6. HOW UKRAINE WILL FARE WITHOUT RUSSIA’S GAS

FINANCIAL TIMES BRIEFING: By Neil Buckley and Thomas Catan
Financial Times, London, United Kingdom, Sat, December 31 2005

[Q] Why is Russia threatening to turn off gas supplies to Ukraine?
[A] Russia has provided its former Soviet neighbours with heavily
subsidised gas since the USSR collapsed in 1991 – partly to keep them
within its sphere of influence. But now it wants to move to market prices,
for what it says are economic reasons. Gazprom, Russia’s massive state-
controlled gas company, has already agreed increased prices with several
former Soviet states.

Ukraine says it is being asked to pay far more than any of those, suggesting
the motive is political: to punish it for the Orange Revolution a year ago
that brought the pro-western Viktor Yushchenko to power.

Ukraine is being asked to pay $230 per 1,000 cubic metres of gas – up from
$50 this year. Latvia, Lithuania and Estonia, all now European Union
members, are paying only $110, as is Georgia, which also had a pro-
democracy revolution two years ago. Belarus, loyal to Russia, pays little
over $46.

Mr Yushchenko says Ukraine will move to market prices only over a transition
period. Russia says if Kiev does not agree to higher prices by tomorrow, it
will turn off the tap.

[Q] What does this mean for Ukraine?
[A] Ukraine can probably get by for several weeks. Officials said yesterday
the country had enough gas in underground storage facilities to ensure it
could supply customers until the end of the winter period. Beyond that, it
could struggle. Of the 80bn cu m it uses annually, it buys 25bn cu m from
Russia, and 36bn from Turkmenistan, another former Soviet republic
(though the Turkmen gas travels through Russia via Gazprom’s pipelines)
and produces 18bn cu m itself.

[Q] What does it mean for the European Union?
[A] The EU gets a quarter of its gas from Russia – most of it flowing
through the giant “Brotherhood” pipeline across Ukraine. If Russia reduces
the volume it pumps into that pipeline, the result could theoretically be
shortages in western Europe. Both Russia and Ukraine insisted yesterday
supplies to other European customers would not be affected.

But Yuri Yekhanurov, Ukraine’s prime minister, said this week Ukraine was
entitled under its current contract with Russia to take 15 per cent of gas
exported across its territory as a transit fee. If the dispute goes on long
enough to deplete Ukraine’s underground reserves, it may have to.

[Q] What are the risks for Russia?
[A] Russia sees its huge oil and gas reserves as the key to rebuilding its
international influence. It takes over the rotating presidency of the Group
of Eight industrialised nations tomorrow and has named “energy security” as
one of its main themes. Stopping supplies to Ukraine could tarnish the image
it wants to project as a reliable energy supplier. It may also make the EU
and other international customers think twice about becoming too dependent
on Russia for oil and gas.

[Q] How can Russia cut off its supplies to Ukraine without cutting off
customers at the other end of the Brotherhood pipeline?
[A] Moscow says it will simply reduce the total volume of gas it pumps into
the pipeline by the amount Ukraine normally takes out for its own use. That
way, Moscow says it will still be fulfilling its commitments to its western
European customers at the other end. – and if Ukraine continues to take out
gas, Russia will accuse it of theft and blame it for any disruption to
European supplies.

[Q] How does Russia export its gas?
[A] At present, 90 per cent of Russian gas exports pass through Ukraine. A
second route, the Yamal pipeline, runs via Belarus and Poland to Germany,
while a third runs to the Balkans and Turkey.

Russia recently started building a pipeline under the Baltic Sea that would
bypass its neighbours to reach Germany, Scandinavia and the UK directly.
However, it will not be completed until 2010 at the earliest. Gazprom is
also due to enter the Shell-led Sakhalin-2 project, which will produce
Russia’s first ever shipment of liquefied natural gas in 2008 and allow it
to reach Asian markets not connected by pipeline.

[Q] Who are the main recipients of the gas that comes via Ukraine?
[A] Russia supplies nearly a quarter of the gas Europe consumes, according
to the International Energy Agency. In 2003, Russia exported 132bn cubic
metres of gas, of which 33bcm went to Germany, 20bcm to Italy, 10bcm to
France and 13bcm to Turkey. Austria is almost wholly dependent on Russia
for its gas.

[Q] Where else does Europe get its gas from?
[A] Europe consumed 535 bcm of gas in 2004, according to the IEA.
Indigenous production (from the UK, Dutch and Norwegian parts of the
North Sea) accounted for more than 60 per cent of consumption. 10 per
cent came from Algeria and more than 2 per cent from Nigeria. -30-

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