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Ukraine-Russian Gas Deadlock Poses Latent Threat To Europe

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Anjli Raval, Financial Times

If a deal cannot reached between Russia and Ukraine soon, Europe may face serious problems with gas supplies this winter

While markets have been focused on the latest geopolitical flashpoint involving Russia and Ukraine – the downing of Malaysia Airlines flight MH17 – an unresolved dispute between the two countries over natural gas has continued to simmer in the background.

Gazprom, the Russian gas exporter, cut deliveries for domestic use by Ukraine in June after a bitter row over unpaid bills. Ukraine has, so far, continued to send gas to EU member states through the pipelines that cross its territory.

But analysts are concerned that could change if a deal is not reached between the two countries soon – an increasingly likely prospect as the conflict in eastern Ukraine takes new turns.

“Talks between both parties are at a stalemate even as problems over gas supplies have become more acute,” says Ilya Zaslavsky, a Russia and Eurasia fellow at Chatham House, a think-tank.

The latest developments echo similar disputes in 2006 and 2009 when natural gas flows to Europe were reduced during freezing weather. Russia cut off deliveries passing through Ukrainian pipelines over claims the country was siphoning off gas, a charge it denied.

Russia meets almost a third of European gas demand, half of which comes through Ukraine. Industry watchers warn of supply disruptions to the rest of Europe and price spikes, reminiscent of the previous gas crises.

“Although demand is very low in Ukraine right now, storage facilities are about half empty,” says Trevor Sikorski, head of natural gas, coal and carbon at London-based consultants Energy Aspects.

Shutting off all flows via Ukraine or Ukraine siphoning off deliveries meant for western Europe could worsen problems which are already brewing, particularly when the winter heating season gets under way…

Western Europe can cope much better with disruptions thanks to access to supplies from Norway and Algeria, imports of liquefied natural gas, and relatively high storage levels. But countries like Slovakia, Hungary, Bulgaria, and Greece – those most dependent on Russian gas via Ukraine – are particularly vulnerable to shortages.

While Ukraine and Europe are devising contingency plans for this winter – including caps on consumption by households and businesses – implementation in such a short period will be challenging, say analysts.

Disagreement on price between Russia and Ukraine is the key sticking point.

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