Russia and Ukraine: Energy Battle, Round Two

Platts is reporting this morning that Russian gas monopoly Gazprom will turn off gas supplies to Ukraine unless the former Soviet republic signs a natural gas export contract by January 1st. According to Gazprom, Ukraine also owes the Russian company $2 billion for past deliveries.

When Gazprom turned off the gas to Ukraine in January 2006, the impact throughout western Europe was dramatic. The pressure drop in the pipelines reduced supplies by as much as 25%. The Russians and Ukrainians settled the dispute within a few days, much to the relief of the Europeans.

But the dispute did not disappear. Russia is holding out now for what it wanted three years ago: market pricing for natural gas shipments to Ukraine. Ukraine wants lower pricing based on "rent" for Russian use of pipelines crossing Ukraine to carry natural gas to Europe.

What’s the difference? According to Gazprom, market pricing would set the price for Ukraine at $418/thousand cubic meters. Ukraine currently pays $179.50/thousand cubic meters, less than half that amount.

European customers’ complaints are not likely to have much impact on Gazprom this time around. In the three years since the first shutoff, Europe has done little to diversify its sources of natural gas. Gazprom could use this dispute with Ukraine to cudgel the Europeans for more money as well.

Remember that Russia’s energy-based economy is struggling. Ukraine alone won’t make much difference. But western Europe takes nearly 30% of Russian gas production. Higher prices on deliveries to Europe will make a difference to Russia’s bottom line.

Paul Ausick