Russia and Ukraine are headed toward another showdown, this time over Kiev’s unpaid gas bills, in a dispute that could disrupt natural gas deliveries to Europe.
Petro Poroshenko, who was elected Ukraine’s new president on Sunday, will immediately face a looming energy crisis. The economically battered country has no financial resources to pay for Russian gas, while its supplier, Moscow’s OAO Gazprom, has threatening to stop selling fuel to its neighbour by June 3.
Gazprom is eager to maintain service to its customers throughout the rest of Europe, but worries Ukraine will siphon gas destined for other customers as it moves through the transit pipelines, said Tatiana Mitrovic, head of the oil and gas sector at the Energy Research Institute of the Russian Academy of Science.
As a result, countries in Europe face the prospect of another disruption in gas service, as they saw in 2006 and 2009 when Moscow and Kiev battled over prices and Ukraine’s shift towards the European Union.
“Russia does not want to stop gas supply to Europe which is its most profitable and largest market,” Ms. Mitrovic said.
“But there is this transit risk.”
The economist echoed Russian President Vladimir Putin’s concern, voiced at last week’s economic forum in St. Petersburg, that some Ukrainian groups have threatened to blow up the Gazprom’s pipelines that feed customers in Ukraine and the rest of Europe.
Europe gets a third of its gas from Russia, half of which flows through Ukraine, which in turn is nearly totally reliant on Gazprom for supply.
Ms. Mitrovic was attending an industry conference at United Kingdom’s Ditchley Foundation, which brought together experts from North America and Europe on the impact of shale gas/tight oil boom on world energy markets.
In an interview, she said Gazprom is reluctant to provide gas to Ukraine because Kiev is not paying the existing debt of $1.7-billion (U.S.). While the International Monetary Fund is promising aid, it will not want to see that money paid to Moscow when there are pressing problems in Ukraine.
Ms. Mitrovic said Europe has few alternatives to Russian supply unless it is prepared to pay Asian prices for liquefied natural gas. Existing European LNG terminals are operating at roughly 25 per cent of capacity because Middle East shippers are targeting the more lucrative Asian market.
North American LNG production is not expected to be a factor for at least five to seven years while projects get approved and built.
“Not much can be done in the short term,” said Paul Sullivan, an economist from the National Defense University outside Washington D.C. He said the European Union has failed to present a united front on energy issues, as countries like Germany have more assured access and better prices from Gazprom than those in central and Eastern Europe.
“If you wanted to have a real European Union, it would have to be a European energy union,” Mr. Sullivan said.
European delegates at the Ditchley conference were clearly at odds over energy policy with Russia, on the need for further sanctions to deter Moscow’s aggression toward Ukraine, and on whether countries should pursue development of their own shale gas resources.
Despite past disruptions and ongoing tension with Moscow, Russia shipped a record amount of natural gas to Europe last year, and Gazprom’s exports grew by 6 per cent in the first quarter over the same period last year.
Mr. Putin last week signed a major deal to supply natural gas via pipeline from eastern Siberia to China. That deal has been in the works for 10 years, but energy experts at Ditchley agreed that Russia’s motivation to conclude a deal was heightened by the prospect of European nations attempting to reduce their reliance on Russian gas.
Ms. Mitrovic said Russia, which has the world’s largest gas reserves, is determined to protect its markets in a European market that is not anticipating overall growth, even as it makes deeper inroads in the fast-growing Asian market.
Still, Russia, which depends heavily on oil and gas exports, could be a big loser in the global energy markets if prices weaken as a result of growing production from countries such as the United States, Canada, Australia and, in the longer term, China itself.
SHAWN MCCARTHY – GLOBAL ENERGY REPORTER
DITCHLEY PARK, BRITAIN — The Globe and Mail
Published Sunday, May. 25 2014, 6:05 PM EDT
Last updated Sunday, May. 25 2014, 6:05 PM EDT