Seminar on 'The EU, energy security and Russia'

19 May 2008

With Alexandr Vondra, Czech Republic’s deputy prime minister for European affairs.

Location info

London

Pipe down, price up

06 January 2009
From The Guardian

External Author(s)

Tomas Valasek

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Just another gas crisis?

Written by Katinka Barysch, 07 January 2009

by Katinka Barysch

Russia has cut off the gas flowing to and through Ukraine – again. Like in January 2006, Moscow and Kyiv are blaming each other, while a convoluted mix of political intrigues, shady middlemen and broken contracts makes it almost impossible for outsiders to ascertain which side is at fault. But the current interruption in gas supplies to Europe is different in many ways from that three years ago.

First, the interruption is more severe but some EU countries appear to be better prepared. In January 2006, when Gazprom first turned off the tap over a pricing dispute with Kyiv, the volumes affected were much smaller. On January 7th 2009, Russian gas supplies through Ukraine (which account for over 80 per cent of all Russian gas sales to Europe) stopped altogether. The bigger EU countries, such as Germany, Italy and France, have plenty of gas in storage and they can use more Norwegian or Algerian or domestic gas instead. However, some of the newer member-states are not so lucky. Bulgaria, Slovakia, Hungary and Poland, with little storage or access to alternative suppliers will have to ration gas. A spike in energy prices is the last thing Europe’s struggling industries need at the moment. Calls for European ‘energy solidarity’ will suddenly acquire a new meaning.

Second, the political dynamics are very different. In 2006, when memories of the orange revolution were still rather fresh, many Europeans were quick to blame Russia for using energy to punish pro-western Ukraine. Now Ukraine’s squabbling, self-serving leaders attract little sympathy. The fact that Ukraine does not have a functioning government mattered less as long as its economy was doing well. But now it has become one of the main obstacles to resolving the crisis.

Russia has considerably beefed up its PR efforts, having warned of potential supply cuts weeks ago (and blaming the Ukrainians in advance). But the fact that some smart people speculate whether Russia has deliberately caused the gas crisis to destabilise Ukrainian politics or to push up global energy prices shows just how little credibility the country has, especially after the Georgia war. Both Moscow and Kyiv had reassured the Europeans numerous times that gas transit to the EU would not be affected. Now half of Europe is living of its own gas storage or switching to fuel oil. Gazprom’s mantra that it, really is, a reliable supplier sounds hollow. But so does Ukraine’s claim to be the innocent victim of neo-imperialist policies.

Third, the stakes for both Ukraine and Russia are a lot higher. In 2006, Ukraine’s economy grew by more than 7 per cent despite higher gas prices, as exports of steel and chemicals boomed. At the end of 2008, Ukraine’s economy was in meltdown, with industrial production down 30 per cent year on year in November. The Ukrainian currency has plummeted 40 per cent against the dollar since September. So paying for imports – including energy – would be a lot harder even if gas prices stayed the same. The IMF, which has pledged $16 billion to shore up the Ukrainian economy, will demand that the government phase out energy subsidies to keep the budget deficit under control. That means that more of any gas price increase will have to be passed on to households. With inflation already running at 20 per cent and presidential elections coming up next year, Ukraine simply cannot afford a rise to $450 per 1,000 cubic metres, as requested by Gazprom after the negotiations broke down.

Russia is also in a very different position. Its external surplus and reserves are dwindling. Gazprom, like most Russian companies, is seriously short of cash. Ukraine buys more than 40 billion cubic metres of gas from Russia a year, which makes it one of Gazprom’s bigger customers. So the price of these sales does matter for Russia. However, the costs of a sustained interruption of gas flows would be immeasurably higher. Not only because Gazprom could face an avalanche of law suits from European companies if supply contracts were breached, but also because Gazprom could lose its standing in its biggest and most lucrative market. That is already happening.

The final, and perhaps most important, difference between the 2006 and today is that Europe is more likely to draw the right conclusions. After the 2006 cut-off, the Europeans panicked – and then the EU proceeded to lecture Russia on how to run its energy sector and export business while individual EU countries rushed to sign long-term bilateral agreements with Gazprom to secure their own supplies. This did not work. Today, the Europeans will (hopefully) focus on what they can do together to increase their energy security: build a functioning internal gas market, invest more in gas storage and focus on alternative sources of gas, for example from the Caspian via Nabucco and in the form of LNG from Northern Africa and the Middle East. They also need to reinforce their efforts to achieve their 20 per cent energy savings target and explore alternative sources of power, namely renewables and nuclear. If the gas standoff reminds the Europeans of the importance of such measures, Russia and Ukraine will have done the EU a favour.

Download the CER’s book ‘Pipelines, politics and power: The future of EU-Russia energy relations’ for free http://www.cer.org.uk/pdf/rp_851.pdf

Katinka Barysch is deputy director of the Centre for European Reform.

Comments

Added on 24 Feb 2009 at 22:24 by Федоренко

A new price on Russian gas for Ukraine is about $230 for thousand cubic meters. Nobody will say more precisely today. A word «about» is a new know-how of the Ukrainian government, that hides the unwillingness of Julia Volodimirivna to acknowledge that she handed us to Russia.

During the first four months we will pay $360 for gas. And that is exactly twice as high, than paid until now. And Timoshenko’s «about» means a kind of an average annual price. Such a convinient gap : nobody knows its size, so no one will notice, someone will grab a piece of pie from there.
http://ua-ru-news.blogspot.com/2009/01/new-price-on-russian-gas.html</A>

Added on 16 Jan 2009 at 18:24 by mls gta

Thank you for interesting article! I have some friends in Central Europe so I am pretty concerned about this topic. As far I know, some countries are able to use some temporary solutions, like gas swaps and storage in Germany, but still, thousands are freezing in their homes. we are really lucky here to have some own resources....
Best wishes and warm winter!
Julie, Toronto

Added on 11 Jan 2009 at 14:46 by Michel

Dear Katinka,

Thanks for this thorough assessment!
Who do you think is benefiting from the opaque deal with Rosukrenergo besides Mr. Firtash and Mr. Fursin?
Was this set up from Ukrainian side or from Russian side or from both?
Thanks in advance.

Michel Kleistra

After the gas conflict

Written by Katinka Barysch, 23 January 2009

by Katinka Barysch

On January 20th, Russian gas started flowing again through Ukraine, after a two-week shut-down that had left people in South East Europe freezing and factories idle. The relief across Europe was palpable but the confusion about what happened is still there.

First, both Russia and Ukraine said that the dispute was about money that Naftogaz, the Ukrainian gas company, owed to Russia’s monopoly Gazprom for last year’s deliveries. Then it was about the price the Ukrainians should pay in 2009 for the Russian (or Turkmen) gas that it uses domestically. Then Ukraine tore up a contract about gas transport to Europe and threw transit fees into the negotiations too. If this was not complicated enough, the dispute then centred on ‘technical’ gas that is needed to keep up volumes in Ukraine’s pipelines. When a handful of European gas companies offered to buy this technical gas in order to get things moving again, the Russians said that this wasn’t really the problem. At one point, Russia claimed that it was sending gas to Ukraine but Ukraine refused to accept it. Ukraine said the gas was coming down the wrong pipe and could only be delivered to Europe if it shut off supplies to Ukrainian factories and households. A group of observers cobbled together by the EU to find out whether gas was actually flowing from Russia to Ukraine never got down to work. The role of RosUkrEnergo, the lucrative trading company at the heart of the Russian-Ukrainian gas deliveries was, as always, unclear. Add the frosty political climate between an angry and increasingly desperate Russia and a divided and even more desperate Ukraine, and the situation is almost impossible for outsiders to understand.

Rumours and conspiracy theories proliferated. PR efforts were ramped up. Insults flew. Various ‘insiders’ offered diametrically opposed accounts of what was happening. The overall impression was that neither the Russians nor the Ukrainians wanted the EU to understand what the stand-off was about. If the parties involved prefer confusion and obscurity, any attempt at mediation – as launched by the EU, numerous European governments and the gas companies in the EU – is bound to fail.

In theory, the conflict has now been resolved. Prime Ministers Putin and Tymoshenko signed a deal on January 19th that is said to be very similar to an understanding they had already reached back in October (details of supply contracts are not usually published, not even those between Gazprom and EU energy companies). According to press reports, the new agreement runs for ten years, and therefore eliminates the haggling that has become an annual ritual since the early 1990s. As from next year, Ukraine will no longer receive subsidised gas from Russia but pay a price that is linked to the one of fuel oil, like all companies in the EU do. In turn, Gazprom will no longer get a discount on the transit fees it will pay Ukraine for shipping more than 120 billion cubic metres gas westwards every year. Under such a deal, there would be no place for shady middlemen – although RosUkrEnergo is reportedly moving into Ukraine’s domestic gas trade.

Does this mean that a repeat of the gas war is unlikely or even impossible? It is hard to say. The EU should not speculate but recount those things it knows for sure: first, both Russia and Ukraine considered it more important to fight for their narrow interests in this energy dispute than to defend their reputations as reliable supplier and transit state, respectively. This is deeply worrying. Second, Russia will not break up Gazprom. Ukraine has rejected the idea of running its pipeline system as a three-way consortium with Russian and European involvement. Monopolies have a tendency to become opaque and greedy unless properly regulated and monitored. Neither Russia nor Ukraine seem keen on doing this. An unpublished contract may or may not be enough to ensure the reliability of Gazprom and Naftogaz (and any intermediary that may yet follow RosUkrEnergo). Third, Russian gas accounts for a quarter of total EU consumption, and 80 per cent of this comes through Ukraine. For some EU countries the dependency is 100 per cent. Even if the supplier was Norway and the transit country Switzerland, this would be an uncomfortable position to be in.

To increase their energy security in the face of such uncertainty, the Europeans do not need to do anything they are not doing – or planning to do – already. The EU has already agreed targets for using more renewables and saving energy (although the latter is non-binding). A new liberalisation directive – if properly enforced – should help to build a more integrated EU energy market. The objective of constructing more interconnections between national gas markets has been there for years. A new initiative to link South East European gas markets (called NETS: new European transmission system) looks a little more concrete, and could get a boost since South East Europe was the region worst affected by the cut-off. On January 26th and 27th, the Hungarians are hosting a ‘Nabucco summit’ for consortium members and potential suppliers for this planned pipeline through Turkey and the Balkans. The project could do with a political push, as well as fresh ideas for financing it. As for its potential supplies, the EU is stepping up efforts to get a big contract with Azerbaijan. And two of the Nabucco consortium members, Austria’s OMV and Germany’s RWE, announced in December that they are dusting off plans to build a trans-Caspian pipeline to get Turkmen gas into Nabucco.

At their spring summit in March, EU leaders will discuss the Commission’s ‘strategic energy review’ (published in November, 2008). It contains useful ideas, for example a proposal to pool EU resources for securing contracts with outside suppliers such as Azerbaijan and Turkmenistan. EU leaders now need to focus on what they can do through concrete steps and investments to increase the EU’s energy security, not speculate about whether Russia and Ukraine may stick to their latest deal.

Katinka Barysch is deputy director of the Centre for European Reform.