Sunday, 11 September 2011

Will Nord Stream stop the gas wars?

When PM Vladimir Putin clicked on a mouse to start the flow of gas in the Nord Stream pipeline Tuesday, he touted the long-awaited launch, which would bring Russian gas to Germany, as an end to its notorious gas wars with neighboring Ukraine.

But while analysts agree that the new gas route will certainly give Russia additional geopolitical leverage in the energy sector, they warn that Nord Stream is not likely to stop the price disputes entirely – it just might make them different.

“Ukraine is our long-standing, traditional partner. Like any transit country it is tempted to use its transit position,” Vladimir Putin said at the launch of Nord Stream at the Portovaya compressor station in the Leningrad Region, flanked by Gazprom CEO Alexei Miller and former German chancellor Gerhard Schroder. “Now this unique position disappears and our relationship will become more civilized.”

Putin was referring to Ukraine’s attempts to review a gas price agreement clinched in early 2009 between Putin and then Ukrainian Prime Minister Yulia Tymoshenko, the “gas princess” who is now facing charges of abuse of office over the deal, which President Viktor Yanukovich saw as detrimental to Ukraine’s interests.

Russia has refused to reconsider the agreement, and the Nord Stream launch came at a convenient moment.

While the new transit route would reduce gas volumes passing through Ukraine, officials in Kiev downplayed the impact.

“With the increase in gas consumption in Europe, we expect to reduce the volume of transit, yet slightly,” Yuri Boiko, Ukraine’s Minister of Energy and Coal Industry, said on Wednesday, commenting on Putin’s words, RIA Novosti reported. Gazprom annually supplies over 160 billion cubic meters of gas to European markets through Ukraine’s territory, which is three times bigger than the expected capacity of the Nord Stream when the second line of supplies will be launched in 2012, according to experts.

“Even if the Nord Stream works on full capacity, which is around 50 billion cubic meters, we still cannot exclude Ukraine,” Yekaterina Rodina, oil and gas analyst, VTB Capital, told The Moscow News. “Without the transit through our neighbor’s territory, we won’t be able to deliver the same amount of natural gas to Europe. Even if we have the South Stream, which is expected to deliver around 63 billion cubic meters of gas by 2018.”

Experts agree that the new pipeline will not necessarily stop the gas wars like the one in January 2009, when a dispute between Ukraine’s gas and oil giant Naftogaz and Gazprom on prices for gas transit and supplies drastically reduced gas to 18 European countries in the middle of winter. But an additional pipeline will certainly make energy shipments more reliable.

And while the row was ultimately resolved in an hours-long meeting between Putin and Tymoshenko, in May 2010 Vladimir Putin offered to unite Naftogaz and Gazprom.

“The risk of gas wars between Russia and Ukraine will exist until Russia decides to stop exporting gas through its neighbor’s territory, or when Russia stops bringing Ukraine to its knees,” Sergei Aleksashenko, an economist at Carnegie Center Moscow, told The Moscow News.

According to Aleksashenko everything Russia does now is to weaken Ukraine’s position as a gas transit country.

“It’s clear that this is Russia’s aim – we say that Kiev should either join the customs union, or give Naftogaz to us, and pay more than Europe does,” Aleksashenko said.

Some experts pointed to Nord Stream as an alternative pipeline which would help secure gas shipments to Europe.

“The long running disagreements between Russia and Ukraine meant that the supplies were not always guaranteed to be available,” Howard Rogers, Senior Research Fellow Oxford Institute for Energy Studies, said in an email. “In this respect then, I would regard the Nord Stream and South Stream projects as ‘transit avoidance’ pipelines. Certainly Western and Central European consumers should be grateful that a substantial portion of their gas supply will be more reliable with the completion of these projects.”

Others said that the additional transit route gave Russia additional leverage – which could indeed stop the conflicts as Putin said.

“Russia has the ace in the hole, or leverage to put pressure on Ukraine. But Europe will feel safer than before, and there will be no repeat of the gas transit problem like a couple of years back,” Slava Bunkov, oil and gas analyst at ATON investment group, told The Moscow News.

Where South Stream is concerned, Bunkov said that the pipeline, which will run under the Black Sea and is due to start shipments in 2015, should not be viewed primarily as a transit avoidance project.

“South Stream is aimed at saving Gazprom’s share in the gas market in Europe, rather than to keep itself from failing to supply gas through transit countries,” he said.

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