Ukraine Offer To Share Pipeline Threatens Russia’s Plan For Alternative Conduit

A decision by Ukraine’s parliament to allow European and U.S. companies to lease shares of the pipeline that carries Russian gas to the West could derail Russian President Vladimir Putin’s plan for an alternative pipeline that bypasses Ukraine.

The Verkhovna Rada voted Aug. 14 to allow the country’s gas pipeline and underground storage facilities to be leased as a joint venture, offering 49 percent to U.S. and European companies, with Ukraine retaining 51 percent control.

The move would give Ukraine more leverage with its much larger neighbor, which it accuses of fomenting violence by pro-Russian separatists on its territory.

At the same time, Kiev needs to keep earning the revenues from reliably supplying Russian gas to Europe, which gets about a third of its gas supplies from Russia’s state-owned Gazprom, half of which passes through Ukraine.

The government of Prime Minister Arseny Yatseniuk argues that the joint venture would generate revenue for Ukraine from investment by foreign countries, and eliminate the need for Russia’s proposed South Stream pipeline.

South Stream, a project begun by Gazprom, would ship gas to Europe across the Black Sea, bypassing Ukraine altogether and denying it the transit fees it now earns. Already, Ukraine has lost some of those fees due to an existing alternate route for Russian gas, the Nord Stream pipeline, which reaches Europe through the Baltic Sea.

Ukraine’s parliament also voted to permit the government to impose sanctions against 172 individuals and 65 companies and similar entities in Russia and other countries for supporting “terrorism” in Ukraine. The targets’ identities, however, have been withheld until the measure is signed by President Petro Poroshenko.

Ukrainian sanctions are further bad news for South Stream, which is expected to cost $46 billion by the time it is completed, if it ever is. Work on the project has been suspended over Russia’s role in Ukraine's unrest and is likely to remain so until Moscow ends its support for the Ukrainian separatists.

So for now, Russia has no choice but to rely on Ukraine to supply its customers in Western Europe, according to an analysis by the Eurasia Group, a New York-based risk research center. The EU, once undecided over the value of South Stream because of its dependence on Russian gas, is now united in opposition to Moscow.

“There’s no way Europe is going to put South Stream negotiations back on the table now, given the larger geopolitical context of the Ukraine crisis,” Emily Stromquist, a Eurasia analyst in London, told Bloomberg News. “That, combined with a number of regulatory disputes about the pipeline and gas deliveries, will push back the timeline [for South Stream] a number of years.”

By Andy Tully of Oilprice.com