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