Black Sea gas deposits – an overlooked reason for Russia’s occupation of Crimea

A ship patrols the Russian oil rig in the Black Sea. Photo: Newstes 

Crimea, Featured

Article by: Kostiantyn Yanchenko

The Ukrainian patrol ship “Hryhoriy Kuropiatnykov” slowly leaves the port of Odesa. Aboard the vessel, there are more people than usual: military prosecutors, representatives of the Ukrainian oil and gas sector, and an assault group of the security service – in case things get out of hand. All of them went to sea to document how Russia, in violation of international norms, exploits two Ukrainian drilling rigs. The modern Singapore-made equipment was purchased by Ukraine in 2011 and appropriated by Russia during the annexation of the Crimea.

“Now Russia steals Ukrainian gas using stolen Ukrainian platforms and sells it to the stolen Ukrainian peninsula,” describes the situation Ukrainian journalist Andriy Tsapliyenko, who is also on board. After some 80 km from the mainland, the ship’s detectors notice one of the rigs. It’s visible that the platform is in operation, devastating the Odesa gas field of 22 billion cubic meters (bcm). On the one hand, this is quite a bit. But, let’s say, for Denmark, these stocks would be enough for about 15 years. Right after the Ukrainian ship starts approaching, all the lighting on the platforms goes out…

The Black Sea oil rigs purchased by Ukraine in 2011. Photo: Ukrinform.ua

Meanwhile, to the south from here, on the deep-water shelf, riches of quite a different scale are waiting for their time. As of 2012, the State Service of Geology and Mineral Resources of Ukraine estimated the potential energy deposits in Ukrainian sector of the Black Sea at the level of 2.3 trillion cubic meters (tcm) in gas equivalent. This is about 40% of all Ukrainian energy resources – an amount sufficient to satisfy the country’s own consumption and take a certain share on the European market, where Russian exports traditionally predominate. However, when in 2014, two-thirds of the former Ukrainian water area passed to Russia with the occupation of Crimea, only a few experts assumed that the struggle for control over energy resources might have been among the main reasons for annexation. Against the background of Moscow’s famous explanation “Why Crimea? Be[cause]Kosovo!”, this version looked unconvincing, but there are many reasons to give it a second glance.

The excitement around the Black Sea began in 2012 when the first major gas field was discovered in the Romanian sector. The gas came from a well, later called “Domino 1,” after just a few weeks of exploration. According to the smallest estimate, the deposit contains 100 bcm of gas.

Ownership of the Black Sea deep shelf before and after the annexation of the Crimea. Source: Lamont-Doherty Earth Observatory of Columbian University

Mykhailo Honchar, President of the Ukrainian Center for Global Studies “Strategy XXI,” believes that the find in Romania almost surely guaranteed success for Ukraine:

“The Romanian and Ukrainian marine sectors border each other, but the gas-bearing province beneath the seabed does not recognize the above-water boundaries. So, if the well gave gas in the Romanian sector, it is most likely to be several kilometers from there as well.”

At the beginning, Russia did not express concern about the sudden Black Sea activity. “Like, what could those khokhly (pejorative name for Ukrainians – author) ever achieve?!”, Honchar scoffs. The situation changed when a consortium of Western energy giants became interested in investments.

In August 2012, ExxonMobil, Shell, and OMV won a tender for the exploration of the Ukrainian deep-water deposit “Skifske.” During the next two years, a number of other unprecedented treaties were signed. The British-Dutch Shell and American Chevron planned to take over two separate onshore gas provinces while Italian Eni was to lead the work on the Black Sea shallow-water block. The most promising of these four mega projects was the “Skifske” deposit with an exploitation period of up to 50 years. The Production Sharing Agreement (PSA) regarding “Skifske” was scheduled to be signed on February 2014. But in November 2013, a sudden political crisis hit Ukraine and in March 2014, Putin seized the Crimea. The Western corporations left. Their official explanation was “force majeure.”

Source: NaftoGaz of Ukraine

When the annexation happened, many experts questioned how serious the intentions of the Western companies really were. Four years later, the example of Romania shows that, if not for Russian aggression, there would be no reasons for skepticism. Eugenia Gusilov, director of the think-tank Romanian Energy Center, claims that despite the worldwide decline in gas prices, the Western companies are still interested in “Domino-1.” Thus, ExxonMobil conducted a detailed exploration of the sector around the well including the collection of unique seismic data necessary for future production. In 2017, Romania created a specific offshore authority while in February 2018, the Senate adopted a necessary legal frame concerning offshore operations. The Final Investment Decision (FDI) is scheduled for autumn 2018. In case of a positive result, Romania will be able to sell gas to such neighboring countries as Hungary, Bulgaria, or Ukraine, which are all interested in diversifying their energy imports.

So, if not for the occupation of the Crimea, Ukraine had every chance of being at the same stage as Romania now. And by the end of 2013, this scenario might have been already disturbing Russia.

“It was high time for Putin to act. Otherwise, Western corporations would have invested real money, and then the US would not have given up Crimea so simply. At a minimum, ExxonMobil could push the US government to protect its interests more harshly,” Honchar reasons.

And even though Putin’s spokesman Dmitry Peskov said that oil and gas in the Black Sea “did not bother Russia at all,” in practice, Russia seems to be interested even in 22 bcm of gas from the Odesa deposit.

A soldier of the 104th regiment of the 76th Division of the Russian Airborne Forces on one of the stolen Ukrainian drill rigs. Source: Inform Napalm

“Bison, I am Plasma, the fighters should keep low! Repeating: the fighters should keep low!”

From this radio intercept, it became clear that the drilling platform is guarded by armed men. This is not surprising, since by using a stolen rig in the exclusive economic zone of Ukraine, Russia committed an act of international aggression. This is not even the water area which Russia claims after the annexation of Crimea. It’s just Ukrainian waters – the Crimean coast is more than 180 km from here. Keeping in a safe distance from the platform, the Ukrainian ship makes an attempt to establish contact with the rig. Among the dispatching group, there is an artillery commander Oleksandr Kygliuk. In March 2014, his detachment of naval defense in the Crimea surrendered to the Russian troops. Many of his former comrades have betrayed the military oath. It is possible that right now, some of them are looking at Oleksandr through the sniper scope.

I am “Wil got-50,” over, over!

The Ukrainian ship tries again to make a connection with the platform. But instead of an answer, one more ship appears on the horizon. This is a Russian military vessel with missile weapons on the board. It quickly moves right towards “Hryhoriy Kuropiatnykov”…

If Russia is ready to defend its right to steal minor resources of another country so aggressively, how far could Putin have gone to preserve Russia’s energy hegemony in Europe? When one puts the question that way, the annexation of the Crimea no longer seems such a big price. The naysayers often argue that Russia doesn’t have the technology to extract gas on the deep-water shelf. This is true, at least now. However, as researchers note, Russia’s short-term objective was not to benefit from the Black Sea gas but to block its production by the Western companies and hence secure own positions in the European market. And the figures are in step with this view.

The dependence of the Russian economy on energy resources did not decrease even after the introduction of sanctions which aimed, among other things, to hit its energy sector. In 2017, the share of oil and gas revenues in the federal budget of Russia accounted for 40%, while the average share of energy in its export structure during 2012-2015 was 67.4%.

This means that for Russia, such important indicators as GDP growth directly depend on prices and demand for energy resources. Therefore, the option in which Ukraine, with the support of Western companies, takes a part of the European market from Russia, is more than a minor nuisance for the Russian political elite.

Furthermore, Russia largely relies on an energy leverage in international relations.

Thus, “The Energy Strategy of Russian Federation Until 2020” starts with the statement: “Russia has significant reserves of energy resources and a powerful fuel and energy complex, which is the basis for economic development, an instrument for domestic and foreign policy (italics are the author’s).” Since the adoption of this document by the Russian government in 2003, the Kremlin has been engaged in the so-called “pipeline-wars” with Belarus (2004), Georgia and Lithuania (2006), Turkmenistan (2009), Ukraine (since 2005 up to now with the short breaks), etc. The essence of most of these conflicts was negotiations about the gas prices or debts restructuring, but the solutions usually lay in the plane of politics, not economics.

For example, it is no secret that the decision of Ukrainian president Yanukovych to extend the stay of the Russian Navy in the Crimea in 2010 was made in exchange for gas discounts.

And this is just one of numerous cases.

One of the modern Ukrainian drilling rigs stolen by Russia during the annexation of the Crimea. Source: Krym.Realii

Together the economic and political importance of gas and oil for Russia leads to its need to maintain an energy hegemony in Europe. The former head of the Main Directorate of International Cooperation of the Russian Ministry of Defense, Colonel-General Leonid Ivashov shows how vital this need is on the example of Syria:

“If Russia did not enter it [Syria – author] and would not have preserved the regime of Bashar al-Assad, then today the very question of the survival of the Russian budget would be very acute, because there are three gas pipes fighting there…”

It is likely that speaking of the three gas pipes, the general had in mind the promising gas flows from Iran, Qatar, and Iraqi Kurdistan that at different times and in different circumstances could enter the EU market through Syria.

So, when gas and oil are not just resources but strategic assets, any competitive projects cause extreme dissatisfaction. Especially if the threat looms right under your nose, which was the case with the projects on the Black Sea – a zone which the Russian elites have always considered to be their regional ownership. In his “Crimean speech,” Putin stated unambiguously:

“I simply cannot imagine that we would travel to Sevastopol to visit NATO sailors. Of course, most of them are wonderful guys, but it would be better to have them come and visit us (the Black Sea Fleet of Russia – author), be our guests, rather than the other way round.”

This eloquent quote is a general formula showing Putin’s view on the Crimea. One may put American ExxonMobil instead of NATO and Russian Lukoil instead of the Black Sea Fleet, but the message will remain the same: Crimea is a zone of Russian interests, and this fact must be respected.

Piping for the Baku-Tbilisi-Ceyhan pipeline section in Azerbaijan. Source: CEE Bankwatch Network

However, the former Extraordinary and Plenipotentiary Ambassador to the Republic of Georgia in Russia Valery Chechelashvili believes that in fact, when it comes to the big international projects, Russia’s potential to disrupt anything with the means of diplomacy is very low. Chechelashvili gives the Georgian examples: Supsa (1999), Baku-Tbilisi Ceyhan (2005), South Caucasus Pipeline (2006). All those energy initiatives were heavily opposed by Russia, but hardly with any success. Now, they are all operational and evolving.

“Putin hates the situation when some oil or gas can reach the European market bypassing Russia. In our case, it was mainly Caspian Sea resources moving through Georgia to Europe. First, Russia tried to intimidate the Georgian government. Then, they shifted to motivating, trying to present all the benefits from a partnership with the Kremlin. After that, they attempted to persuade the West that Georgia is a failed-state and too unsafe for a transit role. But all this did not work and I think that Russia finally realized it doesn’t have the capacity to block these types of strategic projects,” Chechelashvili recalls.

Tracey German, a Research Manager at the World Markets Research Centre, continues after Chechelashvili, claiming that when diplomatic means were exhausted in Georgia, Russia began to defend its interests more brutally. In one of her articles, Tracey German argues:

“The military conflict between Georgia and Russia in August 2008 (…) was merely the latest Russian attempt to (…) prevent the development of further pipelines outside of its control. Moscow successfully demonstrated the vulnerability of the Southern Energy Corridor and its ability to exert its dominance in the region if it so wishes.”

Two post-Soviet countries, two sets of promising energy projects disfavoring the Kremlin, two examples of Western interest and support, and two cases of Russian aggression. Isn’t this too much for just a coincidence?

This time, the Ukrainian ship manages to avoid an armed clash with the Russian side. Oleksandr and other people aboard are left with nothing but to document all the violations and return to the mainland. They are leaving the Odesa gas deposit just as Ukraine had to leave the Crimea together with the historical chance to fuel the Black Sea.

The reconstructed scenes in italics are based on the video reportage by Andriy Tsaplienko (1+1 TV-channel)

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