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Gazprom Seeks A Way Around Ukraine By 2019

Gazprom Seeks A Way Around Ukraine By 2019

Gazprom has vowed to entirely cut out Ukraine as a transit hub for natural gas exports to Europe.

The conflict with Ukraine has scrambled the longstanding energy relationship between Russia and Europe. The European Union imports around one-third of its natural gas from Russia, but having seen those flows cut off multiple times in the past, European officials are pushing to rid themselves of their dependence on Moscow. The violence in Ukraine solidified that motivation.

Russia is also unhappy with the arrangement. In an effort to separate gas exports to the EU (a critical business relationship that Moscow doesn’t want interrupted) from its ongoing conflict with Kiev (a geostrategic priority), Russia has a great incentive to cut out Ukraine. About half of Russia’s gas exports to Europe must travel through Ukraine. Related: A Glut For Natural Gas Too?

But that could change within the next four years, if Gazprom gets its way. “We will not export gas via Ukraine after 2019. The customers will get gas at (newly) agreed delivery points,” Gazprom’s Deputy CEO Alexander Medvedev said on June 9.

However, that would require major investments in new infrastructure in order to successfully work around Ukraine. Medvedev is pressing Europe to hurry up and decide on how and where future Russian gas will enter Europe.

Russia has proposed a new pipeline network called “Turkish Stream” that would run through Turkey to the border with Greece.

Some European countries are open to that plan, but others are throwing their weight behind an alternative route. The Trans-Anatolian Pipeline (TANAP) will run from Azerbaijan through Turkey, and connect with the Trans-Adriatic Pipeline (TAP), which will pick up at the Greek-Turkish border and run gas through southern Europe to Italy. Both pipelines are backed by a consortium of private international oil companies as well as the state-owned oil company in Azerbaijan. Related: Forget The Noise: Oil Prices Won’t Crash Again

To make matters more complicated, the European Union is pursuing an antitrust case against Gazprom, alleging that the Russian company charges different rates to different EU member states, with prices that vary depending on their cooperation with Russia on unrelated political matters. The EU also argues that Gazprom illegally seeks to block the resale of natural gas between EU countries in an effort to maintain its grip, particularly over certain Eastern European countries, such as Ukraine.

The EU has given Gazprom until September to respond to the antitrust charges.

The confrontation between European regulators and Gazprom underscores the animosity between Russia and Europe, and also raises questions about how Gazprom plans on convincing Europe to opt for its pipeline alternative, rather than the TANAP-TAP route.

Moreover, the EU has agreed to work towards creating an “energy union,” which seeks “uninterrupted energy supplies” that European officials think is only obtainable through a common approach. In other words, the energy union is a direct response to Gazprom’s strategy of picking off separate EU members one by one, sealing bilateral deals with unique terms and prices. Brussels sees this as a threat, and while much of its motivation for the energy union is driven by climate objectives, the idea only got off the ground after the Ukraine crisis in 2014. Related: Who Will Take The Energy Storage Crown?

The EU faces its own challenges. For example, it is far from clear whether Eastern European countries currently paying discounted rates for gas will prefer a collective approach, which could end their pricing arrangements. But it is also hard to see how Gazprom will be able to edge out the TANAP-TAP network.

And if Russia’s “Turkish Stream” Pipeline cannot be constructed, Russia will have a very difficult time in entirely cutting out Ukraine from natural gas exports in a few short years.

For now, tension between Russia and the EU won’t go away, despite their strong commercial ties. The G7 nations just reaffirmed their support for sanctions on Russia as a result of the Ukraine conflict. And the antitrust case against Gazprom could force the dispute over natural gas pricing to a head in the relatively near future.

By Nick Cunningham of Oilprice.com

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  • ngass on June 11 2015 said:
    " .... but having seen those flows cut off multiple times in the past, European officials are pushing to rid themselves of their dependence on Moscow". That sentence suggests that Russia was the culprit. It is a fact that the Ukraine steals gas destined to Europe and refuses to pay when discovered. Russia then cut of delivery. The Ukraine still owes Russia $5 Billion for gas.

    Every company has the right to sell a product asking different prices. So, why are the cars of Toyota, for example, cheaper in the US than in Canada? There are reasons. The text Mr. Cunningham is distorted because it is fashionable to bash Russia wherever one can.
  • SteveK9 on June 11 2015 said:
    Russia has started construction of Turkish Stream. The Turks have said they only waited for more detailed information to start building their end. They have also agreed on a discount for Turkey. They are going to build the pipeline. If not enough of the EU arranges for the gas, they will probably pay more for other gas and Russia will lose the sales. It appears that Russia is willing to gamble.

    If they lose, there is always the pipelines being constructed to China. Not as big as the European capacity yet, but certainly significant.
  • JayTe on June 11 2015 said:
    Nick, you're analysis is dated and lacks key facts. You clearly don't understand what is going on in Europe and the larger and losing battle for the USD to remain the world's reserve currency. Yes, the EU would like to diversify the energy needs and they see TAP and TANAP as part of that. But Azerbaijan will not be able to supply significant quantities of gas if it doesn't agree terms with Turkmenistan with whom there is a dispute over Caspian Sea gas deposits.

    At the same time, Russia is diversifying its customer base AWAY from Europe and more on Asia most notably Turkey and China. Turkish Stream is the means by which it can also supply Europe but first Turkey. While US and EU meddling has prevented both South Stream to be completed, except for Macedonia they has less leverage over Turkish Stream.

    First and foremost in relation to europe and asia the US has little to nothing to offer any of the states in eastern europe and asia of any value. All one has to do is look at Afghanistan, Iraq, Syria, Nigeria and Ukraine to see what US "help" amounts to. Even more so, even the western EU countries who despite the damage that it does to their own economies continue to walk over the cliff with the US not because it's in their own long term interests, it's because they are all in bed together knowing where all the bodies are buried! Second, Greece has far more to gain from cutting its ties to the EU, becoming part of the EEA and participating in Turkish stream (as well as TAP) than it does from remaining in the EU. It shows the extent of the profound delusion of people in western europe that they see the EU, a deeply undemocratic institution where legislation is made in committees in conjunction with lobbyists, and which is entirely focused on extracting every pound of flesh from the populace in order to pay off debt that everyone with half a brain knows will never be paid off. But there you go. To quote Bill Bonner, people believe what they need to believe when they need to believe it... rather than accepting the truth of the situation.

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