Gazprom: Can’t Live With It, Can’t Live Without It

Monday can’t come soon enough for residents of hundreds of thousands of homes across Europe. That, according to the BBC, is the day when their heat might turn back on.

Heating went off last week when Russia turned off all four of the pipelines that convey Russian natural gas to buyers in Ukraine and around the continent. Russia took this very hardball action because Ukraine, who contracts year-by-year with Russian state-utility Gazprom to be the conduit for 80% of the natural gas Gazprom ferries via pipeline to consumers in Ukraine and throughout Europe, wouldn’t settle on terms for a contract for 2009. Naftogaz, the Ukrainian oil utility, considered Gazprom’s asking price of 336.8 Euros per 1,000 cubic metres of gas too steep. It thought likewise of Gazprom’s alternative offer of 187 Euros per 1,000 cubic metres. Russia’s negotiating tactics, which included a few unfounded accusations that Ukraine was stealing gas, did little to bring Naftogaz around. Ergo, no contract. And ergo, no gas. Ukraine’s consumers lost out. So did the consumers in 14 other countries that had done nothing wrong except be in need of some gas.  

 

Today’s accord takes firm measures to prevent any more unproven stealing by Ukraine: Monitors from the EU, Russia, and Ukraine will watch to make sure the Orange Republic behaves itself. Note that the good behavior will not in itself get Ukrainians their heat back. According to the Kyiv Post, they will have to do without until Naftogaz and Gazprom come back to the table and work out a new contract, however long that may take 

 

 

Russia is the supplier of one-fourth of Europe’s natural gas supply. That puts it in a position to do many things, including turn the gas spigots on and off at will. I grant that not everyone sees it that way. A few commentators have made some stern-sounding noises about the damage they think Russia has done to its own reputation and the consequences they expect it will reap. Bronwen Maddox, writing in The Times of London, sees it thus: “(Russian prime minister) Putin may have persuaded some on Europe’s eastern fringe of the need to mollify him,” he wrote. “But in the EU, he is more likely to have united those he once divided, and to have persuaded them urgently to cut their dependence on Russian gas.”

 

Take these commentators with a grain of salt. Europeans are hopping mad. But being mad at Gazprom does not equate to firing Gazprom. One quarter of natural gas is a lot of energy. If you are going to swear it off, then you will need to find a very sizable replacement. Where is that replacement now? Hard to say. The Nabucco pipeline, planned to run through Turkey to channel gas from Central Asia and the Caspian Sea, will supply enough gas to meet no more than 5% of Europe’s energy needs. It would take five Nabuccos to equal one Gazprom.  

 

Not to mention that the fledgling banana republics of Central Asia are hardly stable business partners themselves. Quote BBC: “EU officials say that even during the Cold War the Russian gas supply was stable, so it is better to rely on Gazprom than potentially unstable sources such as Turkmenistan and Uzbekistan.”

 

Not coincidentally, there are already plans underway for two new Gazprom pipelines into Europe. These, when constructed, will bypass Ukraine altogether: 

1) Nord Stream, which will run 1200 kilometers along the Baltic Sea. Dutch company Gasunie and German firms E.ON Ruhrgas and Wintershall are partnering on the project.

2) South Stream, which will run under the Black Sea. Italy’s ENI is partnering. 

 

Ultimately, this whole affair will probably work out very well for Russia and very badly for Ukraine. The former will continue to be an irreplaceable source for much of Europe’s natural gas, through one pipeline or another. The latter will find itself somewhere between a rock and a hard place – the rock being high fees it is loathe to pay, the hard place being its removal from the gas transit altogether and a swift plunge into economic irrelevance.  

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