Wednesday, October 01, 2014


Features

In Long Term, Moscow-Kyiv Gas Dispute Could Redraw Europe's Energy Map

Officials in Belarus are reportedly trying to capitalize.
Officials in Belarus are reportedly trying to capitalize.
By Bruce Pannier
There is no quick way for the European Union to penalize Russia and Ukraine for the gas dispute that led to a frosty two-week cutoff in natural-gas supplies this month. So, for the time being, the EU continues to receive one-quarter of its gas supplies from Russia -- and four-fifths of that via pipelines in Ukraine -- just as it did before the feud began.

But the 27-member bloc has already signaled that it will neither forgive nor forget, with EU officials exploring new energy alternatives that circumvent Ukraine, or Russia altogether.

In that sense, says Federico Bordonaro, an energy-security analyst with the Italian-based group equilibre.net, both Moscow and Kyiv lost something in the dispute. Moreover, with other transit countries like Belarus at the ready, one party's loss could well prove another's gain.

He says officials in Minsk are eager to "enhance the role" of the Yamal-Europe pipeline, a major route that stretches from western Siberia to Europe through Belarus, and adds that a second leg "could be carried out in a year or 18 months from now."

"It remains to be seen if everyone agrees with that," Bordonaro says, "but it's important to note that Belarus is trying to get some benefit from the Ukraine-Russia row in order to try and enhance its role as a key transit country, which could actually put it in competition with Ukraine."

Belarus has proven to be a difficult transit partner in its own right. During a pricing dispute in January 2007, Russia briefly suspended oil shipments through Belarus's Druzhba pipeline amid claims that Minsk was siphoning off shipments destined for Europe.

That row was quickly resolved, but for Russia, the ultimate goal remains a pipeline that runs directly to Europe interrupted by potentially quarrelsome post-Soviet neighbors.

Ukraine's gas pipeline system
For Moscow, the best possible consequence of the gas fiasco with Ukraine could be a stepped-up commitment to its South Stream and Nord Stream pipeline projects. South Stream is projected to run from Russia's Black Sea coast to Italy via Bulgaria and Greece, crossing Ukraine's continental shelf but bypassing its soil.

Arguably greater hopes are invested in Nord Stream, which is designed to pipe gas directly from Russia to Germany via the Baltic Sea, and is already nearing completion. Combined, the South and Nord Stream lines would have a capacity of under 90 billion cubic meters (bcm) a year -- far less than the 280 bcm currently piped through Ukraine.

But Chris Weafer, a Moscow-based strategist with UralSib bank, says growing interest in the projects could prove profitable for Russia's Gazpom monopoly.

"You could say that Gazprom is a long-term winner from this, because there should be more momentum on the export pipelines like Nord Stream and South Stream, to get them done," Weafer says. "They will go on a fully commercial basis from 2010. And it should mean that if the deal is done properly, then they perhaps can avoid this sort of annual dispute with Ukraine."

Russia-Free Solution?

If the EU were to proceed on work with Russia on a Nord Stream-South Stream strategy, then Ukraine might emerge as the greatest loser from the recent dispute. But momentum is growing in Europe for the bloc to circumvent Russian gas altogether -- meaning the long-stalled Nabucco project is suddenly back in the spotlight.

Nabucco proposes to pipe gas from Central Asian and Azerbaijani suppliers directly to Europe via Turkey, and is seen as a direct competitor to South Stream.

"Apparently this gas row between Ukraine and Russia has revived this so-called pipeline geopolitical battle between the Nabucco route and the South Stream route," Bordonaro says. "Nabucco is still attractive to the Europeans because Nabucco would ease the dependency on Russian gas as its main sources should be the Turkmen and the Azeri gas fields, and in the future Nabucco could also try to exploit the Iranian gas fields."

Turkmenistan and Iraq have signaled interest in the Nabucco project by arranging to send delegations to a Budapest conference of shareholders and potential suppliers to the pipeline on January 26-27. The conference has been scheduled since late last year, but coming on the heels of the recent gas dispute, interest in the project is expected to be high.

If the EU were to throw its weight behind Nabucco, Turkey could well prove to be a major beneficiary of the Russia-Ukraine dispute. Ankara has long sought membership in the European Union, but has seen those negotiations stall.

Turkey's Erdogan senses opportunity.
Sensing an opportunity, Turkish Prime Minister Recep Tayyip Erdogan attempted to use Nabucco as a bargaining chip, telling officials in Brussels he will "review" his support for the pipeline if Turkey's accession talks remain blocked.

Bordonaro says the gas dispute has given several transit countries an opportunity to use alternative schemes to their advantage.

"Turkey said [on January 19] that if the European Union does not show more goodwill in the general framework of EU-Turkey talks about Turkish accession to the EU, Turkey could withdraw its support for the Nabucco project -- and this could spell the end of the Nabucco project," Bordonaro says. "So, as you see, it's kind of interesting because all players are now trying to reposition themselves -- Belarus, Ukraine, and also Turkey."

Clear Losers

RosUkrEnergo, the shadowy intermediary company that has managed all Russian-Ukrainian gas deals for the past several years, would appear to be an immediate loser from the dispute.

The stalemate ended with the signing of a deal brokered by the prime ministers of Russia and Ukraine, Vladimir Putin and Yulia Tymoshenko. Under the terms of the agreement, RosUkrEnergo would be eliminated as an intermediary.

The company, which is co-owned by Gazprom and two Ukrainian businessmen, Dmytro Firtash and Ivan Fursin, has been at the murky center of questions about the Russian-Ukrainian gas dispute and the opaque nature of Ukraine's gas accounts.

RosUkrEnergo first came under particular scrutiny in 2006, when it was accused of acquiring gas from Turkmenistan and reselling it, at a substantial profit, to Ukraine.

"There have been a lot of rumors in the media about who this company might be linked to," says Tom Mayne, a Central Asia expert with the British watchdog Global Witness, which has tried to follow RosUkrEnergo's activities. "Our research showed that there are certain politicians and gas officials in Ukraine who seem to be close with Mr. Firtash and Mr. Fursin."

The potentially divisive role of RosUkrEnergo is reflected in the deepening gap in Ukraine's domestic politics. Tymoshenko has long advocated for RosUkrEnergo to be eliminated.

But her political rival, President Viktor Yushchenko, criticized Tymoshenko's gas-deal stipulation that the intermediary be shut out, and on January 22 even granted Firtash, a trader and one of Ukraine's richest men, a state award.

The move was sharply criticized by Tymoshenko, who accused Yushchenko of "planning today to give a third-degree state award to a most corrupt individual."

"I guess Mr. Firtash has yet to earn a first-degree award and do more to finance the political activities of Ukrainian elites -- just as Yuriy Boyko, who in effect ruined the entire system of gas supply to Ukraine when he was head of Naftohaz and energy minister, was awarded the title of Hero of Ukraine," Tymoshenko added.

Cost Of Credibility

There are also signs that Gazprom, even with the newfound emphasis on South Stream and Nord Stream, will suffer as a result of the gas dispute.

A billion here, a billion there for Gazprom.
Jonathan Stern, the director of gas research at the Oxford Institute for Energy Studies, says that in addition to the hundreds of millions of dollars in revenues lost during the two-week shutoff, there may be additional shortfalls on the way if Europe carries through with its threat to take Russia and Ukraine to court for the billions of dollars its own countries lost to the crisis.

"Directly, [Gazprom] lost somewhere between $1.2 billion and $1.5 billion, and indirectly they may well be sued for damages," Stern says. "They already have penalty clauses in their contracts for nondelivery. So they have a lot of other financial problems."

Russia's reputation as a gas supplier, Stern adds, has also suffered.

"The real longer-term damage is that up until now everyone was able to say that for 40 years, pretty much, the Soviet Union and Russia delivered gas to Europe in a completely secure and uninterrupted way," he says. "Nobody can say that any longer."

A final loser, clearly, is the European Union. Brussels, which has remained fractured on energy policy, had little leverage against either Ukraine or Russia in dealing with the dispute.

Apart from frantic shuttle diplomacy and hotter-than-usual rhetoric, there was little the EU could do other than wait for Russia and Ukraine to resolve their differences.

Bordonaro calls it a weak moment for the EU. Unless the bloc moves quickly to implement strategies for alternative solutions like nuclear energy, he adds, there is potential for it to get even worse.

"The EU has proved unable up to now to ease its foreign energy dependence [on Russia]. Moreover, if current trends continue by the year 2030, [Russia] may supply more than 60 percent of EU gas import demands," Bordonaro says. "The basic fact is that the European Union is still divided when it comes to dealing with Russia, and Europe has not forged a common Russia policy."
Tangled Web
Many sections of Ukraine's gas-pipeline system date back to the Soviet era and make it difficult to precisely control gas flows.

 More

 
This forum has been closed.
Comment Sorting
Comments
     
by: Anton from: Auckland
January 24, 2009 01:30
I would not call EU a clear loser, as the EU is not even a state in full sense, but rather a loose confederation. But the territory which today is called EU clearly would have some problems in future, regarding the gas supplies.<br /><br />Leaving aside various political contradictions between the countries, the practical task of gas delivery to Europe still remains impossible without usage of Ukrainian pipelines, no matter what. All three projects, Nord Stream, South Stream and Nabucco, if they are implemented in practice, still can not cover the amount of gas, passing through Ukraine alone. Meanwhile, Ukrainian pipelines are former Soviet pipelines - and as such their age exceeds 30 years, while since 1992 Ukraine was continuously accused in the lack of investment in their maintenance and repairs. Winter there always presents critical conditions, in which all faults become noticed, so if in future the supply is interrupted due to purely technical reasons, the projected 3 pipelines would not be able to adequately supply Europe. Same relates to Belarus infrastructure, but there Gazprom is at least 50% owner, so those pipes at least must have some maintenance to them.<br /><br />Also, given that Russia's gas fields are heading for exhaustion while its internal consumption remains stable if not grows, the Europe's reliance on Turkmenian and Iranian gas would grow - but these two do not have enough capacity either. Moreover, there is China next door, looking at Uzbek gas, so Turkmenistan always has another potential buyer, same as Iran.<br /><br />The only realistic available source would be natural gas from the Arctics, but the attempt of someone to start drilling there bears a risk of military confrontation, involving Norway, Russia, Canada, USA and Denmark (ie EU). <br /><br />I would say if EU wants to live freely and sleep well, the only sensible way to this must be developing nuclear energy. If the costs are compared, than putting the Greenies down would be the cheapest and safest solution.<br /><br />

by: Hryhoriy from: New York
January 24, 2009 17:42
Since the russian federation will soon implode anyway, much like the ussr before it, it is very critical that the EU identify other sources to meet their energy supplies. In fact, most analysts confirm that russia will cease to exist, even in it's current form as a banana republic, within the next 4-5 years.

by: DENNIS JUNIOR from: USA
January 26, 2009 03:16
i think that in the long-term the map of europe's energy will be redraw...it will be a positive thing to be done...

by: Richard Mimna from: www.herbalindex.com
January 26, 2009 07:53
Gas and oil are not as necessary as we are led to believe. The money made from hydrocarbon fuels has always been the industry motivator. There has been cheaper and more efficient power generating methods for more than 40 years; now might be a good time to impliment some of these methods.<br /><br />The Nabucco project could provide enough gas to fill the gaps where natural gas is actually the only real choice. Aside from nuclear steam generator plants to produce electricity, there is also the simple conversion from liquid hydrocarbon gas to hydrogen gas injector systems for combustion driven engines. Hydrogen gas can be created easily at the steam generator plants on the cold leg of the heat exchangers - the water is isotope free, and the power needed from the turbines would be negligible. Modern windmill farms are also very efficient for generating electricity and can be tied into any existing grid.<br /><br />The EU can lead the way thru green technology and evolve beyond the industrial age.

Most Popular