Highlights
– Eastern European countries likely most affected by Ukraine-Russian gas dispute
– Europe will remain dependent on Russia oil supplies for the mid to long-term
After weeks of negotiations over transit fees and other pricing issues, Russian gas monopoly Gazprom followed through with its threat to cut gas supplies to Ukraine on January 1, 2009.
Gazprom initially offered to sell Ukraine gas for US$250 per 1,000 cubic meters. However, when Ukraine countered with its own demand, Russia set a new price for its western neighbor, totaling US$418 per 1,000 cubic meters. The changing of the price will only further complicate negotiations, which are expected to resume on January 8, 2009.
The current gas row between Russia and Ukraine is the latest issue contributing to the already deteriorating relationship between the two countries. Both countries remain at odds over prices and transit fees, decreasing the likelihood that the issues will be solved in the near-term. Austria, Macedonia, Bulgaria, Croatia, Romania, and Poland have thus far been the most affected by the crisis. Hungary, Greece, and the Czech Republic have claimed they are currently experiencing shortages. As of January 6, 2008 Gdf Suez, Europe’s largest natural gas distributer, claims that deliveries to France have dropped by 70 percent.
Shortages and supply disruptions are expected to continue for the near-term, as Ukraine and Russia continue negotiating to find a solution to the crisis. We expect Europe to seek a greater role in finding a solution, as a continued shutoff for at least another two weeks will result in major gas disruptions in several Western European countries.
Europe Intervenes
On January 5, 2009, European Union (EU) officials met in Brussels to discuss the implications of Russia’s decision to cut off natural-gas supplies. The meeting was called by the Czech Republic, which began its six-month rotating EU presidency term on January 1st. The EU is intervening in an effort to avoid a repeat of the gas crisis that occurred in January 2006.
In an unprecedented move, Russia asked the EU to provide monitoring of Ukraine’s gas transit system to ensure that they are functioning normally and the correct amount of gas is flowing to EU customers. As Ukraine is a major transit country for oil supplies bound for Europe, the Russian government has often accused Kiev of stealing gas and causing shortages to Western Europe. Despite denying the accusations, the Ukrainian government and Naftogaz, the state energy company, refuses to allow monitors employed by Gazprom to monitor its gas transit stations.
Kiev’s decision to refuse Gazprom monitors is likely more to do with the escalating tensions between the countries and growing mistrust. However, the longer Gazprom maintains its halt in exporting gas supplies to Ukraine, the greater likelihood the country will begin siphoning supplies. By employing such tactics, supplies would be significantly disrupted in Western Europe, a scenario both the EU and Russia hope to avoid.
The likelihood of the EU sending monitors to oversee Ukraine’s gas transit system is unlikely in the near to mid-term, as the EU describes the dispute as a “bilateral problem.” Because there is no independent monitoring, both Ukraine and Russia will continue trading accusations over why certain locations in Europe are experiencing shortages. Neither side wants to appear to be the one to blame over the crisis, which ultimately only hampers the likelihood of solving the crisis and finding new solutions.
Outlook
Because Ukraine is the main route for Russian gas supplies to the EU, the deteriorating relationship between Russia and Ukraine will continue having a direct effect on Europe, primarily in relation to energy issues. While Russia has employed extra measures to prevent significant supply shortages and disruptions to many of its customers, particularly Western European nations, there will be little stability and certainty in the flow of gas as long as Ukraine remains the main transport country. As a result, Russia is likely to implement long-term measures to supply Europe directly, effectively bypassing Ukraine and giving the Kremlin additional options in dealing with Kiev without Europe being impacted.
Despite this instability and uncertainty, Europe has been slow to diversify where it receives its energy, a trend that is likely to continue for the near- to mid-term. However, we believe that tensions between Russia and Ukraine will remain high, causing additional disruptions in gas supplies and affecting customers throughout Europe, particularly Eastern and Central Europe. As gas shortages or potential disruptions become more common, Europe is expected to actively support a long-term initiative that seeks to diversify its oil imports, which is likely to include increased interest and possible investment in Central Asia. However, in the near- to mid-term, Europe will remain dependent on Russian gas supplies.
In the near-term, the current gas row between Russia and Ukraine is expected to continue negatively impacting parts of Eastern and Central Europe, with some countries reporting up to a 90 percent reduction in supplies. Western Europe has taken adequate measures by stockpiling reserve supplies to survive a temporary disruption in supplies. However, significant shortages are unlikely unless Ukraine begins siphoning gas supplies and the crisis continues for at least two more weeks; two scenarios that are growing increasingly likely.