Lock, Stock and Two Smoking Pipes

1 February 2012, 08:00

No matter what those in power in Kyiv think, the Kremlin views their role on the energy map as greatly limited and nominal. Moscow needs Ukraine to block access of other gas suppliers to the EU and fill Gazprom’s shallow treasury. For some reason, though, Ukrainian politicians think this is normal.


European countries saw all threats of depending on just one gas supplier a decade ago. They intensified projects to diversify their gas sources and switch to different fuels. Today, every EU member-state is implementing them in all possible ways: they are building new liquid gas terminals, developing their own extraction of shale gas and other fuels, building new pipes in gas chains and streamlining gas pumping through their territories. Slowly, yet confidently, the EU is decreasing its dependence on the only source of gas, i.e. Russian.

Increasing independence requires a change of tone in negotiations between Europe and Russia. Just a few years ago, Europeans readily accepted Russia’s reluctance to ratify the Energy Charter Treaty and turned a blind eye to Gazprom buying up energy companies on the EU internal market through its affiliated companies. Today, after the adoption of the Third Energy Package aimed at increasing competitiveness on energy markets through segregation of companies that extract, transit and sell fuels, among other things, Gazprom finds its access to running European gas networks blocked. Gazprom’s key partner companies have been investigated for signs of monopoly conspiracy under an order from the European Commission. French, Polish and German energy companies that were Gazprom’s friends just days ago have now sued it for overvaluing its gas, while Russia is asking, rather than demanding, the EU to grant its ‘South Stream’ the status of a trans-European project which will allow it to draw investment.

The EU has now almost accomplished what is still an objective for Ukraine: it has determined Russia’s significant, yet clearly outlined place in its energy balance. Indeed, Gazprom supplies up to one third of the EU’s imported gas, which is a lot. Yet, despite the projected growth of gas consumption in European states, they do not want to buy more gas from Russia as this will damage Europe’s national security. Europe is not interested in Russian projects: it has reached its limit of supply from Gazprom. That was the reason for the European Commission’s cool greeting of the South Stream launch and support of the Southern Gas Corridor rather than the South Stream despite all efforts made by the Kremlin. The Southern Gas Corridor is supposed to transit gas from the Caspian area, i.e. Turkmenistan and Azerbaijan, to the EU. These two countries will meet the EU’s growing demand for gas in the decades to come.  

This makes things much more difficult for Russia. For Gazprom, it means that the EU will reduce or even stop the funding of infrastructure projects. With time, the amount of gas Gazprom exports to the EU may fall furthermore while the price will also shrink as a result of spot market development. The revolution of shale gas exported from the US discourages European companies to work in Russian fields under the current terms. For instance, Statoil, a Norwegian partner in the Shtockman field development, has already announced that it is certain of its future success in shale gas projects. “The Russian gas sector will face some serious competition for the share of the European gas market estimated at 13-40% after 2030,” commented Valeriy Yazev, President of the Russian Gas Community, at the Gas Russia 2011 International Forum. “Clearly, we need to get closer to 40%.” And the East is hardly more promising. China, for instance, has not agreed to the price offered by the Russians. Instead, it bought extra gas from Turkmenistan in November 2011. According to Societe Generale analysts, Turkmenistan will remain the key gas supplier to China for the nearest future.

To preserve its role in the West, Russia needs to look for projects to take part in, other than those related to the supply of its gas, and block alternative offers in the meantime. One of the projects could be a “gainful” proposal to transit Turkmen gas to the EU borderline via available pipelines through Russia and Ukraine. Russia’s argument is that anything could happen before Nabucco[1], or any other pipeline is completed and in the meantime Europe can securely cut a deal with Turkmenistan sometime soon, while the Russians will make sure gas is delivered right to the EU’s Eastern borderline today. Perhaps, this scenario has been offered to Ukrainian politicians as well. Coupled with the South Stream spooks, it could have convinced the Ukrainian party to accept the Russian proposal.


How the EU, let alone Ukraine, will benefit from this scenario is yet unknown. Firstly, Europe will no longer view the Ukrainian gas transit system as an alternative supply option if it ends up under Russian control. It will become an element of the Russian system. Secondly, no matter how good Turkmen gas is, it will loose its value for the EU if transited through the Russian pipeline as this will mean pretense, rather than real diversification and the EU definitely knows the difference between the two. Thirdly, how can Ukraine benefit from this kind of a consortium? Will it have a sustainable gas supply? No. Since the South Stream has just been a spook for the naïve so far, gas would be supplied in smaller amounts, although sustainably at this point. Will Ukraine have a chance to streamline its gas transit system? No. There is no way Ukraine can get extra funding for the reconstruction if the consortium is really a thank you for the lower gas price in 2012. Instead, Ukraine will have to share transit income with all parties in the process. Cash flows from the World Bank or EBRR are likely to stop, so there is no point in talking to a country whose pipeline is run by a different entity. Most importantly, Ukraine will loose opportunities for real, rather than imitated, diversification of energy sources.

Ukraineshould look back at the countries which have had similar experiences rather than trying to invent the bicycle or accepting the scheme being imposed from outside. When Russia attempted to get access to the Polish pipeline in exchange for cheap gas last year, Poland rejected the deal point blank, intensified projects for the extraction of its own shale gas, and started building a liquid gas terminal. Currently, these projects are being implemented practically rather than on paper. After ten months of failing gas price talks, Polish PGNIG sued Gazprom at the Stockholm Court that already has a pile of similar claims from German, French and other companies. Moldova has also had a hard time coming to terms with Gazprom, so it asked the European Commission for some help in negotiations. The Moldovan parliament took up control over negotiations with Russia while the government has publicly confirmed its readiness to implement all European reforms, although it must be feeling huge pressure to surrender strategic interests from Russia. 

What is Ukraine doing? Kyiv responds to many proposals of help from European structures with silence. When the talks with Russia reach a particularly critical point, Ukraine opens the second front as Volodymyr Makukha, Deputy Minister of Energy, tells journalists that Ukraine is not happy with the European party. The efforts of Ukrainian MPs to find out the essence of the talks, let alone control them, are useless and hopeless. The secrecy of negotiations makes viewers think of the worst scenarios and aggravates the effect of media provocations and manipulation.

The EU and Ukraine are consumers of gas. Their common objective is to decrease dependence on just one supplier. A reasonable way out for both would be to think of common diversification options instead of mistrusting each other. If Ukraine provided free access to its gas transit system and the EU managed to get gas transited from Turkmenistan through Russian territory – and it has the necessary instruments to do so – Ukraine would end up with a real, rather than pretence diversification. The cost of gas would also be different from that promised by Russia today.

Valeriy Muntiyan, Authorized Representative of the Cabinet of Ministers for Cooperation with Russia, CIS and EurAsian Union: Ukraine is indeed discussing Naftogaz-based joint ventures to run the gas transit system and gas distribution chains

[1]The launch of Nabucco is postponed; the current estimated launch date is 2019

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