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Russia-Ukraine gas dispute: yet another prod for Europe.

On March 9, 2008 Gazprom cut natural gas supplies to Ukraine by 35%. The Ukraine pipeline network plays a pivotal role in ensuring supply of natural gas from Russia and Central Asia to the Central and Eastern European countries. The pipelines through Ukraine have an enormous influence on the eventual supply to Western Europe as Ukraine pipelines have a capacity of 120 Bcm/year.

Russia accounts for 62.7% of European imports through the pipeline corridors of Belarus and Ukraine. The dispute was resolved in four days and did not immediately affect Austria, Bulgaria, Serbia, and Slovenia. But the dispute once again brings into focus the energy policies of the European Union and Russia and the enormous influence exerted by Gazprom in Europe.

The squabble over the gas tariff rate between Ukraine and Russia has dragged on for three years. The latest dispute on March 9 led Gazprom to cut down gas supplies through pipelines to Ukraine resulting in a drop of 46 MMcf/d. Gazprom said the reason for the cut was nonpayment of tariffs amounting to $600 million from 2007. On March 13, 2008 Gazprom and Ukraine agreed grudgingly to a gas tariff rate for the remainder of 2008. However, both countries are well aware that this is a stopgap deal that has still not resolved the contentious issue of long-term gas pricing and the presence of brokering companies.

RosUkrEnergo, a company owned by Gazprom, exports gas to UkrGazEnergo, a Ukraine company which is jointly owned by Naftogaz and RosUkrEnergo. UkrGazEnergo then supplies the gas to Naftogaz Ukrainy. The government of Ukraine says the arrangement of "middleman" companies--UkrGazEnergo and UkrGazEnergo--is to swindle gas. The new agreement attempts to eliminate "middleman" companies and future negotiations on tariffs are expected only between Gazprom and Ukraine's state energy firm, NJSC Naftogaz Ukrainy.

The supply cuts were essentially the volumes intended for domestic use in Ukraine. Despite this, the cutbacks unsettled several Central and Eastern European countries. Slovakia, Bulgaria, Lithuania, Greece and Austria import more than 75% of the gas they consume from Russia through the Ukraine pipeline system. The events of the first fortnight of March are yet another reminder that Russia exerts an enormous influence on gas supplies to Europe.

[FIGURE 1 OMITTED]

Gazprom And The Impetus For Europe To Diversify

The gas to Europe is delivered from Russia and Central Asia through transit countries Belarus and Ukraine. Russia has a divergent relation with its neighboring countries. It supplies natural gas to Belarus, a political ally, at a subsidized rate of $100 per 1,000 cubic meters, whereas the pro-western Ukraine is supplied gas fetched from Central Asian Republics at a rate of $135 per 1,000 cubic meters.

The pipelines through Ukraine have a greater influence on the eventual supply to Western Europe as Ukraine pipelines have a capacity of 120 Bcm/y compared to 30 Bcm/y capacity of Belarus natural gas pipelines. Approximately 38.5% of gas supplies in Europe were imported from outside the region. Russia accounts for 62.7% of European imports through the pipeline corridors of Belarus and Ukraine.

During the last decade, Gazprom has acquired a strong market presence in Europe. The concern for the European Union (EU) is to balance Gazprom's market position and their requirement to secure gas at reasonable prices. While Russia and Ukraine were settling the dispute, Russia also agreed to a new gas deal with Kazakhstan, Turkmenistan and Uzbekistan. Under the new gas deal, the Central Asian countries would sell their gas at significantly higher "European prices" beginning in 2009.

On the heels of this deal, Gazprom Chief Alexei Miller said the average gas price for European countries could hit $400 per 1,000 cubic meters by the end of 2008. This is an ominous number, considering that Europe will import 79% of its gas for domestic consumption through the pipeline network in Belarus and Ukraine.

Figure 1 shows the gas pipeline network in Belarus and Ukraine. The figure also shows the three major planned gas pipeline projects--Nord Stream, South Stream, and Nabucco Gas Pipeline.

Division Causes Weakness

The EU should attempt to solve its import dependency on Russia by formulating a unifying policy. The lack of harmonious policy is an impediment to identifying and diversifying upstream sources and import pipeline routes. The European Union and the countries which constitute the EU have acted tangentially to each other in their quest to ensure energy security.

The EU, in an attempt to consciously avoid Russia and Gazprom, has made several overtures to Turkmenistan and Azerbaijan to secure its gas directly through Turkey. Meanwhile in 2007, EU members Bulgaria, France, Hungary, and Italy struck private partnerships with Gazprom.

The planned Nabucco Gas Pipeline is a fine example of failure of the EU. The gas project has been repeatedly stalled because of doubts over upstream gas source and non-cooperative transit countries.

Gazprom Continues To Dictate Gas Price

Gazprom's energy strategy revolves around making Europe more dependent on Russian gas. The regular disputes have led Russia to chalk out plans to avoid Ukraine territory to reach the European market. Ukraine sells Russian gas to Western Europe at the market price. Russia has planned the Nord Stream pipeline through the Baltic Sea to Germany and the South Stream pipeline via the Black Sea to Southern Europe.

The strategy includes consolidating supply of gas by signing long-term contracts with Central Asian republics and securing equity stakes in key infrastructure in Central and Eastern Europe. The deals with Central Asian countries are mainly to offset the dwindling gas reserves in Russia. Gazprom hasn't opened a new gas field since 1991 and the active fields produce only 550 Bcm, which is enough to satisfy domestic needs. Turkmenistan has pledged its entire gas production to Russia at $100 per 1,000 cubic meter while Gazprom's subsidiary in Uzbekistan has been given 35 years exploration and production rights.

Russia has also created an OPEC-style gas cartel by forming the Shanghai Cooperation Organization. The EU's failure in keeping together its members was a loophole well exploited by Russia. Russia negotiates only long-term bilateral contracts so that the gas price is discriminated according to the nation in the deal. The solution for Europe lies in diversifying its suppliers and looking at the Middle East and North Africa as options.

Conclusion

The gas tariff dispute between Ukraine and Russia has yet again brought to the forefront the issues of natural gas pricing and energy security of Europe. The European Union and Russia have been dependent on Ukraine as a transit country for piped natural gas. The EU is dependent on the pipeline network in Ukraine which brings Russian gas to Central and Eastern European nations.

Russia has clearly been displeased with Ukraine as it sells the Russian gas to Europe at market rate and makes a profit from its gas. The gas disputes between Ukraine and Russia have resulted in increased consolidation of key infrastructure by Gazprom and planning of alternate sources and transport routes by the EU.

Sundhar Parthasarathy is an Analyst with Global Energy, DM Ventures India. He has a master's degree in Atmospheric Sciences and his research areas include Midstream Energy and Energy Geopolitics. He can be reached at sparthasarathy@dmventures.net.
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Author:Parthasarathy, Sundhar
Publication:Pipeline & Gas Journal
Date:Jul 1, 2008
Words:1204
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