Guest post by Andrew McKillop:
Russia’s gas giant OAO Gazprom suspended gas deliveries to Ukraine on Monday 16 June, after days of negotiations with the Kiev interim government presided by ‘Chocolate Billionaire’ Poroshenko. This specially concerned gas prices for future deliveries, and payment arrears on gas supplied to Ukraine over many years, dating as far back as the 1990’s but especially since 2009.
The exact amount of these arrears is “controversial” and a major subject of dispute. They range from estimates by the IMF and European Commission of amounts less than 2 billion US dollars (about 1.4 billion euros) to estimates by Gazprom and Russian ministry sources of more than $4 billion.
To be sure the main concern in EU28 countries is a complete shutdown of Gazprom gas supplies through Ukraine to the EU countries, but this fear is made more real by the way the European Energy Commissioner Gunther Oettinger, and EU politicans have treated the issue. Oettinger and political leaders of the EU28 countries know that Ukraine’s Kiev government has been stocking huge quantities of gas – possibly 14 billion cubic metres more than its needs or the needs of downstream EU countries – so that it can be in a better bargaining position with Gazprom and Russia. Energy analysts suggest that Kiev could hold out against Gazprom, even if there is complete shutdown in gas deliveries, at least until early-September. The Kiev government claims it can “hold out until end of the year” even if gas supplies stay suspended.
During that time, the Kiev government can present Russia as the aggressor, which has prevented not only Ukraine but downstream gas consumers in Europe from having supplies.
Suspension of gas supplies ratchets up already high political tension between Russia and the Kiev government which claims that Russia is fomenting violence and arming separatist fighters in the eastern region. “We will not subsidize Gazprom,” acting Prime Minister Arseniy Yatsenyuk said. He claimed that “Ukrainians will not let Russia spend this money on weapons, tanks and planes to bomb Ukrainian territory.”
Yatsenyuk’s interim government is using IMF loans, US aid money and funds supplied by EU countries to pay for its own military operations, including airstrikes against Russian speakers who organized autonomy-seeking referendums in east Ukraine, calling them “terrorists”.
His interim government also admits it owes nearly 2 billion US dollars to Gazprom, and possibly much more than that. It also admits that before the “Maidan uprising” Russia’s President Vladimir Putin had offered subsidized gas prices well below European price levels, and the purchase of Ukrainian bonds on its national debt. This was refused by the Kiev interim government and its present behavior has been called emotional and political blackmail against Russia. Prime Minister Dmitry Medvedev said that Ukraine’s negotiating position “smells of blackmail.”
The EU has already urged Kiev not to deplete its natural gas storage, worried that both Ukraine and Europe could otherwise face shortages. Sabine Berger, a spokeswoman for EU energy commissioner Oettinger said: “It’s a problem if the Ukrainians now live from their [gas] storage”
The only advantage of the current situation is that high gas storage inventories in Ukraine and in other EU countries, and lower gas demand in summer means that most EU countries do not face any serious shortage for months ahead. This is nothing like the 2009 “price war” between Ukraine and Gazprom when several EU countries were badly hit after Gazprom cut off supplies in the middle of a very cold winter. The Kiev government may have hoped to create a “gas crisis” for Europe, to help their bargaining position but they chose the wrong time of year!
The main short-term effect will be price volatility and probably a small net increase in gas prices on energy markets in Europe.
Mr. Oettinger has said he would try to bring both sides back to the negotiating table this month and he continues to claim “this issue should be solvable” but the price conditions recommended by Oettinger are unrealistic. With European political leaders, he has continued claiming that Gazprom should supply Ukraine at prices as low as $300 per kcm (thousand cubic metres) in summer months, when all other major suppliers of gas to Europe – Norway, Algeria, Qatar and others – get much higher prices.
These very low prices would allow Kiev to buy more gas than it needs for domestic uses, and sell the rest to downstream gas consumers in Europe at a minimum of $400 – $450 per kcm.
Mr Oettinger made a point of talking about the political issue, saying: “We have to be prepared to ensure that Russia doesn’t use energy as a weapon against Ukraine; we can’t stand by and let that happen”. Mr. Oettinger on Sunday night, 15 June, proposed a winter price in line with Gazprom’s offer of $385 per kcm, but his proposed lower price for summer months of $300 was rejected by Russia.
The real solution is a unified gas price in Europe, or minimum and maximum gas prices from all suppliers, but Mr Oettinger says he does not like that idea and it is “against market principles”. His proposal, rejected by Gazprom, that Ukraine should receive very cheap gas so that it can sell it at a profit to other users is also not a free market principle. Ukraine has its own very large domestic reserves of gas – which have not been developed – meaning that if Kiev wants to sell gas at a profit, it should produce and sell its own gas instead of demanding very cheap supplies!
The gas price conflict between Ulraine and Russia may go to the Stockholm trade arbitration tribunal (SCC Institute) for a decision, probably taking more than 1 year, but in that case Gazprom can rightly claim that Ukraine has paid no gas arrears so Gazprom does not have to resume supplies until at least the arrears – for example the arrears as estimated by the IMF – are paid to Russia. Ukrainian officials have countered by saying the country’s gas storage inventories and imports from other EU countries via “reverse flows” of Gazprom gas, notably through Slovakia, would see them through to the end of the year but this is a risky strategy. Winter might come earlier than Kiev’s interim government hopes!
Andrew McKillop has held posts in national, international and Euro Commission energy, and energy policy divisions and agencies.
These missions have for example included role of National energy coordinator, Govt of Papua NG, Director of Information at the AREC technology transfer subsidiary of OAPEC, Kuwait, Senior energy research associate at the UN ILO and UNDP, Senior advisor to President, Hydro & Power Authority of British Columbia, Canada (BC Hydro), Seminar leader at the Administrative Staff College of India, Hyderabad, study, Senior energy associate at the Canadian Science Council, and elsewhere.
Andrew McKillop is a regular contributor to many specialist oil and energy Web sites. He was first energy editor of the journal ‘The Ecologist’ and has published works with other analysts, e.g. ‘Oil Crisis and Economic Adjustment’, Pinter Publishing, with Dr Salah al-Shaikhly, currently the Interim Iraqi government’s Ambassador to London.