Ukraine tense over Russian gas supply

To compound already-bursting tensions between Ukraine and Russia, the Russian oil and gas company Gazprom has raised prices to the country by 37% by cancelling a discount and even threatening to cut supplies entirely. This, according to a statement delivered by Ukrainian Energy Minister Yuri Prodan, means that Ukraine will be forced to pay $368.50 per 1000 cubic meters in Q2 of 2014, as opposed to the earlier price of $268.50. In turn, these raised prices are putting pressure on Western leaders to back off as the price increase will have an equally deleterious effect on the still-fragile economy of the EU. Russia provides approximately a quarter of the natural gas consumed in the EU and almost 80% of these exports travel through Ukrainian pipelines.

This economic trump card has allowed Russia to forcibly leverage its foreign policy with Europe in particular. Two recent incidents highlight Russia’s use of its gas resources to compel other countries like Ukraine. In 2005, Gazprom claimed Ukraine was consuming the gas it sent, instead of transferring it over to the EU as dictated. Ukrainian officials denied the accusation but Naftohaz (the Ukrainian national gas corporation) admitted that some was retained and used for domestic needs. Russia cut off gas entirely to Ukraine in 2006, forcing its acquiescence to a new deal, but disputes continued for several years due to Russian insistence that Ukraine pay off so-called “gas debts.” In 2009, these disruptions invited the reproach of the EU, when over 18 countries reported major drops or complete cut-offs of gas supplies routed through Ukraine. The dispute could not have come at a worse time, when the global recession reached its nadir.

Ukraine’s gas debts have been confirmed by outside sources. In 2010, an arbitration administered in Stockholm ruled that Naftohaz owed a total of 12.1 billion cub meters of gas to the Swiss-based RosUkrEnergo. The controlling stake in the company is from Gazprom, and corroborates the Russian accusations of Ukraine siphoning gas resources intended for consumption in the EU.

These disputes appear to be far from over. EU Leaders have begun to officially discuss obtaining alternate means of energy resources, as Russia’s invasion of the Crimean peninsula and its punitive raising of gas prices have caused outrage among European leaders. On Friday, Gazprom’s CEO Alexei Miller stated that Kiev missed its February deadline to pay for its gas and threatened “…to return to the situation of early 2009.”  The United States has seized on this dissatisfaction and tension with Russian energy suppliers to suggest exploiting LNG exports to Europe from the United States, currently the largest producer in the world. However, the United States has only completed a handful of liquefaction terminals necessary for the export of LNG resources, and with a domestic glut in gas supplies resulting in lowered prices, the FLNG facilities look less likely to be completed without government help. If they are completed and exports begin to the EU, Russian leverage over the EU’s energy markets will have declined dramatically.

Part of the original EU aid package to Ukraine that caused its civil strife were funds specifically allocated for the modernization of its gas transmission systems. It was also suggested that pipelines from countries with excess supply be reversed so that Ukraine would receive the needed supplies and Gazprom would have fewer legitimate reasons to cut off or mark-up future gas transmissions. Senior German officials have expressed an interest in supplying Ukraine with its own reserve tanks of natural gas to ease the economic impact of this latest move. If the EU does not find another source of LNG for its markets, it is likely they will remain vulnerable to Russian leverage.

Map of Ukrainian LNG Pipelines here.

News Briefs:

  • China National Petroleum Corporation (CNPC) has reaffirmed its interest in brokering stronger ties with Tajikistan’s state-owned Tajiktransgaz, with the aim of developing a pipeline that would traverse much of Central Asia and form Line D of an already extant Central Asia-China gas pipeline. Chinese efforts to augment its supply of Central Asian gas began in 2011 when an agreement between Beijing and authorities in Turkmenistan was brokered. Since then, China has signed bilateral agreements of up to 25 billion cubic meters of gas annually with the governments of Uzbekistan, Tajikistan and Kyrgyzstan, and expects to import up to 40% of its gas from Central Asia by the year 2020.
  • Iranian Foreign Minister Javad Zarif expresses his hopes that a long-term nuclear deal could be brokered in as little as four months, contrasting dramatically with the sentiments of hardliners in Tehran. The optimism expressed by Zarif was met with similarly optimistic, though cautious, statements made by Catherin Ashton, who warned that “no guarantees” could be offered regarding the deal’s success.
  • Uzbekistan will work together with the World Bank to develop and implement an electronic public procurements mechanism that, when completed, will allow the Uzbek  public sector to acquire services and purchase supplies in a more economical fashion and promote efficiency in public spending. The World Bank used the implementation of electronic procurement mechanisms in UZEX, the Uzbek stock market, as an example to follow, and was agreed upon following a visit by the World Bank’s leading procurement specialist for Central Asia, Nagaraj Dutalauri.
  • Kazakhstan has filed suit against a foreign oil consortium headed by Exxon and Royal Dutch Shell due to a lack of progress being made on Kazakhstan’s Kashagan oilfield in the Caspian Sea. The government has expressed its discontent over widespread delays that have hindered progress and led to widespread criticism in Astana. Kazakh reserves in the Caspian Sea nearly equal those of Brazil, though production during the beginning of 2014 has been minimal. In spite of the delays, Kazakhstan is projected to receive between 2.5 and 3 billion tons of oil from Kashagan during the second half of 2014. Officials have long commented on the difficulty of the Kazakh project, which has been described as one of the most difficult development projects in the world, due to the difficulty presented by extracting oil from nearly 4,200 meters below sea level.
  • Eurasia Review profiles Iran’s geostrategic calculations vis-à-vis Afghanistan. The report, which focuses on Iran’s efforts to enact a policy that positions them favorably as international coalition forces leave Afghanistan, suggests that the linchpin of Iranian policy will be economic, with greater investment in mutually beneficial infrastructure and development projects taking precedence. Furthermore, it is posited that a percentage of the nearly 800,000 Afghan refugees living in Iran could return and play a role in fostering Persian-centric projects both within the public and private sectors.
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