European energy stability in the Russian hands

Signing a 10-year gas deal between Russia and Ukraine has put an end to the large dispute that caused more than 15 nations to scramble for alternative sources of energy

Russia and Ukraine have signed a 10-year gas deal, which looks set to resolve a dispute between the two countries that has left large swathes of Europe short of gas for nearly three weeks.

Oil fell to more than $2 towards $34 a barrel after Russia and Ukraine signed a 10-year gas deal clearing the way for the resumption of supplies to a freezing Europe.
The agreement, which set a final price for 2009 supplies, is expected to lead to the restart of flows of Russian natural gas to Europe via Ukraine to resume natural-gas exports to Europe via the Ukraine, which should end a dispute that had disrupted the flow of gas for around two weeks.

The heads of Russia’s Gazprom and Ukraine’s Naftogaz signed a new deal to end a long, bitter dispute that has left many European countries running short of fuel during a frigid winter. Under the deal Ukraine will get a 20 percent discount to European prices this year, but will have to pay full European prices starting in 2010, according to media reports.

That came after analysts foresaw that fighting between Palestinians and Israelis, together with the recent outbreak of the gas dispute between Russia and Ukraine may combine to push international oil prices higher.

Both, the heads of the two companies, said they hoped the gas crisis would never be repeated and pledged to do everything possible to make sure Europeans start getting gas as quickly as possible.

Earlier, Russia cut gas supplies to Ukraine on New Year’s Day, saying it would pump only enough for customers further down the pipeline.
Ukraine and Russia face negotiations over the renewal of gas supply contracts every year, but by midnight, on 31 December 2008, they had failed to agree on the price Kiev should pay for gas in 2009.

After initially offering to supply Ukraine at a price of $418 per 1,000 cubic meters of gas, Gazprom eventually dropped the offer to $250. Russian Prime Minister Vladimir Putin said that price, less than half of what most countries in Europe pay, was very generous.
But Ukraine rejected this offer and Moscow accused Kiev of blackmail by threatening supplies.

Ukraine later offered $235, but Gazprom has reverted to its previous demand, of $418. Meanwhile, Gazprom demanded payment of about $2 billion by the Ukrainian state energy firm Naftogaz; $1.6 billion in backdated bills and a further in $450-million fines for late payments.

Naftogaz claims it has fulfilled its obligations by paying $1.5 billion to RosUkrEnergo, a Switzerland-registered gas trading company, to cover its debts, but it disputes the fines.

Thereby, critics say that Russia is using its energy resources as a political weapon to pressure European and former Soviet countries to adopt favourable stances towards Moscow.

But disrupted exports have damaged Russia’s reputation as a reliable gas supplier.
Meanwhile, Gazprom has suggested that “political forces” in the pro-Western Ukrainian administration are seeking to provoke a wider confrontation with Russia.
From January 7th, gas supplies were completely halted, leaving a dozen or more countries without their expected supplies of Russian gas. Some, like Bulgaria, Serbia and Bosnia, are almost completely dependent on supplies via Ukraine and so were left with major shortages, during a very cold spell in Europe.

The European Union (EU) called the supply cut “completely unacceptable”, demanded immediate restoration and entered into shuttle diplomacy between Kiev and Moscow.

On January 12th, a deal was reached, whereby EU and Russian observers would monitor supplies from pumping stations on Ukraine’s eastern and western borders, in order to calm Russian fears that Kiev was siphoning off its gas for domestic use.

A day later, the transit gas to Europe was supposed to start flowing again, but Russia accused Ukraine of blocking the flow westwards across Europe. Kiev retaliated by saying said it could not pump the gas as Russia had switched the transit route.

Russia is a major supplier of natural gas to a dozen or more countries in Europe, with much of the supply moving through pipelines across Ukraine while Gazprom controls about a third of the world’s gas reserves and it is responsible for a quarter of Europe’s supplies.
Most of Europe’s gas is piped via Ukraine, and when Gazprom shut down the pipeline in 2006, the flow to the rest of Europe fell, in some areas, by 40 percent. Customers as far away as France were affected.

Since 2006, Ukraine has built up reserves that will cover its needs for several months, and most other EU countries have done the same.

Gazprom had already embarked on plans for pipelines that bypass Ukraine and Belarus, former Soviet states which are currently essential for transit. Gazprom has two major projects, Nord Stream and South Stream. Nord Stream will run for 1,200km along the bed of the Baltic Sea, and South Stream under the Black Sea. Gazprom has signed up big European partners: Italy’s ENI for South Stream, and German companies E.ON Ruhrgas and Wintershall, along with Dutch provider Gasunie, for Nord Stream.

The EU has major concerns about security of supply and is moving ahead with a pipeline plan of its own. Nabucco will bring gas from Central Asia and the Caspian across Turkey into the European Union. But it will have only enough capacity to provide a small proportion, perhaps 5 percent, of Europe’s needs.

So Europe needs Gazprom, and that is why European companies and their governments have actively embraced the two projects. Austria is likely to serve as a hub for both. EU officials say that even during the Cold War the Russian gas supply was stable, so it is better to rely on Gazprom than potentially unstable sources such as Turkmenistan and Uzbekistan.

By Ahmed Morsy & Tamer Abdel Aziz


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