Published Jan 6 2009 by Energy Bulletin
Archived Jan 6 2009

Gazprom-Ukraine flare up

by Staff

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The battle of the oligarchs behind the gas dispute

Jérôme Guillet and John Evans, Financial Times
A monolithic, Putin-led Kremlin using the “energy weapon” to browbeat neighbouring Ukraine and beyond threaten the rest of Europe with natural gas shortages: the image has become a commonplace during the “gas spats” of the past few years. Yet those spats have a longer history than is generally appreciated – they began in 1992 – and, what is more, Vladimir Putin and Gazprom cannot win a prolonged gas war, and they know it.

The Soviet gas industry was born in Ukraine in the 1930s and the infrastructure was built from there. Ukraine remained a central part of the gas pipeline network even as the focus of activity moved to western Siberia. Carving up the Soviet Union along along the borders of its former republics made for an often unworkable allocation of physical assets. Vital assets for Gazprom, the Russian gas monopoly, are located in Ukraine and thus no longer under its direct control: the pipelines are an obvious item, but, just as significantly, Ukraine controls most of the storage capacity of the Russian export system. On the other hand, Ukraine, a heavy industry country, has mostly depleted its gas reserves, making it dependent on gas from Siberia.

So this is a situation of mutual dependence. Russia needs Ukrainian infrastructure to honour its export contracts to Europe, and Ukraine needs Russian gas. In case of conflict, withholding gas (from Russia’s side) or shutting down export infrastructure (from Ukraine’s) are tempting options, which have been taken up repeatedly since the demise of the Soviet Union.

Ukraine used to get its gas allocation from Soviet planners and continued to expect the same after independence. When Russia first tried to get payment for its deliveries in the early 1990s, it failed. When it first cut off gas to Ukraine to enforce payments, Ukraine simply tapped the gas sent for export purposes; when European buyers howled, Russia relented and restored gas supplies without having managed to get paid by Ukraine. This has gone on. Yet somehow the gas continues to flow every year.

Russia cannot cut off Ukraine for any lengthy period of time, because that endangers its exports. In practice, giving roughly 20 per cent of its gas shipments to Ukraine as payment for transit is an acceptable deal for both sides. So why the annual charade?
(6 January 2009)
Jérôme Guillet is a regular contributor to Energy Bulletin, The Oil Drum and Daily Kos.

Also posted on European Tribune, with links to a longer version and earier articles on the topic. Also and crossposted on Daily Kos. -BA

Europe begins to feel gas pipeline pinch

Fred Weir, Christian Science Monitor
Thermometers are plunging across Europe, and so is the pressure in the natural-gas pipelines connecting the continent with its key supplier, Russia.

But no one is pushing the panic button yet. The five-day-old gas war between Moscow and Kiev appears worse than in past years, aggravated by Ukraine's deepening financial and political crises and Russia's urgent need to refloat its floundering state budget by raising gas prices. Europe, watching closely, has sufficient gas reserves to see it through any short-term crisis and has officially declined to take sides.

The increasingly acerbic dispute, which has seen Russia's state gas monopoly Gazprom accuse its Ukrainian counterpart of "stealing" gas and acting to damage the pipeline that transports 80 percent of Russia's gas exports to Europe, may be doing permanent harm to Moscow's relations with its most important ex-Soviet neighbor. It has also reignited a European debate about how to secure energy supplies amid deepening instability in the resource-rich former Soviet lands to the east.
(6 January 2009)

Ukraine will end up paying more – but it needs to wean itself off Russian gas soon

Tomas Valasek, Guardian
... So the way to avoid future crises lies with Ukraine. The country needs to wean itself off its dependence on cheap Russian gas. First, it should reduce overall gas consumption. The Ukrainians consume twice the amount of gas per capita that neighbouring Poland does (according to BP statistics). This is partly due to the fact that the economy is driven by energy-intensive steel production. But inefficiency is the key factor. Ukraine needs to upgrade its industries and housing stock to consume less energy. This would lessen the impact of higher gas prices on Ukrainian economy.

As it grows accustomed to paying European prices for gas, Ukraine should also demand a multi-year supply agreement from Russia. The new contract should spell out how much gas prices will rise each year until they reach European levels.
(6 January 2009)

It's time to see through Gazprom

Roger Boyes, London Times
The bust-up between Russia and Ukraine that threatens to gum up the gas supplies of much of southern and Eastern Europe hardly comes as a surprise. It is almost part of the New Year ritual and somehow – perhaps Kremlin meteorologists are in on the plot – always seems to strike during a cold spell. Across the continent, radiators run cold.

So why hasn’t the European Union devised some kind of strategy by now to deal with the threat? Years of talk about energy security have generated nothing but hot air.

The fundamental problem is that the west Europeans, and in particular the Germans, have bought into the myth that Gazprom is a normal commercial concern struggling to succeed in the marketplace.

The European Commission pretends that it is behaving in an even-handed way in the row between Kiev and Moscow. Scratch the skin of a Euro-bureaucrat however and you see soon enough that Brussels is in sympathy with the Gazprom line. Ukraine, you will hear, is chaotically governed, is not a reliable friend to the EU; a gas-thief, no less.
(6 January 2009)

Gazprom's Tactics Harsh But Its Logic Sound

Vidya Ram, Forbes
The Russian gas goliath's argument that the price it charges Ukraine must rise is a valid one, based on its own costs.

... Moscow's heavy-handed tactics and its timing--coinciding with temperatures plummeting below minus 10 degrees Celsius (18 Fahrenheit) in many parts of the European mainland--will not do any favors for the Russian bear's international image. Still, Gazprom does seem to have a point when it comes to raising gas prices.
(6 January 2009)