Russia Ukraine Gas War

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!

Extended Bio

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.


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5 Responses to Russia Ukraine Gas War

  1. Willem Post says:


    Thank you for writing this summary.

    I had not heard about a summer price, only Oettinger’s proposal of $325/1000 cm (which Gazprom rejected), whereas, in 2013, Gazprom charged Europe an average price of $387/1000 cm!!

    Ukraine’s prime minister and his sidekick the energy minister are unrealistic, pig-headed, regarding their demands, which may be orchestrated with US input, just to needle Russia.

    Gazprom would like to build out Nord-Stream from 2 to 4 lines, and start construction on South Stream which will also have 4 lines. But, Europe came up with its Third Energy Package to frustrate Gazprom/Russia.

    With that capacity, Russia will sell nothing to Ukraine, except if paid in advance, will completely bypass Ukraine to send gas to Europe.

    Ukraine will have to get any gas it needs from its other neighbors.

    I wrote an article on the subject which covers a lot of territory. I look forward to your comments.

  2. Euan Mearns says:

    In Andrew’s posts there is normally at least one thing I disagree with. In this on it is the notion that Ukraine has its own very large gas reserves. According to BP, Ukraine reserves are 600 billion cubic meters (bcm) – which is not a lot. Gas production runs at 19 bcm and annual consumption at 45 bcm.

    There are a number of extraordinary things about the current stand off 1) neither Russia nor Ukraine are members of the EU and I don’t understand why Oettinger sees that he has any mandate to interfere 2) Ukraine has effectively been stealing gas from Russia for many years and have just been given a very large sum of money from the EU and IMF. If the EU were to have a position it should be to direct Ukraine to pay the arrears in full and to respect the rule of law and 3) Russia is currently building the South Stream pipeline to circumvent this thorn in their side that is Ukraine. The EU have just forced a halt on this work paid for by Russia aimed at enhancing European energy security.

    The EU have lost the plot completely on this one!

    • Willem Post says:


      Here is Ukraine’s gas consumption for 2013


      Ukraine gas consumption, Bcm, was 53.1, 59.0, and 61.9 for 2009, 2010 and 2011, respectively.


      Imports from Russia……….32.940………………..27.970*

      * Naftogaz 12.92, Ostchem 12.92, EU reverse flow 2.13 in 2013.

      Russia, to increase its influence in Ukraine, agreed in December 2013 to reduce the gas price for Kiev to $268.50 per 1,000 cubic meters, about 1/3 less than the $385.50 Ukraine had paid since 2009. As a result of recent events, Russia has rescinded the December 2013 gas price reduction, and increased the $385.50 price to $485.50.

      Putin warned that Ukraine’s mounting debt is forcing Moscow to demand advance payments for further gas supplies. He warned that if Ukraine failed to make such payments, Russia’s state-controlled Gazprom would cease or partially reduce gas deliveries via Ukraine.

      The EU is aiming to have decrepit, corrupt, dysfunctional Ukraine into its orbit (taking on an additional BIG dependency, as if Greece, Spain, Italy, Ireland, Portugal, etc., are not enough!!) to sell more goods and services to its 46 million people to boost EU’s near-zero growth economy, and wants Russia to continue to subsidize Ukraine’s economy (supplying cheap gas, buying its easily-printed worthless bonds, buying its low-quality exports, etc.), instead of the EU having to do it.

      Russia has said to the EU: No thank you, it is your turn. Russia is demanding Ukraine pay about the SAME gas price ($385/1000 cm) as the annual AVERAGE price the rest of Europe pays ($387/1000 cm in 2013), and because of non-payment of past-due bills (about $4.5 billion, depending on who is doing the accounting), Russia is demanding any gas delivered for Ukraine’s consumption be pre-paid.

      Ukraine crowing about increasing “reverse flow” sounds ominous, but will the suppliers of that gas not want to be paid by Ukraine?

      Adding South Stream and building out Nord Stream from 2 to 4 lines would enable Russia to completely bypass Ukraine AT ALL TIMES, not just during the summer. However, Europe partially relies on Ukraine’s large gas storage facilities for continuous supply during winter. Russia said, it is a reliable supplier, has plenty of gas, and also has large storage facilities that could easily take the place of Ukraine’s.

      But for the past 25 years, it has been the Europe/US/NATO/CIA geo-political goal to hamstring/encircle Russia using Ukraine, Georgia, etc., as their foils, just as if the Cold War never ended.

    • Roger Andrews says:

      Euan: After doing a little reading I get the impression that the answer to your extraordinary thing 1) may be your extraordinary thing 3). South Stream is a lot more important to the Russians than a few unpaid Ukrainian gas bills, and I think they would like to make some kind of a deal with the EU to get things moving again as an offshoot to the Ukraine talks. Oettinger has so far refused to discuss the South Stream construction shutdown, but that could be because he’s embarrassed about having assured the Russians back in January that EU rules wouldn’t be a problem:

      On the subject of the EU losing the plot, Juan Manuel Barroso really seems to believe that shutting down South Stream construction will enhance European energy security:

      “We have to make sure that the rules of the internal market are respected, not only because it’s our duty, but because ….. European energy security would be at risk if these rules are not observed,”

      • Willem Post says:


        A lot has happened since those statements were made.

        Russia has cut off gas to Ukraine, insists on getting paid the amounts due BEFORE resuming gas flow, and requires pre-payment for any future deliveries, at a price of $385/1000 cm, about the same as the average price of $387/1000 cm paid by Europe in 2013, and will sue regarding reverse flow, as it is RUSSIAN-OWNED GAS IN TRANSIT until paid for.

        It would be like taking a car off a dealer’s lot, letting others drive it, and pay for it later.

        Ukraine’s new president responded with an ultimatum (with likely advise from the CIA, FBI, EU, US, NATO); a cease fire for a few days to give “terrorists” time to lay down their weapons, or we will have a lot of them in coffins, but, if they do lay down their weapons, we have a lot of them in jail for treason and murder Yikes!

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