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Short-Sighted Europe Cannot Resist Russian Gas

As the rhetoric between Russia on one hand and the West and Ukraine on the other reaches an all-time high, and the situation in eastern Ukraine gets bloodier, Moscow holds the only gas card. Europe might complain, but in the end it will give in like a cheap gas junkie at the expense of its future.

In particular, Spain, Italy, France and Germany are eager for this crisis to end and to continue with major business and energy ties to Russia. But that era is over, according to Turkey, Poland, and the more recent EU members near the Russian border who have a more realistic view of the state of affairs.  

Though the rhetoric right now is that Russian forces are poised to invade eastern Ukraine as tensions between pro-Russian militias and Ukrainian security forces mount, the reality is that Moscow does not need to occupy Ukraine to win.

Russia’s state-owned gas giant, Gazprom, already has the power to stop Russian gas transit through Ukraine’s pipeline system, which feeds Europe. Ultimately, what is happening is a heavy handed, near-term loss of credibility for President Vladimir Putin and Russia. They won’t invade Ukraine. President Putin will ensure that Russian troops remain on the border and continue their campaign of chaos and sabotage within eastern Ukraine. The goal is to ensure that Russia’s Crimea is recognised, Ukraine's gas debt is paid in full, and constitutional changes are made in Ukraine that would give Russia significant leverage in creating discontent in the country for an indeterminate period of time.

Much hinges on the new government and the integration of eastern and western Ukrainian ministers representing all of Ukraine, not just the Maidan as the government is currently configured. Much also hinges on what sort of constitutional reform emerges. Russia wants a guarantee that Ukraine won't join NATO. It also wants direct elections in the regions to both legislative and executive office.  Does anyone sense the irony here? One of the most centralized states on earth is demanding sweeping decentralization next door.

Russia has been working on alternatives to the Ukrainian pipeline system for years, most notably through the South Stream and Blue Stream pipelines.

Moscow is now deciding what form retribution will take if Ukraine’s debt to Gazprom is not paid. But invading isn’t as easy as it may seem from the perspective of the Russian troops lined up on the border. They aren’t necessarily supported by eastern Ukraine across the board.

Polls conducted have shown an overwhelming repudiation of joining Russia. The same polls have shown that there is little support for the current government in Kiev and the direction of the country overall. As much as Russia has tried, it has been unable to generate the support needed from the local populace.  

In the meantime, Europe is scared to death.

Gazprom, which controls nearly one-fifth of the world's gas reserves and supplies more than half of the gas Ukraine uses each year, still supplies around 30% of Europe's gas. Recall January 2006, when Russia stopped selling gas to Ukraine and Europe and the impact was immediate. More than a quarter of the EU's total gas needs were met by Russian gas, and some 80% of it came via Ukrainian pipelines. Austria, France, Germany, Hungary, Italy and Poland soon reported gas pressure in their own pipelines was down by as much as 30%.  While it was eventually resolved, the EU warned of the dangers of becoming overly dependent on one source of supply.

Three years later, it happened again. Russia through Gazprom demanded a price hike to $400-plus from $250. Kiev refused, and on New Year's Day 2009, Gazprom began pumping only enough gas to meet the needs of its customers beyond Ukraine.

Several countries--particularly in Southeastern Europe, almost completely dependent on supplies from Ukraine--simply ran out of gas.  

So aside from the annexation of Crimea and continuing internal discontent in Ukraine, what more prompting does Europe need to just attempt to get off the Russian gas treadmill?

There should be a great deal of skepticism as to whether Europe’s fear will actually prompt it to develop an energy strategy this late in the game. Europeans will cry foul and express alarm, but at the end of the day, they will be bought off with cheaper Russian gas.

Equally troubling, Turkey is paying lip service to a Russian deal to increase the capacity of the Blue Stream pipeline, which brings in Russian gas via the Black Sea, to 19 billion cubic meters annually. This would be up from 16 bcm annually, giving Russia another 3 billion bcm of gas to fortify the energy arsenal it holds over Europe.

What should be happening is some longer-term thinking on the part of Ukraine, Turkey and the European Union. But short-sightedness, diverging political and business interests, and corruption rule--which means that Russia rules the day.

Europe is positioning itself to become the next Ukraine, floundering without any real energy policy of its own and giving up any chance of energy independence. Turkey, consistently worried about its own dependence on Russia, is falling into the same trap, when it should be pursuing the strategic proposal of former vice-prime minister in charge of energy, Yuri Boyko. To wit: working to build a Black Sea gas dominion with Ukraine—a powerful combination that could control the market for liquefied natural gas (LNG) to Europe.  

In 20 years, Europe will be looking a lot like Ukraine and Turkey will be reflecting on how it failed to seize the opportunity to become the key energy hub connecting Europe and the Middle East. By then it will be too late.

By Robert Bensh, Special to Oilprice.com




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  • Jim on April 28 2014 said:
    I could only stomach the first 2 paragraphs of this shameless propoganda piece. The inferences assigned to the motives behind Western Europe wanting this crisis to die down and Eastern Europe/Turkey wanting to stand up to Russia were back to front. Western Europe wants it to die down not because they are oil junkies, but because they know USA State Department/NATO meddling created this crisis by assisting in the coup in February that toppled pro-Russia Yanukovich. The reason Eastern Europe/Turkey favour weaning themselves off Russian gas is because they support the USA's containment of Russia strategy. Trying to ascribe "oil junkie" motives to France/Germany/Spain/Italy is simply a ploy to discredit them for not adopting the US position. This oilprice.com site sounds like one of those shadowy "Freedom Foundation" type "thinktanks" that spread misinformation using benign names to hide their intentions.
  • Arkadiy on April 28 2014 said:
    Dear Mr. Bensh,

    for sure, the LNG from USA will be much
    more cheap then Russian gas for Europe!
    And U.S. are ready to ship it tomorrow!
    I wonder if U.S. LNG therminals are eager
    to send LNG to Europe not to Asia!

    I wonder if US helps to Ukrain? No. Not cent!
    And look, Russia still does not stop the gas flow
    to Ukraine, feeding up the Ukraine. But Kiev stops
    the flaw of the fresh water to Crimea!
    Hey, guy! What are you talking about?!
  • Dave on April 28 2014 said:
    Jim's reaction is the same as mine. Although I think a large part of what's driving the EU putsch for Ukraine is troika seeking to protect Bundesbank bondholders, they clearly blew the plan when Right Sector and Svoboda pushed Yanacovich out the window. Now they can't really back down. On the US side, Obama's ego can't take another Putin strategic win, so he's all in with NATOs creeping regional ambitions.

    Terrible piece. For a few months there I thought maybe OilPrice.com would be a good resource but if this is the caliber of writing you're going to publish, I won;t bother reading anymore.
  • Nevil Chambers on May 03 2014 said:
    What will this mean for the refinery in Odessa, which is also where Ukraine would have it's LNG facility, a key to its energy indepenence ...

    More than 30 people were killed in violent and chaotic clashes in the southern Ukrainian city of Odessa on Friday as pro-Ukraine activists stormed a building defended by protesters opposed to the current government in Kiev and in favour of closer ties with Russia.

    The violence continued on Saturday as Ukraine said its forces had attacked pro-Russian separatists in the industrial east of the country at dawn near the town of Kramatorsk.

    Interior minister Arsen Avakov said Ukrainian forces had seized control of a television tower in Kramatorsk, near the rebel stronghold of Slavyansk where there was heavy fighting on Friday. "We are not stopping," Avakov wrote on his Facebook page, but gave no information on casualties.

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