Gas cutoff sparks fear of wider crisis Europe feels effects of Ukraine dispute
 
Jan 3, 2006 - International Herald Tribune
Author(s): Andrew Kramer

Russia's abrupt disruption in natural gas supplies intended for Ukraine cascaded through the European pipeline system Monday, with Hungary, Austria and Slovakia reporting a drop in pressure at a time of peak winter demand, deepening the sense that a dispute between Russia and Ukraine over prices was spiraling into a wider energy crisis.

 

An executive at Gazprom, the Russian energy giant, accused Ukraine of diverting natural gas exports intended for Western Europe to satisfy the needs of the former Soviet republic of 48 million people, with an economy heavily dependent on cheap natural gas. Ukraine's energy minister immediately denied the accusation.

 

Gazprom provides about a quarter of Western Europe's natural gas and most of that about 80 percent is shipped through a grid of pipelines that cross Ukrainian territory.

 

On Sunday, Gazprom reduced the flow into Ukraine by 20 percent, saying it expected Ukraine to continue shipping the remainder westward.

 

Yet Aleksandr Medvedev, the director of the export arm of Gazprom, said Monday that Ukraine had already siphoned 100 million cubic meters, or about 3.5 billion cubic feet, of natural gas intended for export to Western Europe on the first day.

 

Speaking on Russian television, Medvedev took pains to assure West European clients that the Continent's energy supplies will remain secure through the company's dispute with Ukraine, while striving to divert any blame for a disruption onto Ukrainian authorities.

 

"With the indisputable thievery of our gas from the export pipes, we've decided to take all possible measure to secure our gas so that Western consumers continue to receive gas in accordance with contracts," he said on state television.

 

Medvedev said Gazprom had asked an independent auditor to monitor the flow of gas across Ukraine and alleged that siphoning on the first day had cost Gazprom about $25 million in lost export revenue.

 

Ukraine's fuel and energy minister, Ivan Plachkov, immediately denied the accusation, a delicate issue for Ukraine, which is a signatory of the European Energy Charter, a treaty that seeks to secure the flow of fuel across borders.

 

"There has been no unauthorized diversion of natural gas," he said, according to the Interfax news agency.

 

The Ukrainian authorities, meanwhile, said the flow had all but stopped in three gas mains in Ukraine and that some households and factories were at risk of losing energy, according to Russian news reports.

 

The dispute comes a year after the Orange Revolution brought a pro-Western government to power in Ukraine and ends a decade of post- Soviet subsidies in the form of cheap energy that allowed Russia to retain some influence over the former Soviet republics.

 

Choking off the westbound pipes is a dramatic gamble by Russia, one likely to send political and economic ripples westward in the months ahead. Russia is positioning itself to become an energy- supplying nation capable of easing dependency on Middle Eastern oil in Western Europe and even in the United States.

 

On the same day it throttled back its gas to Ukraine, Russia assumed the chairmanship of the Group of 8, the club for the world's large developed economies, promising to push the theme of "energy security." Sunday's early-winter cut in gas supplies to Ukraine came as an unsettling reminder that promises of energy exports are not Russia's only method of using oil and gas to further its foreign policy goals it can also turn off the valve of energy exports.

 

The victory of Viktor Yushchenko as Ukraine's president last winter pulled the former Soviet country from Russia's sphere of influence. A gas shortage this winter could discredit him and weaken his party, with parliamentary elections coming up in March.

 

Tellingly, President Vladimir Putin of Russia was personally involved in the negotiations. It was he, rather than company officials, who on Saturday made the final offer of a grace period.

 

Already Monday, there were signs of political fallout in Kiev, Ukraine's capital. The People's Opposition alliance, a group opposed to Yushchenko, has asked two other opposition parties to call an emergency session of Parliament during what is usually an extended vacation after the New Year's holiday.

 

The party said it would push Yushchenko to hold "speedy and effective talks on the gas issue with Russia," according to Interfax.

 

A jump in Russia's utility bill to Ukraine is at the heart of the current conflict. Russia is seeking to charge $220 to $230 per 1,000 cubic meters of natural gas, up from $50. Ukraine's economy has depended on buying cheap energy from Russia, which provides about a third of its natural gas supply.

 

The effects were starting to be felt in Europe. Natural-gas suppliers in European countries including Austria and Hungary said Russia's decision to halt supplies to Ukraine had reduced deliveries by as much as 40 percent and could result in supply cuts for some customers, Bloomberg News reported.

 

Gas supplies from Russia to Austria fell as much as 33 percent last night, and energy ministers from Germany, Italy, France and Austria had made a joint appeal to Moscow and Kiev to keep gas flows steady, Bloomberg reported. An emergency European Union meeting is scheduled for Wednesday. The U.S. State Department, expressing hope that the conflict would be resolved, said in a statement: "Such an abrupt step creates insecurity in the energy sector in the region and raises serious questions about the use of energy to exert political pressure. As we have told both Russia and Ukraine, we support a move toward market pricing for energy, but believe that such a change should be introduced over time rather than suddenly and unilaterally."

 

Putin has said that Russia's foreign policy will hinge on energy exports. In trips to Germany, Turkey and Japan last fall, he boldly promised not only a secure supply of fuel for the West, but also that Russia could become a much larger energy exporting country in the years ahead.

 

He pushed Germany to endorse a multibillion-dollar underwater gas pipeline in the Baltic Sea. Gazprom is hoping to extend the pipe to Denmark, Belgium and Britain. Gazprom is also in talks with a shortlist of five major energy companies to develop a huge gas field in the Barents Sea, far above the Arctic Circle off western Russia, hoping to ship significant quantities of liquefied natural gas directly to the United States, the world's largest energy consumer.

 

Gazprom is the Russian government's largest energy policy instrument though the company sometimes insists it operates only on business principles. The loss of fuel, if it persists, could shake Ukraine's economy the way the 1973 oil embargo helped plunge the United States into recession. Ukrainian officials said the loss could reverse its modest economic growth to cause a contraction of between 4 percent and 5 percent this year.

 

The dispute involves complex arguments by Gazprom, which says the price it wants to charge Ukraine is based on the prices of competing fuels, such as diesel and bunker oil, on international exchanges. But not far below the surface, there is the embarrassing loss of a Kremlin-backed candidate in last winter's Orange Revolution.

 

Russia has increased the costs of its natural gas to other former Soviet states, though not as steeply. Belarus, a Russian ally, pays $47 per 1,000 cubic meters.

 

Bt reducing the flow of natural gas from a rate of around 120 million cubic meters per day to 96, according to Gazprom Russia demonstrated there is only so far Ukraine can go before Russia reacts, and that indeed the country is still within Putin's range of influence.

 

Each side blamed the other for the breakdown in talks.

 

On Sunday, Gazprom reduced the pressure in the gas mains leading to Ukraine at three metering stations and ceased raising pressure in the westbound pipelines from a storage system that is designed to keep the pressure up during peak demand in the winter. It was unclear whether the impact on the other countries was a result of Gazprom's action or whether it was the result of any interference by Ukraine.

 

"It's their task not to take the gas that goes through their territory," a Gazprom spokesman, Denis Ignatyev, said by telephone.

 

In addition to a large pipeline called "Brotherhood" for the supposed warm relations between the two Slavic republics in Soviet times Russian gas enters Ukraine through more than 100 smaller pipes.

 

"There's a lot of posturing and a lot of ways to put pressure on Ukraine," said Leonid Mirzoyan, an equity analyst at Dresdner Kleinwort Wasserstein, a financial company that has investment banking business with Gazprom.

 

 


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