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9 June, 2011

Getting Around Gazprom

Lithuania has found an alternative to Gazprom, but Ukraine is still searching.

Gazprom’s monopoly on natural gas seems to be coming to an end. When Americans began developing shale gas and oil sand technologies, Russian analysts sneered. They argued that it was expensive — the USA is too far away from Europe for any pipeline to connect the two continents, they said.

When a post office director in a European country was shown one of the first models of the telephone – naturally, a very expensive thing – he sagely said: “Americans may be pouring money into this useless thing, but we will do fine with telegram boys.” While the USA was developing modern technology to extract hydrocarbons, Russia was expending its strength to raise gas prices and pressure countries both near and far.

The USA is now the world’s biggest producer of gas and has started to export it. Interestingly, the channels of gas export from the Persian Gulf countries originally set up for the USA have been redirected to Europe. Liquefied gas is 15-25% cheaper when it reaches Rotterdam than gas pumped through a pipeline from Siberia. The gas price fall in Europe has so far been averted by the increasing demand for energy in China and India, but Algeria, Indonesia, and Nigeria have also entered the market. When the war in Libya ends, it will resume its deliveries of oil and gas to Europe.

Gazprom recently received an alarming signal from Lithuania. Cheniere Energy, an American company, signed a letter of intent with Lithuanian Klaipedos nafta on liquefied gas deliveries tentatively scheduled to begin in 2013. Lithuanian Energy Minister Arvydas Sekmokas said in an interview for Lietuvos rytas: “The gas we receive from Gazprom today is one-third more expensive than that offered by the Americans.” In the United States, the March price of gas was USD 150 per 1,000 cubic meters, so even if you figure in the transportation costs (USD 90-110 per 1,000 cubic meters), it will be much lower than in Europe (USD 350-370 in the first quarter and set to rise later).

Of course, Lithuania is not Ukraine — it consumes a mere 3bn cubic meters of gas per year. Given this low volume, it is not that hard to find a replacement. Ukraine consumes much more, but solutions can still be found to replace Russian gas. Furthermore, doing so does not require transporting gas from America to Ukraine — Azerbaijan is much closer and Egypt and Algeria are not too far away, either. Romania, Bulgaria and Syria have already signed agreements with Baku, while Kyiv is still doing a lot of talking. Moscow perfectly understands counterparts negotiating from a position of strength. If we had a liquefied gas terminal in Odessa capable of receiving at least 5bn cubic meters of gas – something that is only being discussed now –  Ukrainian delegations could negotiate with their Russian counterparts in a completely different tone in both Moscow and Kyiv. Our prime minister would not have to hang his head and ask for a discount, while putting ashes on his head and claiming Ukraine’s economy will go under if the current and projected gas prices stay at this level.

Moscowwill certainly demand something in exchange for a concession. This would be a good opportunity to renegotiate the conditions and term of stay of its Black Sea Fleet, considering the Kremlin’s special sensitivity to this issue. But no, the current government gave up everything at once in Kharkiv, and is now trying to grasp at straws. What can be expected of Moscow can best be seen by looking at Belarus. Belarusian President Alexander Lukashenko boldly claimed with conviction that none of his republic’s gains would be given away – and look now where he is now. On his knees, he is begging Russia to issue a 3bn-dollar loan to Minsk. Lukashenko will find it very difficult to pay off this loan and the consequences will cast shadows over the country for a long time to come.


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