6. The Natural Gas dispute between Ukraine and Russia

It is a ritual that now seems set to occur at the beginning of every year as Russia and Ukraine face off over the payment of previous gas bills, and Russia cuts off, or threatens to do so, all gas supplies to Ukraine (while urging them to continue to allow gas supplies to flow west through the pipelines to Western Europe). This year it has, again reached the point that the conflict has led to a shut-off in the gas supply. And now Western Europe is going to watch the same familiar dance play out once again as they wait to see how their supplies will be affected. Early this morning Naftogaz, the Ukrainian energy firm, announced a drop in gas pressure in the lines from Russia. Russia has also raised its price to Ukraine from $215 to $415 per 1,000 cu m (kcum).

To briefly review the background to the problem, one has first to look at a map of that part of the world and see that at present almost all the gas from Russia flowing West passes through Ukraine. However, at the same time Ukraine is one of the largest consumers of natural gas - it was sixth in 2006. This map is taken from Eastern European Gas Analysis.


At present Russia pays Ukraine some $1.70 per 1,000 cu m as a transit fee to allow gas to flow through the pipeline to the West. The scale of this dependence can be illustrated with some figures from 2007.

Germany bought 34.5 billion cu m (bcm) or 42% of its consumption.
Turkey imported 23.4 bcm for 67% of its use.
Italy was third using 22 bcm for 28% of consumption.
Britain bought 15.2 bcm for 16% of consumption.
France imported 10.1 bcm for 24% of consumption.
Hungary got 7.5 bcm for 60% of consumption.
The Czech Republic bought 7.2 bcm for 80% of consumption
Poland bought half its natural gas from Russia
Austria bought 5.4 bcm for 60% of requirements
Greece buys 75% of its gas from Russia
While Slovakia, Bulgaria and Finland get all of their supplies from those pipelines.

There have been some attempts to get around the problem, but until the alternate pipelines known as the Nord Strream and South Stream pipelines, come on stream at some time in the future, the gas must largely flow through Ukraine.

Earlier this fall Turkey had tried to increase the amount of gas that it could purchase from Iran. This despite the fact that last January they were buying more from Russia to offset shortages from Iran.

Now there is an additional catch to all this, in so far as the Russian supply, to some extent, actually comes from Turkmenistan, Azerbaijan and Kazakhstan. The Russians, in the same way as the Ukrainians, charge a fee to transit the gas West. Gazprom has been busy this past year trying to lock up that supply. However their history in dealing with Turkmenistan has not always been that amicable with Turkmenistan getting paid considerably less than the price that Russia obtained for the gas at the other end of the pipeline.

The differences in price that Russia charges to favored customers can be quite dramatic, with Belarus for example only paying $119.53 per kcum. Prices, however, are slated to go up. Belarus also provides a secondary pipeline that carries natural gas to the West, and flow rates through that pipe have already increased by 25%.

We are now just at the start of this years dance, and we shall just have to wait now and see how this plays out over the next few days.