Publication: Monitor Volume: 6 Issue: 165

Poland resists, Slovakia seems to accept and West Europeans consider Moscow’s plan to establish a gas export route that would bypass Ukraine. Unveiled by Gazprom and the Russian government in July with a marked sense of urgency (see the Monitor, August 1), the plan aims to minimize Ukraine’s role as a transit route for Russian gas exports to Western Europe. Those exports are believed to represent Russia’s single largest source of hard currency revenue.

At present, some 120 billion cubic meters of Russian gas traverse Ukraine annually, bound for points West. Russia pays the transit fees mainly in the form of gas supplies to Ukraine, which are triply advantageous to Kyiv: They are virtually guaranteed, do not increase Ukraine’s arrears to Russia and represent a substantial addition to the direct commercial deliveries of Russian gas, for which Ukraine is deeply in arrears. Moreover, Russia’s dependence on the Ukrainian transit pipelines helps offset the political leverage which Moscow could otherwise exercise as the sole gas supplier to this pivotal country.

For these reasons, Ukraine is interested in preserving its role as the key transit country for Russian gas while Moscow seeks an alternative export route overland. That alternative route, however, is beyond Russia’s financial means to create. Moscow needs Western financing as well as the political consent of Poland and Slovakia. The Russian government hopes to mobilize West European private capital and to generate political pressure in Western Europe upon Poland and Slovakia to go along with the project.

On August 29-30 in Paris, a delegation of Gazprom held talks with four major companies which have expressed interest in forming a consortium for this project: Gaz de France, Italy’s ENI and Germany’s Ruhrgas and Wintershall. The project envisages overhauling Soviet-era export pipelines that traverse Poland and Slovakia and laying a new pipeline to connect those two countries’ westbound mainlines. That connecting pipeline, approximately 600 kilometers long–400 via Poland and 200 via Slovakia–represents the centerpiece of the plan. In the latest version, Gazprom envisages a throughput capacity of 30 billion cubic meters annually for this pipeline, at an estimated cost of US US$1 billion. Russian oil and gas companies, however, tend consistently to understate the costs of pipeline projects they propose to Western investors.

That throughput capacity would enable Russia significantly to reduce the gas transit via Ukraine. Yet such a dent would be less than dramatic, relative to the overall volume of Russian gas traversing Ukraine at present. Moreover, the Russian side probably considers routing some Turkmen gas as well through this new pipeline. Moscow plans to boost imports of low-priced gas from Turkmenistan and resell much of that gas to Western countries at a profit.

The Paris talks resulted in the creation of a joint group of the five companies to examine the plan. Moscow had hoped for a prompt affirmative answer; but it remains optimistic. Its main selling point is that diversification of Russia’s gas export routes would help guarantee Western Europe’s energy security in the years ahead. The Russian government expects the European Union to obtain Polish and Slovak consent. According to Russia’s Deputy Prime Minister Viktor Khristenko, those two countries’ aspirations to join the EU make them amenable to persuasion, particularly from such key EU members as Germany and France.

Slovakia’s Economics Minister, Lubomir Garah, discussed the plan in Moscow yesterday with Russia’s Prime Minister Mikhail Kasyanov. The Slovak government evidences interest in the transit revenue and in the prospect of Slovak companies becoming involved in the project as subcontractors. Poland is a different matter. Prime Minister Jerzy Buzek and Economics Minister Janusz Steinhoff have in recent days reaffirmed Warsaw’s opposition to any project that would diminish Ukraine’s energy and political security. On September 1, Buzek conferred in Krakow with his Ukrainian counterpart Viktor Yushchenko on this and other issues affecting Ukraine’s interests. The two prime ministers also discussed possible alternative supply sources of gas to Ukraine. One potential alternative under consideration is Norwegian gas. Poland and Norway currently discus laying a gas pipeline that would bring North Sea gas to Poland’s Baltic coast. The Polish government considers the possibility of extending that pipeline southward toward Ukraine and also involving Ukrainian companies in the project’s first stage on Polish territory (Dow Jones, August 30, September 4; UNIAN, August 29, September 1, 4, 6; Eastern Economist Daily (Kyiv), August 30-31, September 4-5, 7; see the Monitor, April 19, May 23, July 7, 24, August 1).