Thursday, January 08, 2009

The Cold War: Gazprom ups the ante against Ukraine

The Russian gas standoff with Ukraine is now a week old and its impact is being felt across the continent. A quarter of Europe's gas comes from Russia. Of that amount, 80 per cent passes through Ukraine, which has refused to meet demands from OAO Gazprom, Russia's monopoly gas giant, for contract price hikes and $2 billion in debt repayments. Russia stopped gas shipments through Ukraine on New Year's Day after accusing it of stealing gas en route to other European countries. Bulgaria has been hardest hit with thousands of homes without heat and many schools and companies unable to open. Experts warn that Gazprom’s reputation will take a hit if people are affected. "If people start freezing, Gazprom could suffer from the long-term point of view,” said Igor Kurinnyy, the oil and gas analyst in London with the Dutch bank ING Groep. “It could be seen as a highly unreliable company."

But the Russian company is showing little sign of backing down. In a provocative media release yesterday Gazprom accused Ukraine of rejecting international law and said it illegally “began to siphon off Russian gas illicitly and then entirely stopped gas deliveries to Europe through its territory”. This, it said, gave Gazprom no option but to “stop gas deliveries to the entry point of the Ukrainian gas transmission system until the moment when Ukraine has provided guarantees of gas transit in full volume.”

Gazprom chief executive Alexei Miller said the company has now filed a law suit against Naftogaz, the Ukrainian state gas company for breaking a long-term gas transit contract agreed in 2002. "Gazprom has taken the decision to file a lawsuit with the Stockholm international arbitration court to force Naftogaz Ukrainy to secure unimpeded transit of Russian gas to Europe across Ukraine," he said.

However, Naftogaz chief executive Oleg Dubyna said Ukraine could counter sue. "I am today confident that Russia is not giving its customers enough gas... in order to say we that Ukrainians are stealing," he said. Dubyna unexpectedly went to Moscow today, (there was talk that the pair would meet in Brussels instead) where he met Miller to seek a resolution to the crisis. Both companies confirmed they met early Thursday but released no details of the meeting.

The Russian state owns 50.002 per cent of Gazprom and that crucial .002 gives it the power to set the gas giant’s agenda. Gazprom said that Russian President Dmitri Medvedev had personally approved the lawsuit against Naftogaz. Russia holds the world's largest natural gas reserves and is not afraid to flex its muscles. It holds 512 trillion cubic metres, more than twice the next-largest reserves, in Iran, according to the US Energy Information Agency. Gazprom is the sole gas supplier to Estonia, Latvia, Lithuania and Slovakia, and provides 89 percent of Hungary's gas, 86 percent of Poland's and nearly three-quarters of the Czech Republic's. In addition Gazprom supplies 36 percent of Germany's gas, 27 percent of Italy's, 25 percent of France's, 67 percent of Turkey's, 65 percent of Austria's and 100 percent of Finland's. Poland, Hungary, Bulgaria, Romania and Turkey have already reported shortfalls of up to 40 percent since Russia cut off deliveries to Ukraine.

Serbia and Bosnia are typical of Eastern European countries feeling the pinch. Serbia gets 90 percent of its gas from Russia piped through Ukraine to Southeastern Europe. The manager of state-owned Srbijagas says there are only enough gas reserves in the country for a matter of hours and the country's oil stockpile is enough for one day. With outside temperatures dipping below -7 degrees Celsius that makes for an uncomfortable time ahead for Serbian citizens unless a quick solution is found. Neighbouring Bosnia is equally affected. One woman on the street expressed her anger and frustration at a dispute they can do little about. "Nobody is asking us for our opinion," she said. "The politicians are doing what they want, and we can just wait and freeze."

Today’s Financial Times reports that Gazprom might itself freeze if it waits too long for a solution. The English newspaper said Gazprom has been placed in a difficult position due to the crisis and needs to extract as much revenue as possible from Ukraine in the short term. However its tactics could stand in the way of its longer-term ambition of becoming a leading global energy business. The recent drop in oil prices has seen the company drop from the world’s third largest (with a market capitalisation of $350b) to the world’s 46th (valued at just $86b). Gazprom's profits are being squeezed at a time when it faces a massive demand for investment in Russia's crumbling infrastructure and open up new sources of production. But while it has a valid case to charge Ukraine more for its gas, the impact on Europe is badly damaging its reputation as a regular supplier. The stakes are high for Gazprom and for Russia’s rehabilitation as an international superpower.

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