EU Commission Warns Member States of New Russian-Ukrainian Gas War

Following a recent telephone conversation between the head of the European Commission Jose Manuel Barroso, and the Russian Prime Minister Vladimir Putin, the commission urged all E.U. member states to immediately begin filling gas storage facilities because they believe that a new Russian-Ukrainian gas war is imminent. A source in the commission told the Russian newspaper Kommersant on July 3 that "the conversation between Barroso and Putin does not inspire optimism" (Kommersant, July 3).

An emergency meeting of the E.U. coordinating group on gas took place in Brussels on July 2 to discuss the emerging crisis. The E.U. commission summed up the recommendations of the meeting in a statement which noted that Ukraine’s unpredictable ability to fill its gas storage facilities, due to lack of funds, should be taken seriously and urged member states to fill their storage facilities to capacity with gas "from all available sources" (Kommersant, July 3). This call is bound to increase LNG spot market sales to Europe in the coming weeks.

By the end of June the E.U. was optimistic that the terms of a loan for Ukraine could be reached. However, the size of the loan would be $2 billion-half of the total sought by Kyiv. Moreover, the commission attached a number of conditions to the loan, the foremost being the restructuring of the state-owned gas monopoly Naftohaz Ukraine, in order to improve its transparency. The commission wants to see Naftohaz split into separate entities, which would each be responsible for different functions such as transport, sales, production and storage.

Despite the E.U. commission’s optimistic prognosis, Russian energy experts and officials were not convinced that the problem could be resolved in time for the peak heating season. One Gazprom official was quoted as saying: "We heard that it would be impossible to finalize the loan before September. This is already too late and we hope that it will be agreed upon earlier" (www.jamestown.org/blog, July 1).

The commission’s warning, however, is easier issued than complied with. The Balkan countries do not have LNG receiving terminals, and being tied to Russian pipeline gas, they could suffer most. Germany has been enmeshed in a conflict with E.U. regulators over the construction of its first LNG import terminal designed to import gas from Algeria and the Middle East. An E.ON Ruhrgas spokesman admitted that construction will not begin in 2009 as scheduled (www.neurope.eu, July 3).

Italy, which according to the CIA Factbook consumes 84.89 billion cubic meters (bcm) (2007 estimate) of gas, has only one operating LNG terminal with less than a 4 bcm receiving capacity, and is owned by ENI, the Italian energy giant. The French GDF Suez hopes to build a second offshore Italian LNG terminal by 2012. In the event of a new prolonged Russian-Ukrainian gas war the Italian economy, as well as homeowners are bound to suffer.

What was once a boom in gas storage projects in Germany and the surrounding countries is running out of steam, as sizeable new additions fall victim to the financial crisis. The region might get by in the long term if the regulators enforce greater access for all players by freeing storage from the grip of heavyweights such as E.ON Ruhrgas and Wingas. These companies have progressively expanded underground facilities to store more Russian gas and to maximize profits from trading seasonal supplies. Smaller players followed suit, but they cannot maintain the momentum as cash flows decrease, and forecasts for gas demand remains gloomy as the economic crisis continues (www.guardian.co.uk, July 3).

In anticipation of the upcoming payment deadline for gas deliveries in June, the Ukrainian cabinet of ministers raised the statutory capital of the state-owned UkrEksimbank by almost $1 billion. Most Ukrainian analysts believe that this money will be used by Naftohaz to pay the bill and avoid any shutdown of deliveries (www.ua-energy.org, July 2).

How long Ukraine can continue using such stop-gap measures is a question that is rightfully worrying E.U. officials. In June, the media reported that the Ukrainian Central Bank printed more money to pay for its gas deliveries in May – although Prime Minister Yulia Tymoshenko adamantly denied this. Furthermore, the cost of the 19 bcm of gas which Naftohaz needs to buy from Gazprom to power the compressor stations during the height of the heating season is part of the gas transit contract signed in January 2009. This money has already been given to Ukraine and it was spent on shoring up the budget.

What awaits Europe in the next few months is far from clear. While exasperation with Ukraine grows in Brussels, and while Moscow is justified in demanding timely payment for gas delivered to Ukraine, as well as all the penalties incurred for buying less gas than it was contracted for in the January contract, Russia does not want to be seen again as a villain causing undue human suffering and economic pain by the governments and people of its largest gas and oil market.