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The Impact Of The Ukrainian Crisis On The Gas Market

Originally published on Energy Post.
By Karel Beckman.

A new report by the Oxford Institute for Energy Studies discusses what the current Ukrainian crisis could mean for EU and global gas markets.

Gas stove burners.
Image via Roman Sigaev/Shutterstock.

According to the report, “The change of government in Kyiv, the Russian military action in Crimea, the diplomatic reaction by the western powers, and the perceived danger of war, clearly have implications for all economic relations between Russia, Ukraine and Europe, especially in the energy sphere. Russia supplies about 30% of Europe’s natural gas, and more than half of these volumes are still transported via Ukraine. In Ukraine, gas supply issues are combined with the economic upheavals aggravated by political crisis.”

As of March 10th 2014, the most likely source of supply disruptions is the serious indebtedness of Naftogaz Ukrainy, which, despite clearing some of its $3.3 billion debt to Gazprom in late February, as of 7 March was in arrears to Gazprom by a sum of just under $2 billion.  In previous Russo-Ukrainian gas disputes, such a build-up of debt has led to Gazprom cutting off deliveries to Ukrainian customers and the subsequent diversion of transit gas bound for Europe to consumption in Ukraine. This led in January 2009 to all westward deliveries of Russian gas, both to EU and Ukrainian destinations, being suspended for two weeks.

The report continues: “If gas deliveries through Ukraine are halted the impact would be less serious than in 2009, because (i) the Nord Stream pipeline, which transports Russian gas to Germany without crossing Ukraine or Belarus, has been completed, and other interconnections have improved the situation in eastern Europe; and (ii) the economic situation, and the arrival of milder weather means that demand is relatively low.”

“From Europe’s standpoint, commercial logic would suggest that support would be given to diversifying gas transit away from Ukraine, including regulatory support for the South Stream pipeline, which, if completed with four strings, should enable the transit of Russian gas through Ukraine to be suspended completely by 2020. However, it is possible that a political move to minimise cooperation with Russia on energy issues in line with European governments’ views of the Russian action in Crimea – may prevail. In this case, the EU-Russian disputes over gas imports and regulation will worsen, with potentially negative consequences for South Stream. Moreover, European efforts to diversify away from Russian gas, the success of which has been limited in the past because of the economic costs, will be revived.”

The full report, written by Simon Pirani, James Henderson, Anouk Honoré, Howard Rogers & Katja Yafimava, can be found here.

 
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