It seems like the Russia-Ukraine-Europe gas crunch will not go away. On the back of a cold snap in eastern Europe that is causing a great deal of anguish in Ukraine, the Russians and Ukrainians cannot sign their agreement on Russian shipment of gas to Ukraine. Heat is in such short supply that the Ukrainian prime minister has suggested he may ask industries to halt production to divert gas to residential use; the Russians are accusing Ukraine of siphoning gas again, which the Ukrainians deny. LEvko reports that the Russians are asking the Europeans to help pressure Ukraine to not siphon.

The problem is made worse by explosions on the gas pipelines between Russia and the south Caucasus. It may be Chechen sabotage. Russia may therefore be diverting gas it would have sent through to Europe to the Caucasus instead, greatly complicating matters. I don't have any definitive view of what's happening yet, but I think LEvko makes an interesting case:

In an address to Ukrainians yesterday Yuschenko unequivocally said: "Ukraine is receiving Europe's cheapest fuel, while its gas transportation system remains in state ownership. There can be no discussion of its transfer to some other country or group of countries." PM Yekhanurov, said much the same, more wittily, in a recent TV interview: "He who gives up his gas transport system will have to dance to music played to him on a balalaika". He did however encourage and invite foreign partners to co-operate in developing any new pipelines through Ukraine.

In March 2004 President Yushchenko proposed the creation of an international consortium to build, own, and operate a new large-capacity gas pipeline from Turkmenistan via Kazakhstan and Russia to Ukraine and on to Western Europe, but it came to nothing because, as I wrote in an earlier posting: "this would have challenged Putin's plan of a Eurasian producers' cartel which would enable Russia to monopolize supply and dictate the price of gas delivered to European customers." Any possible foreign co-owners of Russian gas transportation systems would surely insist that Russian domestic consumers also contribute a fair price to system costs too.

So perhaps for Europeans it will be difficult to gain any control of existing pipelines, but for future pipeline projects between Russian gas fields and European markets, [which certainly will be required] they should collectively demand some input and control. A good place to start would be to ask Germany to have a rethink and cancel its planned expensive underwater Baltic pipeline, which bypasses Poland and the Baltic countries. For the same money a shiny new overland pipeline could be constructed direct from the gas fields to end users. Sadly I don't think it will happen, not while every player is just thinking of their own self-interest.

UPDATE: Now this is interesting: Abdymok reports that the "technical reasons" for the delay in signing the gas agreement is that the Ukrainians are balking at buying shares in RosUkrEnergo, the new joint venture to deliver Russian and Central Asian gas to Ukraine, is that the Ukrainians claim not to have the money.

Categories: economics