers with increase of natural gas prices in recent years b) Solidarity among the EU member states - Green Paper stresses the need of monitoring of the gas demand and supply on the European markets and identifying of the potential gas infrastructure failures by the European Energy Supply Observatory. A mechanism to ensure rapid solidarity and possible assistance to a country facing difficulties should be also developed. c) Dissatisfaction of the European Commission e.g. insufficient energy market opening, continuing barriers in the process of liberalization; d) Gas producers are mostly from non-eu countries Technological factors a) Promotion of new investments b) Development of the new energy technologies EU needs the proper strategic energy technology plan. This should accelerate the development of promising energy technologies and should also help to create the conditions for bringing such technologies effectively to the EU and the world markets. Environmental factors a) Natural gas consumption b) CO 2 emissions

11 Legal factors a) Directive No. 55/2003/EC on common rules for the internal market in natural gas revised by new Directive in the framework of the Third energy package b) Council Directive No. 67/2004/EC concerning measures to enhance the security of the gas supply will be revised by new Regulation submitted by the EC in July 2009 c) Regulation No. 1775/2005/EC on conditions for access to the gas transmission network revised by new Regulation in the framework of the Third energy package d) New Regulation establishing the Agency for the Cooperation of Energy Regulators SWOT ANALYSIS There was a detailed analysis of the European environment and conditions influencing the security of the gas supply in Europe made in the chapter 7. I analyzed the possibilities of Slovakia and assessed a level of gas industry infrastructure in the chapter 6. The key strategic message from these chapters can be summarized in the form of an analysis of strengths, weaknesses, opportunities and threats. SWOT analysis summarizes the key issues from the business environment (Europe) and the strategic capability of an organization (Slovakia) that are most likely to impact the strategy development. It is evident that I focused above all on Slovakia. In order to obtain the complex overview, the facts bearing on the issue of gas industry are supplemented by the political economic circumstances. Strengths The strategy of security of natural gas supply (SoS) 1. High-performance gas transmission industry network. 2. Highly-developed gas distribution network. 3. Natural gas underground storage with adequate storage capacity. 4. Professionally skilled and experienced staff. 5. Strategic investors in the Slovak gas industry. 6. Slovakia, though a very small producer of natural gas, is important as a transit country. About a quarter of the natural gas consumed in Western Europe passes trough Slovakia, which represents about 70% of total Russian natural gas exported to the region.

12 7. Slovak political institutions are robust and independent, with established liberal democratic norms ensuring stability over the long term. 8. Slovakia s entry into the euro-zone on 1 January 2009 underlines the country s strong reform efforts. Adoption of the euro will help to enhance economic integration with the euro-zone. Weaknesses 1. Insufficient diversification of the natural gas resources. 2. Absence of gas market, single monopoly supplier until One-way gas flow in the transmission network until Location of UGS in Western part of Slovakia. 5. State interventions and infringements upon Regulatory Office s rights. 6. Absence of the North-South interconnection. 7. While Slovakia s score in Transparency International s 2008 Corruption Perceptions Index rose to 5 from to 4.9 in 2007, the fact that the government has not yet formulated in its appointments to state companies 8. Domestic oil production is believed to be under the level of 1000 barrels per day, from reserves of around 9million barrels. Oil consumption is 80000barrels per day, and Slovakia imports its crude oil from Russia through the Druzhba and Adria oil pipelines. Opportunities 1. Energy policy harmonization of the EU member countries. 2. Common European energy legislation (including SoS). 3. EU s economic power. 4. Creation of a single European gas market. 5. Solidarity among the EU member states concerning the SoS. 6. New gas pipelines and new gas infrastructure in European interest. 7. In December 2002, the governments of Russia, Belarus, Ukraine, Slovakia, Hungary and Croatia signed an agreement to integrate and expand the capacity of the Druzhba and Adria pipeline systems in order to facilitate the transportation of Russian crude oil. Threats 1. Increasing dependency on natural gas. 2. The country s per capita natural gas consumption is very high, with more than 80% of Slovak households connected to the natural gas network.

13 3. Threats of Russian natural gas supplier Gazpromexport/Gazprom. 4. Selfish behavior of certain EU member states concerning the SoS. 5. Increasing gas consumption in EU. 6. Strong lobby pressure on EU authorities and ambiguity of certain directive. 7. Construction of new competitive transport gas pipelines. 8. There are concerns that the Smer-led government will continue to reverse previously implemented structural reforms, undermining the economy s productivity and labor. TOWS MATRIX The TOWS matrix is a method for identifying strategic options directly from a SWOT analysis. The TOWS matrix builds directly on the information about the strategic position that is summarized in a SWOT analysis. The TOWS matrix is a way of generating options from the knowledge of strategic position of Slovakia. Each box of the TOWS matrix is used to identify options that address a different combination of the internal factors (strengths and weaknesses) and the external factors (opportunities and threats). You can see the complete matrix in the table No.4 External f a c t o r s Opportunities (O) Threats (T) Internal f a c t o r s Strengths (S) SO Strategic options Generates options that use strengths to take advantage of opportunities. Developed gas industry infrastructure increases SoS in Slovakia and contributes to stimulation of SoS in the whole Europe. ST Strategic options Generates options that use strengths to avoid threats. Developed gas industry infrastructure in Slovakia remains partially used despite the import dependency. Weaknesses (W) WO Strategic options Generates options that take advantage of opportunities by overcoming weaknesses. Possibilities offered by EU can improve Slovak weaknesses. However, problems remain. WT Strategic options Generates options that minimize weaknesses and avoid threats. Smooth natural gas supply in Slovakia is threatened. Important role of energy efficiency and renewables.

14 A detailed and explicit SWOT and TOWS analysis would have to be made in order to justify the choice of strategic options (see bibliography, item 23). However, this falls beyond the scope of this thesis, I propose the use of following list of options to be investigated. We obtain this list of strategic options by comparing the strategic options resulting from the TOWS matrix with the list of instruments to enhance the security of the gas supply stated in Directive 67/2004/EC. They also represent the main measures for enhancing the security of the gas supply in Slovakia: Diversification of sources of gas supply - Pipeline projects /Nabucco, Trans-Caspian gas pipeline, White Stream/ - LNG terminals /Adria Project-Croatia, Baltic Sea Project-Poland/ - HUB and Norwegian natural gas Diversification of Russian transport lines - Nord Stream - South Stream Building of new storage capacities - in Slovakia - in the locality of the Viennese basin Long-term contracts - with existing suppliers - with new suppliers New interconnection pipelines - Interconnector Poland Slovakia - Interconnector Hungary - Slovakia Gas market organization Co-operation between transmission system operators of neighboring states for coordinated dispatch and cross-border capacities Use of alternative fuels and enhancement of energy efficiency According to the theory of strategic management, an assessment of a possibility of success of the strategic options should be the next step after the identification of the strategic options. The success criteria are: suitability, feasibility and acceptability. I will concentrate on suitability.

15 Suitability assesses a strategic position - whether a strategy addresses the circumstances in which an organization (Slovakia) is operating. It requires a broad assessment of the extent to which new strategies would fit with the future trends and changes in the European environment. It also examines the exploitation of the resources and competences of Slovakia and fulfilling of the expectations of the Slovak citizens. It is a relative suitability of options that matters. There might be some available options that are more or less suitable. There are two methods that can help to understand better the relative suitability of different strategic options: Ranking of the strategic options against a set of key strategic factors (see Table No.5) Decision trees that also assess the strategic options against a list of key factors. Preferred options emerge by progressively introduced requirements that must be met, such as growth, investment and diversification (see fig. No.7). Fig. 7

16 Table No. 5 RANKING OF STRATEGIC OPTIONS K e y s t r a t e g i c f a c t o r s Strategic options Problems with Russian natural gas sources Own consumption of natural gas will increase Natural gas price will increase Common European Gas Market will not established Strategic position of Slovakia will weaken Ranking 1. Diversification of gas sources? A 2. Diversification of Russian transport lines?? X A/B 3. Building of new storage capacities?? A 4. Gas market organization??? B 5. Long-term contracts?? A 6. Building of LNG terminals & interconnections? A 7. Cooperation between TSOs and cross border capacities??? B 8. Use of alternative fuels and enhancement of energy efficiency??? B 9. Doing nothing X X?? X C = favorable x = unfavorable? = uncertain or irrelevant A = most suitable B = suitable C = unsuitable Table No.5 shows that the strategic options 1, 3, 5 and 6 have the largest impact on the enhancing of the security of the gas supply for Slovakia and the Central Europe. Their realization would thus bring a significant contribution. Therefore, I deal with these strategic options in more detail in the next chapters.

17 CONCLUSIONS AND RECOMMENDATIONS As I have mentioned before security of supply is a multi-dimensional phenomenon with a lot of different aspects. Hence it follows there does not exist sole or single solution. The balance of various instruments is essential to enhancing the security of gas supply. According to assessment report of Directive 2004/67/EC on security of gas supply the most frequent measures are gas storage, long term contracts, flexibility of production and imports and diversifications of gas supply. Now it is a time to come back to the question stated in the introduction: What should Slovakia do in order to improve its natural gas supply portfolio and increase the security of supply? The outlined scenarios and the evaluation of the strategic options show that Slovakia cannot wait and rely on an accidental favorable development. The described pessimistic scenarios actually offer rather gloomy future. The January gas crisis that left Slovakia for several days without the Russian gas for the first time in its history has underlined the necessity of concentration on more flexible, effective and faster solutions to increase the energy security. Slovakia is not able to markedly influence financially and time demanding extensive gas industry projects with its economic and political power. In this chapter I tried to formulate a concise and clear statement concerning the strategy that should be implemented by the Slovak government. Therefore, it is convenient to divide the recommendations resulting from this thesis in accordance with dimensions of the security of gas supply into operational SoS, long-term SoS and strategic SoS relating to ability to deal with a crisis. Operational SoS recommendation 1. Slovakia shouldn t resign from the development of the new underground storage facilities /UGS/. January crisis showed the higher are the commercial gas stocks in a state the less necessary are or will be used the strategic gas stocks. The state should not make direct investments however, it should support private investors. But to stimulate investment in new commercial gas storage, an appropriate regulatory framework needs to be implemented. Access to storage should be unregulated to encourage competition. Insufficient seasonal storage may lead to temporary gas shortages, high gas price volatility and a larger exposure to security of supply risks. Having sufficient seasonal storage facilities would put Europe in a better position for ensuring the supplies from outside the Europe. Namely, Slovaks can use the own deposit structures or co-operate on the international basis with Austria and the Czech Republic in the locality of the Viennese basin. The SoS level will increase not only in these countries but also in the whole Europe.

18 2. It is necessary to pay systematic attention to the legislative and organizational measures for further opening of the gas market. The free and competitive market is the best way for ensuring the reliable natural gas supply. The possibilities of the establishment of a gas trade-logistic centre HUB in Veľké Kapušany should be also examined. Long term SoS recommendations 1. The Slovak natural gas consumption with respect to the diversification projects is relatively low. The simplest and cheapest solution is the conclusion of the longterm contracts with the existing suppliers at reasonable prices. This strategic option has been applied by the Slovak Republic. Incumbent trader SPP, a.s. concluded 20-year contract with Gazpromexport in November 2008, 10-year contract for gas supply with E.ON Ruhrgas in June 2009 and the contract with GdF SUEZ is under preparation. All these steps have been taken in a right way and they demonstrate that Slovakia has learnt from the January gas crisis. This strategic option is the last resort if the other options are not completely or partially realized. The long term contracts shall be taken as a tool to guarantee that certain amount of gas will come to the market. In a world of tight supply/demand tension long term supply contracts in the sense of the Directive 2004/67/EC grant guaranteed volumes of gas with a predictable price calculation method, with less risk of volatility. 2. However, Slovakia shouldn t resign from the diversification projects. Strategic option doing nothing in the ranking of the strategic options has a very unfavorable ranking and the scenarios confirm that risks of waiting are too high. The question is in which way Slovakia could join in realization of such project. The Slovak state holds a 51% share in the SPP a.s. (Slovak incumbent) and roughly 30% share in the Nafta a.s. (Slovak system storage operator). Neither SPP nor Nafta are involved in Nabucco or the LNG projects. However, both could benefit from their implementation. For example, SPP could be prepared to support one or more of these projects by signing a long-term take or pay gas purchase agreement that would support the external debt financing. Even though now after having signed the long-term contracts with Gazpromexport and E.ON Ruhrgas, it is harder imaginable. Another possibility is to think about the possibility the UGS project by Nafta as an integral part of the North-South gas pipeline project or the Nabucco project. However, Slovakia should enter or invest in such project after having taken the supply arrangements under acceptable conditions. Simultaneously, we have to have in remembrance the natural gas prices from

19 3. Diversified localities can be higher than current gas prices in Slovakia. Even if the gas company with majority state interest didn`t directly join the consortium Nabucco, the negotiations in the EU structures related to its construction should be supported by Slovakia as a matter of principle. It does not only mean the act of solidarity but also responsibility for own safety of energy. 4. Diversification of the supplies by import of the Norwegian natural gas despite the higher purchase price. 5. Focusing more on reducing the energy use may be more cost efficient for the EU and also for Slovakia than focusing on developing and promoting alternative and renewable energy sources. Strategic SoS recommendations 1. Construction of the North South interconnection pipelines. The problem during the January gas crisis was not that there wasn`t enough gas to go round but that the gas could not get to where it was most needed. In case of Slovakia construction of the North-South interconnection pipelines stands in good stead: Interconnector with Poland would enable the connection to the Yamal gas pipeline and later to the LNG terminal at the Baltic Sea. Interconnector with Hungary would enable the connection to the Hungarian gas industry network with the underground storage facilities of the capacity of 3.5bcm and later to the LNG terminal at the Adriatic Sea. 2. Strategic gas stocks are normally owned and/or controlled by governments, with the aim of protecting consumers against non-market risk. Commercial parties normally do not cater for such event, unless they have an obligation by law. We have to take into account that natural gas is more difficult and expensive to store than other hydrocarbons: Information available on gas storage facilities currently under construction suggest the initial capital cost of building UGS is between five to seven times the costs of underground oil storage facilities per tons of oil equivalent (toe) stored (IEA, 2008). The state has its majority ownership participation in the decisive gas industry companies in Slovakia. Hence, when the European Commission currently proposes 60-day safety standard for captive consumers, the following solution would be topical for Slovakia: to build new UGS for foreign commercial use but also to reserve part of it as strategic gas stocks held by the Slovak government. This solution is advantageous simultaneously in order to obtain economies of scale.

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