RUSSIAN GAS GIVES EU HEARTBURN

The settlement announced overnight between Russia and Ukraine that will allow Russian natural gas to once again start flowing to Europe highlights Russian deep strategy. The Russian Bear’s use of its gas as a political weapon to express hostility toward Ukaine’s pending NATO membership is only the surface of the story.

Everybody in Europe wants new natural gas pipelines from Central Asia to Europe. But Europe wants them to come through Turkey (the Nabucco line) and Russia wants them to come through Russia (the Nord Stream and South Stream lines). Hence the sense of déjà vu as Gazprom’s supply of Europe is once again disrupted in midwinter.

Gazprom is coming off a few cold months of active sales. Once monitors are in place in Ukraine, Gazprom can count on a few months more of active sales to recover from losses incurred during the interruption. The settlement ends a 2-week disruption that left factories across Eastern and Central Europe temporarily shuttered and citizens shivering. The losses represent a short-term fall off in Gazprom’s sales that will quickly be made up. The shutdowns and shivering will be long-remembered.

Ukraine is a convenient whipping boy, its pre-existing hostility a fact of life for Moscow, its treatment a warning to other former Soviet satellites.

Chris Weafer, strategist, Russia’s UralSib Bank: "If this is done relatively quickly ... then Gazprom can easily shrug off any short-term reputational damage and emerge in a better position…"

Ukraine is a central transit site. (click to enlarge)

A Bulgarian business group’s outraged accusation that the government’s amnesia regarding the 2005 disruption of supply led to Bulgaria’s current desperation misses the point, as does conventional wisdom.

Conventional wisdom is that this is between Russia and Ukraine.

Krasimira Dimitrova, resident, Sofia, Bulgaria: “Half of Europe has become a hostage of the squabbling between Russia and Ukraine. This is pure blackmail, totally unacceptable and we should demand financial compensations…"

The squabble is not between Russia and Ukraine. It is between Russia and the EU.

Tanya Costello, director, Eurasia Group: "The EU will now be thinking more than ever that, whoever is to blame, the relationship between Russia and Ukraine over gas is very problematic and puts gas supply to the EU at risk…That will strengthen the political will to further projects that would allow the EU to diversify away from Russian gas."

Russia wants everybody’s attention. Tellingly, the matter has been publicly handled not by President Dmitry Medvedev but by Prime Minister Vladimir Putin, the real power in Russia. Putin is (by implication) making it clear: Build those pipelines where we want them (Nord Stream and South Stream) or risk ongoing compromised supplies.

Russia’s move is especially cynical because it demonstrates its doubt that the EU can organize to prevent the domination. All that is needed is a European-wide gas and electricity transmission system and alternate power supplies.

Katinka Barysch, deputy director, Centre for European Reform: "If they needed a reminder it is necessary to have a unified European gas grid, to have more gas storage and build alternative pipeline routes, then Gazprom has just given them that reminder…"

Russia’s boldness is doubly inspired by the global financial crisis.

On the one hand, the crisis has prevented the EU from funding even small new infrastructure projects such as 15 km and 80 km pipeline spurs to Romania and Bulgaria, much less the Nabucco pipeline, which will eventually bring large enough volumes of Caspian and Middle East gas through Turkey to break Russia’s stranglehold.

Jonathan Stern, Oxford Institute for Energy Studies: "Larger volumes will not be available until the early 2020s…All new infrastructure development will be slowed by the economic recession."

On the other hand, the economic downturn and concomitant crash in oil prices no doubt makes Russia desperate to assert its dominance while it holds all the cards. While strangling the EU in Ukraine, recent events remind the world the proposed Nabucco line could still be interrupted by Russian action in states like Georgia and it would make Europe as dependent on Iran as it now is on Russia. (See GEORGIA'S PIPELINES AND EUROPE'S CHOICE...)

Which devil, the one the EU knows or the one it rues? (click to enlarge)

Forget Nabucco, Russia seems to be telling the EU. Build Nord Stream and South Stream directly to our supplies and make peace with the Bear or risk forever compromised supplies.

To the extent that Eastern Europe persists in dependence on imported natural gas, Russia is right. Dependence on the Bear is inescapable because it is preferable to dependence on the Ayatollahs. One of the reasons Nabucco has not been financed is U.S. refusal to support a pipeline that will enrich Iran.

As power rationing and shortages threatened, Eastern Europe turned to electricity, largely generated from dirty coal, for heating. The crisis also inspired renewed calls for new nuclear plants, some of which are presently under construction though far behind their schedules and over their constrained budgets.

There is, though, another option. The former Soviet satellites are among the most inefficient energy consumers in Europe and lag far behind Western Europe in development of their New Energy resources.

More importantly, Europe has committed to development of Supergrid, a plan to share Northern European and North Sea wind power across the Union, and it is planning a Tran-Mediterranean project to bring in solar energy-generated electricity from North Africa.

Russia is half right: Forget Nabucco - but not in favor of Nord Stream and South Stream. In favor of New Energy.

Watch grumpy Papa Bear turn into cuddly Cubby Bear when long term demand for natural gas starts dropping.

The only choice that really makes sense. (click to enlarge)

EU monitors arrive to get Russian gas flowing again
Gleb Garanich, January 11, 2009 (Reuters via Washington Post)
and
Gas row exposes east Europe's Achilles heel
Anna Mudeva (w/ Tsvetelia Ilieva, Ivana Sekularac and James Jukwey), January 9, 2009 (Reuters via UK Guardian)
and
Bulgaria has learned what energy dependence really means
Petar Kostadinov, January 9, 2009 (The Sofia Echo)
and
Gas row risks long-term damage to Russia's reputation
Robin Paxton and Tom Bergin (w/Christian Lowe), January 9, 2009 (Reuters)

WHO
Gazprom; 18 EU nations; Meglena Kuneva, Consumer Affairs Commissioner, EU; Bulgarian President Georgi Purvanov and Prime Minister Sergei Stanishev; Chris Weafer, strategist, Russia’s UralSib Bank; Tanya Costello, director, Eurasia Group; Katinka Barysch, deputy director, Centre for European Reform; Jonathan Stern, Oxford Institute for Energy Studies; Meglena Kuneva, Consumer Affairs Commissioner, EU; Tim Gould, Caspian-Caucasus-southeast Europe expert, IEA; Aleksandar Kovacevic, energy analyst, Serbia; Fyodr Lukyanov, editor, Russia’s Global Affairs; Julian Lee, senior analyst, Centre for Global Energy Studies

WHAT
The cutoff of natural gas supplies to Eastern and Central European nations by Gazprom as a result of its conflict with Ukraine reveals the vulnerability of dependence.

The big picture. (click to enlarge)

WHEN
- The January 1 cutoff to Ukraine and subsequent January 6 cutoff to other EU countries, just like the similar incident in 2005, came in midwinter, just when gas for heating is most urgently needed.
- Medvedev’s term as nominal Russian leader is up in 2012. Putin is expected to resume offical power then.
- Though Nabucco could be completed in 2013, adequate alternative gas supplies via Nabucco are not expected before 2020.

WHERE
- The cutoff is due to a fundamental disagreement about payment to Moscow (Gazprom) by Kiev (Ukraine).
- Both Bulgaria and Croatia have termed the situation “a crisis.”
- Bulgaria has 1 natural gas pipeline that carries natural gas from Russia to Greece, Turkey and Macedonia.
- Serbia and Bosnia depend entirely on Russian gas supplies for heat and electricity and have no reserves.
- Also affected: Austria, Germany, Turkey, Greece, Italy, France, Hungary, Czech Republic, Slovakia, Bosnia, Serbia. Moldova

WHY
- Russia’s economy contracted 1.1% in 2008, the 1st contraction in a decade.
- 80% of the Russian gas that goes to Europe, 20% of the EU’s supply, goes through Ukraine.
- Eastern European countries could have but did not free themselves of dependence on Russia with new supply lines, improved efficiency or new energy sources.
- In return for serving as a supply transit site and because of its position as a former Soviet satellite, Ukraine pays Russia $179.50/1000 cubic metres for natural gas while most of the rest of the EU pays $450.
- Most Eastern European countries also do not have significant stored gas supplies to ease the impact of the cutoff.
- Factories across eastern and central Europe were forced to stop operation because of the lack of fuel.
- Blackouts and power rationing could result if the cold and the fight over price continues.
- Many are turning to electricity for heat.
- The EU’s situation could be somewhat alleviated by interlinking eastern and western power sources and upgrading the outdated Eastern European Soviet-era grid and gaslines to improve transmission losses and other inefficiencies.
- The Nabucco pipeline is a longer-term solution.
- The gas line interlinks involve Hungary, Austria, Slovenia, Croatia, Bosnia, Serbia, Romania and - Bulgaria and would facilitate gas imports from Azerbaijan and the North Sea.
- Nabucco would transport large gas volumes from the Middle East and the Caspian regions through Turkey.

Georgia is the other major transit site. (click to enlarge)

QUOTES
- Meglena Kuneva, Consumer Affairs Commissioner, EU: "This is a big lesson for us all to realise how dependent we are and to find ways to reduce this dependence… We have seen paradoxes -- gas from one part of Slovakia could not be brought to another one simply because there is no pipeline connection…"
- Tim Gould, Caspian-Caucasus-southeast Europe expert, IEA: "Investment in regional infrastructure and greater interconnection of both gas and power markets would...allow the region to cope better with supply shocks…"
- Aleksandar Kovacevic, energy analyst, Serbia: "The energy efficiency [in Eastern Europe] is three to four times lower than in Western countries…"
- Fyodr Lukyanov, editor, Russia’s Global Affairs: "You couldn't invent a bigger present to those in Europe who say you have to find other sources, diversify, at any price…"
- Julian Lee, senior analyst, Centre for Global Energy Studies: "That's their only real positive out of this...The one thing they will seek to exploit through this is European fear of a disruption to gas supplies, which Moscow is already blaming on Ukraine."