Towards a Gas Settlement

Economic News

22 Jul 2010
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Ukraine's role as a gas transit centre for Europe has been brought into focus in recent years by disputes over supply from Russia and payment. A new deal for 2009 with Russia's state-owned energy giant Gazprom, and a plan floated by a US official for increasing the volumes of gas exported to the EU through Ukraine could herald a period of stabilisation and boost the country's importance as an energy hub.



On July 24, US Deputy Assistant Secretary of State for European and Eurasian Affairs Matthew Bryza told the international press that the US would consider supporting a project to speed the export gas through Ukraine to Europe from Central Asia.



"In principle, we're very interested in doing this, if it's workable," Bryza was quoted as saying. "A modest investment of around $800m (could) bypass a bottleneck in the Ukrainian gas transit network into Slovakia." The proposed investment could boost exports to Europe by 19bn cubic metres, he said.



He went on to warn that US support would be based on further negotiations and research. "Now we are in the conceptual phase," he said. "We're just scoping it out... we'll have to look at feasibility studies and the possibilities of financing."



The US has long been keen to diversify Europe's energy supply away from Russia, which it accuses of using its hydrocarbon wealth as a geopolitical tool.



A long running spat between Russia and Ukraine over energy has called into question the energy security of both Ukraine and Europe. A quarter of European gas needs are sourced from Russia, of which 80% transits through Ukraine. Russia has rapidly increased the cost of the gas it sells to Ukraine from $50 per 1000 cubic metres in 2005 to $179.50 this year. Disagreements about Ukraine's alleged non-payment of charges led to Russia cutting the country's gas supply for four days in January 2006.



However, tensions may have eased in recent weeks. On July 24, Ukraine's President Viktor Yushchenko announced that he expected a new natural gas deal with Russia to be finalised within a month. The day before, after negotiations with Gazprom, Prime Minister Yulia Tymoschenko had declared, "We have found a way to set [the natural gas] prices for next year."



Any gas from Central Asia to Europe on Bryza's proposed line would probably still have to pass through Russia before reaching Ukraine, unless it were to transit through the Caucasus states. The latter option would surely be more than bypassing a "bottleneck" and cost considerably more than $800m.



So it may be that after the new deal with Ukraine and an announcement earlier this year by Gazprom that it would narrow its margins between purchase prices of gas in Central Asia and sales prices in Europe, Bryza may be indicating a rapprochement.



For some years, the US has thrown its weight behind the proposed Nabucco pipeline, which would carry gas from the Caucasus through Turkey to the Balkans and Central Europe. Progress on the Nabucco project has been somewhat slow, however. Some of the firms involved have shown more enthusiasm than others - some allege that Gazprom has been buying off key players. Meanwhile, the forecast cost of the pipeline has jumped from $7.2bn to $12.3bn.



Perhaps most worryingly for the US, there have been disagreements over which countries should provide for Nabucco's gas. While Azerbaijan is usually cited as a front runner, Werner Auli, CEO of Austria's OMV Gas, has also suggested Russia (surely defeating the main aim of the pipeline) and Iran (a pariah in the US's eyes).



Given the time and money that the US and others have invested in Nabucco, it seems unlikely that the pipeline will be scrapped altogether. Furthermore, the details of Bryza's plan are currently rather opaque, so it should not be seen as an alternative to Nabucco.



But it does seem that the Ukrainian government's will to move the country closer to the West - and EU and NATO membership - combined with a new deal with Gazprom, have increased confidence that the country can become a reliable gas distribution hub for Europe.



This is very much the government's aim. Speaking at a July 21 news conference with German Chancellor Angela Merkel, Yushchenko pledged to ensure a steady supply of Russian-transited gas to Europe, and urged the EU to incorporate Ukraine's energy pipelines into its system.



"We would like the European Union to consider Ukraine's oil and gas transit network as an integral part of the unified European market," he said.



"Ukraine's gas transit transportation system could play a constructive role in the stability of the European gas market...Ukraine will faithfully carry out all the obligations it has assumed," he added.



Bryza's statement, for the time being, remains just that. But it will hearten Ukrainians who see their country as a vital part of the European energy picture.

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