The SMH reports that Russian gas exports via the Ukraine have been blocked yet again - Europe gas halted as Russia-Ukraine deal falters.

Russia's natural gas supplies bound for a freezing Europe were halted again on Tuesday only a few hours after a truce had been announced in its "gas war" with Ukraine. The Gazprom energy giant accused Ukraine of blocking gas bound for Europe, while Ukraine blamed "unacceptable" technical conditions imposed by Russia.

The breakdown again infuriated the European Union as hundreds of thousands of people shivered in the depth of winter and factories and schools remained closed in many countries.

European Commission chief Jose Manuel Barroso telephoned Russian Prime Minister Vladimir Putin, to express the "EU's disappointment" at the new hurdles.

"Ukraine has blocked all our actions in respect of renewal of the transit of natural gas through Ukraine, which is unbelievable," said Gazprom's deputy chief executive Alexander Medvedev. "In these circumstances we again don't have the physical possibility to transit gas to European customers and the whole responsibility for this lies on the Ukrainian side," he added.

The ABC reports that Gazprom is accusing the Ukrainians of being American puppets - Gazprom accuses Ukraine of being 'US puppet'.

Russian state-controlled gas behemoth, Gazprom, has accused the United States of orchestrating the Ukraine's actions in the gas dispute that has left Europe with gas shortages. Russia started pumping transit gas destined for European consumers into the Ukraine earlier today for the first time since transit supplies were halted on January 8.

"We believed yesterday that the door for Russian gas was open but again it's been blocked by the Ukrainians," Gazprom deputy chief executive Alexander Medvedev said on a conference call with reporters. "It looks like... they are dancing to the music which is being orchestrated not in Kiev but outside the country."

Mr Medvedev said he was referring to an agreement signed between the Ukraine and the United States. He did not name the agreement.

The Times reports that British gas reserves have fallen to less than a week’s supply of UK consumption - Britain close to low gas alert.

BRITAIN’S gas network operator is on the verge of issuing an emergency alert that could lead to cuts for industrial users and potentially affect Ireland, which takes 90% of its supply from Britain.

The National Grid in Britain said it could issue the “gas balancing alert” in the next two to three days because reserves had fallen to less than a week’s supply of UK needs.

Suppliers were forced to dip into reserves last week after energy companies began siphoning gas out of Britain to supply other parts of Europe.

Bord Gais said on Wednesday that consumption had reached a two-year high due to cold weather but it would take months before the row between Russia and Ukraine would cause a shortage in Ireland.

“The conflict would have to run into months before it would be a problem for Britain and Ireland,” said John Mullins, the Bord Gais chief executive.

Jerome a Paris ha an update of his regular series of posts on the topic at The Oil Drum - Gas crisis: Is Gazprom really expecting Europe to take its side against Ukraine?

It looks to me that Gazprom seems to be thinking that it had successfully managed to put the blame for the conflict on the Ukrainians, and was trying to push its advantage and finally separate the issue of payment for gas delivered to Ukraine from that of the transit of gas (thanks to the European monitors enlisted to put the blame on Ukraine for blocking further gas deliveries).

But it looks like we're back to square one: the Ukrainians will not accept to pay for the portion of the gas delivered by Gazprom, and will still hold transit hostage to impose that. It will be interesting to see Europe's reaction, but I don't see them taking sides in favor of Russia in this conflict.

I presume that Gazprom sees little downside to this, expecting that this will improve the prospects of its direct pipeline projects like Nordstream and Southstream, but this might be a bad miscalculation.

With the nuclear lobby strengthened in recent years, and wind industry actually able to deliver, it's quite possible that plans to move away from gas-fired power generation could finally take shape and make Europe, for almost the first time, focus on the demand side of the equation.

Gazprom's main asset has been its reliability. Its extended shenanigans in Ukraine (where their case, once again, is rather narrow and weak, altogether) are endangering this a lot more than they improve prospects for additional revenue from Ukraine.

Energy Bulletin has an article on the impact of the gas situation on prospects for the Nabucco pipeline (ignoring one key option that I've been meaning to write a post on for a while) - Russia-Ukraine gas row - cacophonic overture to Nabucco summit.

he hardship imposed on Central and Southeastern Europe by the delivery hiatus of Russian gas via Ukraine has unleashed a free flow of speculations about the future of the Nabucco pipeline project. Nabucco could bring Europe a modicum of badly needed independence from Russia’s state-dominated Gazprom, the world’s largest gas company. It could also provide some protection against being held hostage by the endless wrangling between Moscow and Kiev over prices, pilfering, and unpaid bills.

To seal the deal and make final commitments, a summit is scheduled in Budapest on January 26-27, with the participation of consortium members (Austria, Bulgaria, Germany, Hungary, Romania, and Turkey) and potential suppliers (Azerbaijan, Egypt, Iraq, Kazakhstan, and Turkmenistan), the European Union (as represented by the Czech Republic, which is currently filling the role of the Union’s rotating presidency, and the EU energy commissioner); the Council of Europe and the European Bank for Reconstruction and Development. Invitations have also been extended to the United States, Russia, and Georgia -- a temporary transit country for Caspian gas shipped to Turkey.

While the most recent bout between Russia and Ukraine appears to raise Nabucco’s prospects, other news and the entire constellation of circumstances leading up to the summit are discouraging.

Nabucco’s stage, cast, and maddening difficulties of orchestration
With an estimated construction cost of $10 billion, the pipeline would transport Caspian and Mideastern gas along its 2,050-mile long route from Erzurum, Turkey, through Bulgaria, Romania, and Hungary, to the Baumgarten Hub in Austria, from where further customers in Central and Western European would be served. If construction begins next year, as currently envisaged, the system could become operational by 2013, and could reach its full throughput capacity of 31 billion cubic meters per annum (bcm/y) by 2020. The Nabucco consortium is managed by Austria’s OMV, Central Europe’s top oil and gas group, and includes the leading energy companies of the rest of the four countries along its route, plus the German utility giant, RWE.

Nabucco enjoys EU support and U.S. approval, yet it has been struggling from the start. It has to compete for Caspian and Mideastern gas resources not only with formidable Gazprom, which is building up its capacity to serve European markets, but also with China, to some extent India, and with other projects designed to reduce Russia’s grip on Europe’s energy sector.

Gazprom’s ability to deliver gas to Europe will increase through the construction of the North Stream (completion date 2012), the South Stream -- Nabucco’s direct rival -- with 2015 as the completion date; and the expansion of the Blue Stream, supposedly ready by next year. The main Gazprom-competing projects, in addition to Nabucco, are the Turkish-Greek-Italian Gas Connector (completion date 2012), the Trans-Adriatic Pipeline (completion date 2012), and the White Stream or Georgia-Ukraine-EU line (proposed).

Inhabitat has a report from Bulgaria on the continuing impasse between Russia and the Ukraine over Russian gas exports - Gazprom Crisis Engulfs Europe.

Home heating price increases have certainly been a major concern for recession-strapped households in northern climates, but the possibility of having one’s heat completely shut-off in this new era of natural resource ‘muscle flexing’ and bitter political show-downs is perhaps a whole new energy policy boiling point in Europe and beyond. Russia’s decision this week to turn off the flow of gas from its Gazprom pipelines to the Ukraine, which in turn forced many European countries to rely on their (in some cases virtually nonexistent) gas reserves, demonstrates the dire need to identify alternatives to Siberia and the Middle East for our massive oil and gas dependencies. Given that my family and I are currently in Bulgaria for six weeks, we are experiencing the Gazprom gas cut-off crisis first-hand. This issue will not be going away any time soon, despite the band-aid patches that will crop up over the next few weeks and months.

Media sources from around the globe began reporting earlier this week that exports of Russian gas via Gazprom had ceased to flow from Russia to the Ukraine. Central and Eastern Europe were worst hit as the bitter cold shuddered in the New Year with temperatures plunging to -10 C or lower in some regions. Heating systems were shut down as regional officials grappled with how to allocate whatever reserves, if any, they had – does one prioritize the elderly, the very young, schools, hospitals? According to reports from the BBC, “the EU says it wants its own monitors to check the flow of gas. The EU depends on Russia for a quarter of its gas supplies, some 80% of which is pumped through Ukraine. The countries that have reported a total halt of Russian supplies via Ukraine included Bosnia-Herzegovina, Bulgaria, Croatia, Greece, Hungary, Macedonia, Serbia, and Austria. Italy said it had received only 10% of its expected supply.”

Here in Bulgaria the situation is particularly dire as gas reserves can be measured in days alone. Cities outside of Sofia have been more drastically affected, although family members of ours living in the capital’s Soviet-style blocs were trying to manage in freezing cold temperatures without any heat or hot water. Given that centralized heating is the norm for these communities, every household is affected when a shut down occurs.

Politics and not just economics are to blame for the finger pointing that is occurring back and forth across the border between the Ukraine and Russia, as each accuses the other for the cut-off in supply. Many view this crisis as a case of Russia’s Gazprom and the Ukraine’s Naftogaz taking the EU’s gas supply “hostage”. This is perhaps the 21st Century’s first glimpse into how future wars may be fought.

Jerome a Paris has an interesting post on the last round of gas politics being played by the Russians and Ukrainians, noting that this stuff has been going on for well over a decade, and that for now the Russians are pretty much stuck when it comes to getting a market price for their gas from the Ukrainians that control their export pipelines (if they ever get the Baltic pipeline to Germany built or pipelines to China and/or Japan then the situation may change dramatically) - Ukraine-Russia gas spat: some background and context.

As we enter yet another episode of worried or sanctimonious articles about the gas conflict between Russia and Ukraine, it's worth remembering a few simple facts:

1) The conflict started in 1992, not in 2006;
2) Russia cannot win a gas war against Ukraine and knows it;
3) the real underlying stakes are not about Russia or Ukraine.


1) The conflict started in 1992, not in 2006

A given in most of the coverage of this episode is that these things have been happening over the past few years only. Everybody remembers the 2006 episode 3 years ago, which brought the issue to global awareness, and most coverage seems to think that this is when it all started. It's not. Russia and Ukraine started squabbling about gas as soon as the Soviet Union broke up, ie from 1992. There were cuts to gas deliveries to Western Europe in 1992 and 1993, which led the major importers - the GDFs, Ruhrgas and SNAMs - to set up offices in Kiev to try to understand what was going on and to bring pressure on the then new country of Ukraine to not interrupt gas deliveries.

I spent half a year in GDF's Kiev office in 1994, where I painstakingly collated local sources to prepare a report on the Ukrainian gas industry, and picked up most of the content for my PhD dissertation on the independence of Ukraine and its relationship with Russia, both of which were defined largely by gas. I've never been able to ascertain that Ukraine actually ever paid anything for gas to Russia then or since.

The reality is that the Soviet gas industry was born in Ukraine in the 1930s, and the infrastructure was built from there and Ukraine is still a central part of the gas pipeline network even as the focus of activity moved to Western Siberia. Splitting the Soviet Union along Republic borders made for an often unworkable allocation of physical assets, and nowhere was this more true than for gas. The consequence is that vital assets for Gazprom are located in Ukraine and thus no longer under its direct control.

The ties between the industry in the two countries are thus massive, impossible to unwind, and highly constraining. Effectively, as soon as there is a conflict between the two countries, the temptation to use the "gas weapon" (ie to hurt the other by, in the case of Russia, withholding gas or, in the case of Ukraine, withholding export infrastructure) is large - and it has happened repeatedly, until, each time, cooler heads prevail.

So you could go back and look into Ukrainian and Russian papers from any date over the past 17 years and find that they have articles about unpaid Ukrainian debts for gas (which, since 1992, have for some reason always been in the $1.5-2 billion range) and bilateral brinkmanship. Yet somehow the gas continues to flow every year.

So why do we think that the conflict started in 2006? Well, it's just that we started to care that year, for some easy-to-identify reasons:

* The 2004 orange revolution put Ukraine on the map, as a new, spunky member of the "democratic world" against the axis of evil and other assorted dictatorships, a group that Russia was beginning to join in the White House view. Never mind that Yuschenko was initially more pro-Russian than Yanukovich, hardliners in both the US and the Kremlin were happy to play this as a West vs Russia fight and it de facto became one. Suddenly, the arcane gas disputes that only a few buyers cared about became the battlefront between two large blocs, and one that the WestTM cared about.
* The run up in oil prices since 2003 has had an impact on gas prices (Russia's gas is sold to Europe at prices indexed, with a lag, to oil prices) and more generally on how much attention we give to energy-related issues. For Russia, the urge to get more money out of the gas delivered to Ukraine was growing; for the West, the attention paid to energy supplies similarly got more priority.
* More importantly, 2006 is the year when the UK became, it seems unexpectedly for its political leadership, a gas importer rather than a gas exporter. Suddenly, for the first time ever, security of gas supply became an issue for English-language experts. Somehow, this turned into Europe's dependency on Russian gas and Ukrainian transit being a big deal - never mind that Western Europe has been importing Russian gas for 40 years and that companies like GDF and Ruhrgas have been aware of the delicate situation of Ukrainian transit for 15 years.
* Almost at the same time, 10 Central and Eastern European countries joined the EU. As the majority were former Soviet satellites (or even Soviet Republics), they are very wary of Russia and most of them are highly dependent on Russian gas, because their supply infrastructure was built in the context of the COMECON. While they are not all in the same situation (in particular, transit countries have a lot more leverage), they have certainly encouraged the EU to focus on Russian gas supplies a lot more closely, and a lot more adversarially.

While these recent factors can explain why it's not unreasonable to care more today than in the past about the underlying conflict, there is no excuse not to provide the relevant context, ie that this is a long, simmering dispute that has no good guys and no bad guys and which has very little to do with us.

2) Russia cannot win a gas war against Ukraine and knows it

The most important bit of information that would need to be provided is why this conflict happens in the first place, and how it's been resolved in the past.

The reality of Soviet legacies is that Ukraine has a lot of vital Soviet-times gas infrastructure (the pipelines are an obvious item, but, just as significantly, Ukraine controls most of the storage capacity of the Russian export system, something rather important when you know that winter gas demand is 2-3 times summer demand and pipelines can be made smaller if you can ship gas all year long and store it close to markets for winter use). It is also a heavy-industry country, with very high gas demand. It has also mostly depleted its gas reserves, making it heavily dependent on gas from Siberia.

So there is a strong co-dependency, with Russia needing Ukrainian infrastructure to honor its export contracts to Europe, and Ukraine needing Russian gas. In the early years, there were additional constraints, such as the only Soviet manufacturer of large pipes used by Gazprom being in Ukraine, the only manufacturer of medium sized pipes (needed by the Ukrainians) being in Russia, and gas going to Southern Russia needing to flow through Ukrainian territory. I have written in detail about this co-dependency in this article: Ukraine vs Russia: Tales of pipelines and dependence (Dec. 30, 2005).

Ukraine used to get its gas allocation from Soviet planners, and continued to expect the same after independence. When Russia first tried to get payment fors its deliveries in the early 90s, it failed; when it first cut off gas to Ukraine to enforce payments, Ukraine simply tapped the gas sent for export purposes in Ukrainian-controlled pipelines; when European buyers howled, Russia relented and restored gas supplies without having managed to be paid by Ukraine. This happened repeatedly in 1992-1994 until both sides learnt to make their disputes as public.

The exact same thing happened over the years, but more discreetly. 2006 marked a change in that the dispute was thrust into the limelight once again, but fundamentally the same thing as before happened. The proof of this in January 2006, Russia restored deliveries before an agreement was announced. This was mostly overlooked in Western coverage of the crisis, as was the fact that the announced agreement was absurd on its face - everybody should have realised it was a sham (the price Russia claimed to be getting and the price Ukraine agreed to "pay" were not compatible, even with the inclusion of ultra cheap gas from Turkmenistan - and nobody asked why Turmenistan would agree to such a low price).

The hard fact is that Russia cannot cut off Ukraine for any period of time, because that endangers its exports (Kiev has always retaliated by siphoning exports), and Gazprom knows it perfectly well. The other hard fact is that, in practice, giving roughly 20% of its gas shipments to Ukraine as payment for transit (over an average of more than 1,000km) is an acceptable transaction for both sides. Of course, when prices for gas go up, as in recent years, the temptation to change the balance of the trade is tempting, but Russia simply has no practical way to do so.

The SMH reports that the Russians are playing hardball over price increases for gas to the Ukraine, causing some nervousness in Europe about possible supply interruptions - Russia cuts off gas to Ukraine.

Russia on Thursday cut off gas supplies to its neighbour Ukraine after failing to agree a new contract, sparking renewed concern over Europe's dependence on Russian-controlled energy resources. Major European consumers of Russian gas - most of which transits across Ukraine - reported no immediate impact on their supplies but the European Union expressed concern that the dispute had flared up yet again.

Russia's state-run gas giant Gazprom confirmed that supplies to Ukraine were shut off at precisely 10am (1800 AEDT) after the parties failed to agree terms for a 2009 contract to replace the old one which expired at midnight. "We have reduced the supply of gas to Ukraine by 100 per cent," Gazprom spokesman Sergei Kupriyanov told reporters.

Ukraine's gas company, Naftogaz, confirmed that the volume of gas it was receiving from Russia had dropped, but promised that transit of supplies meant for customers downstream in Europe would be guaranteed.

Gazprom's move recalled a similar cut-off in January 2006 that affected gas supplies to Europe, although this time, Ukraine and the EU say they have enough gas reserves to see them through the winter.

A Gazprom official said the flow of more than 300 million cubic metres per day of gas that transits Ukraine destined for clients further afield in Europe would continue unabated. Around a quarter of the gas used in the European Union - more than 40 per cent of the gas imported by the bloc - comes from Russia, 80 per cent of it moving in pipelines that pass through Ukraine. ...

The European Union's Czech presidency and the European Commission said in a joint statement that they were "concerned" by the turn of events. But Italy and Poland, two big consumers, said on Thursday they had no immediate problem with their Russian gas deliveries. Germany said precautions had already been taken to ensure supplies were not disrupted.

Kiashu at GWAG has a look at the Russian energy situation as well - After the game is won, all bets must be paid.

We see recently linked on TheOilDrum an article saying that Russia has "blundered" because... it relies on fossil fuel exports for money. The writer Steve LeVine is speaking too soon in saying that Russia is "in trouble". For one thing, he lacks perspective,

"Simply put, Russia is in trouble. Its much-ballyhooed $600 billion cash reserve base dropped by a quarter by Dec. 1, to about $450 billion, and even further since."

At least they have cash reserves, rather than having to borrow funds to do their spending. He goes on,

"The Putin era’s new generation of oligarchs, like Deripaska — men who obtained ownership of large parts of Russia’s industrial sector in the last few years — is lining up for a bailout from some $110 billion in foreign debt coming due next year. According to Bloomberg’s Yuriy Humber and Torrey Clark, that’s twice the debt owed in Brazil, China and India. The oligarchs are seeking some $78 billion in loans."

It is unclear why US$280 billion for the EU, or US$700 billion for the US, or US$255 billion for Japan, why these occasion no comment in an article where the much smaller amount of US$110 billion is presented as a dangerous thing.

Of course the Third World has a total debt of some $523 billion; readers may recall that a few years ago when the Third World asked for this debt to be delayed or written off, it was explained that doing this would cause financial chaos in the West; we can afford $1,235 billion for ourselves, but cannot afford $523 billion for them. We wagged our fingers and gave them a lecture about fiscal responsibility. Stop laughing, please, it's rude.

Apparently, tremendous debts are bad for Russia and the Third World and absolutely must be paid back as soon as possible, but tremendous debts are an unfortunate necessity for us in the West and we should pay them back... well, sometime later, no hurry.

LeVine, an American writing in an American magazine, also quotes Zachary Shore, an American, as speaking of Russia's "weak banking sector", and apparently is not trying to be ironic.

This sort of article shows how the West tries very hard to present itself as a brilliant success and the rest as a dismal failure. But Russia of course also has natural gas, and while oil's price has plummeted from near $150 in July to under $40/bbl this December, natural gas has halved rather than dropped by three-quarters; though as Lavine correctly notes, much gas is sold on long-term contracts, so spot prices don't reflect immediate conditions as much as with oil. Can Russia increase its gas prices to make up for loss of oil revenue? It seems that they think so.

Putin says "cheap gas" era ending

Mr Putin said the cost of extracting gas was rising sharply, therefore "the era of cheap energy resources, of cheap gas, is of course coming to an end".

The Gas Exporting Countries Forum (GECF) [a precursor to a natural gas version of OPEC] meeting in Moscow has agreed a charter and plans for a permanent base. [...]

The countries attending are Algeria, Bolivia, Brunei, Egypt, Indonesia, Iran, Libya, Malaysia, Nigeria, Qatar, Russia, Trinidad and Tobago, the United Arab Emirates and Venezuela. Equatorial Guinea and Norway are attending as observers. [...]

Officials at the meeting stressed they were not trying to set up a price-fixing cartel. [...]

Ukraine row

At the moment Russia remains locked in a dispute with Ukraine over non-payment of debts. Russia's Gazprom says Ukraine owes it $2bn (£1.4bn) and has warned it may cut off gas supplies next month if the dispute remains unresolved. [...]

So what do we have?

1. Russia's income from oil drops
2. Russia speaks of the possibility that gas will become more expensive
3. Ukraine is behind on its gas bills, and so Russia may cut their gas off, which - oh no! would cut off a good chunk of Europe, too - most unfortunate and I'm sure Russia would express many regrets.

They don't need an official price-fixing cartel with that happening. The EU will pay Ukraine's gas bill, and in the next round of gas contracts higher prices will be negotiated. Putin and Medvedev, following their checkmate of the West in the Caucasus where the EU was trying to diversify its oil and gas supplies, now want the EU to pay up.

This is the price the West pays for continuing to burn large amounts of fossil fuels. Russia is not blundering, we are.