8. The continuing dispute between Russia and Ukraine

It is winter in Europe and, as I first mentioned last week, there is the usual dispute between Russia and the Ukraine about the latter paying for the gas that they have been getting from Russia. The problem is a little more complex, and likely to get more so, since some of the finances behind the conflict are now becoming apparent.

One of the worries about this situation, going into the future lies in the Russian ability to maintain the levels of production that will be needed in the West. For while Gazprom has significant reserves that could be tapped, there have been delays in awarding contracts, a move away from collaboration with outside investors and thus some question as to whether the levels of daily production can be maintained, particularly in harsher winters.

To get some sense of the situation, we need to look at some of the numbers. Normally Russia exports about 300,000 tcm (thousand cubic meters) a day to Western Europe and 90,000 tcm to Ukraine. Ukraine has been paying $180 per tcm, but rejected the initial 2009 price of $250 per tcm, and so Russia responded by raising the price to that which it gets from the West (some $418 per tcm). Part of Ukraine’s response has been to raise their transit fee for the Western gas from $1.70 per tcm per 100 km to $4.00. However both prices are likely adjustable, since Gazprom itself anticipates that the price of the gas in the West may fall to $280 per tcm this year. But that is only part of the story.


The deal now gets more complicated, because not all the gas that goes West actually starts in Russia. With much of the gas that, for example is normally sold to Ukraine originating in Turkmenistan, there was this report from last January

RIA Novosti had reported that in the month of January 2008, RusUkrEnergo, the middleman that supplies Central Asian gas to Ukraine, had only pumped Russian gas to Ukraine because the harsh winter conditions had caused drastic reduction of gas supplies from Central Asia.

It was a statement that the Turkmen fudged an answer to, amid questions as to whether exports were taking place at the expense of local consumers.

Now the price that Turkmenistan gets for the gas has been around $150 per tcm, (while Turkmenistan planned to sell it to China for $80 per tcm). But while deals to bring 30 million tcm of Turkmen gas and 10 million tcm of Khazakh gas to Russia through a new pipeline continue to advance, the price may be subject to re-negotiation.

This should be born in mind since the Turkmen deal with China has started to slip delivery dates . The planned start of the 30 million tcm delivery this year has now been postponed from this year, even though work continues on the connecting pipeline which will also pick up some Uzbek and Kazakh gas on its roughly 5,500 km way to China.

At the same time Turkmenistan has agreed to keep supplying Iran with 25,000 tcm a day, at an undisclosed price, for the next six months, with the proviso that the supply can be raised to 30,000 tcm if needed. While the price was not mentioned, debate last year centered around a figure of $140 per tcm, up from $75 in 2007.

Now when Gazprom Chairman Miller went to Turkmenistan earlier this year he offered them a price of around $340 per tcm, starting this year. And so part of the question has to be whether this price is also being re-negotiated.

In the meanwhile Russia is seeking to expand the pipeline that carries natural gas from Yamal through Belarus to Germany, and which currently carries 30 million tcm per year, but which is scheduled to be expanded by 2010 to carry 67 million tcm. It is also trying to accelerate the Nord Steam pipeline that would carry up to 55 million tcm of natural gas to Germany through the Baltic and short circuit the Ukrainian problem. That process, however, is just entering its period of public hearings. and so may not provide as fast a solution as once anticipated. (See map here.) And Gazprom has also brought onstream the Achimgaz field in Siberia, with some 1 million tcm of reserves, and this, with the Yuzhno Russkoye field, that came on stream in 2007, and is running at 50,000 tcm/day with a 50% increase in well numbers planned to full production, of the anticipated 600 million tcm field.

Putting all those numbers together it would appear that the current dispute is only going to repeat again only a few more times, and that long term supplies of gas to Western Europe might be reasonably assured, for a price. But this dispute isn't over yet, and in the meanwhile Greece, at the far end of one of the supply lines, has now seen supply drop by a third – and the dispute isn’t even a week old yet.

Oh, and just a short technical note, the volume of gas that flows down a given pipe size is controlled by the pressure at which the gas is pumped into the line. So the higher the pressure, the greater the volume, and vice versa. So that the way in which the volumes that the Russians are supplying is controlled is by dropping the supply pressure, and this lowers the volume of gas going into the line, and thus also out the far end. But then you knew that already.