If Gas Talks Fail, Europe Has A Backup Plan

BERLIN, Germany -- For the past several winters, companies and households, especially in Eastern Europe, have had to brace themselves for the annual energy spat between Russia and Ukraine.

This year is no exception.

Gazprom, Russia’s state-owned energy giant, begins talks with Ukraine this month over what it will charge for its energy.

Already they are disagreeing. But this time Europeans are well prepared.

Storage facilities in some countries are full. The weather is mild.

Europe has access to natural gas from other sources.

“Europe has a lot of access to relatively cheap spot market gas,” said Graham Freedman, a gas expert at Wood MacKenzie, the energy consultants.

No wonder then that the Russia-Ukraine energy negotiations have a special significance.

Both countries enter them at a disadvantage, analysts say.

Ukraine has always had one crucial card to play: its gas transmission pipeline.

Because Russia needs Ukraine’s extensive pipeline for transporting its gas to Europe, Ukraine has had a strong negotiating hand.

In order to pressure Russia to sell gas at a discount to Kiev, Ukraine could switch off, as it did in 2006, the transmission tap, thus preventing Russian gas from reaching Europe.

Gazprom could retaliate by stopping the flow of gas destined for Ukraine.

The few times that this happened, everyone lost.

The Europeans, especially countries completely dependent on Gazprom, suffered serious shortages.

Russia’s credibility as a reliable supplier of gas to Europe was weakened.

Ukraine’s reputation for guaranteeing the flow of gas to Europe plummeted.

This time around, the dynamics are different — and to Europe’s advantage, if it plays its cards astutely.

“Russia now faces real competition from L.N.G. and from shale gas, which the Europeans have access to,” Mr. Freedman said, referring to liquefied natural gas. “It should be worried.”

Europe imports a third of its gas from Russia and accounts for 65 percent of Gazprom’s total exports.

But the big energy companies that have signed long-term gas contracts with Russia are winning more flexible pricing arrangements.

Some German companies argue that it is now a buyer’s market.

This is because increasingly, the price of natural gas is no longer fixed to the cost of a barrel of oil, as it was in the past.

There is competition from liquefied natural gas, which is transported by ship, and shale, an unconventional natural gas extracted from sedimentary rocks that already makes up 14 percent of the U.S. natural gas supply, according to the U.S. Energy Information Administration.

The availability of liquefied natural gas and the discovery of shale resources in Europe have rattled Gazprom’s position, especially in Eastern Europe.

Poland, which imports two-thirds of its gas from Russia, plans to reduce its dependence on Moscow by extracting shale and buying liquefied natural gas.

Waldemar Pawlak, the deputy prime minister and energy minister, said that having access to alternative supplies gave Warsaw leverage in negotiations.

“We can either buy cheaper conventional gas or move quicker on shale gas extraction,” he said.

This changing gas market in Europe is the backdrop to the latest energy talks between Russia and Ukraine.

But Ukraine’s hand is weaker too.

Russia can now divert some gas from the Ukraine transmission gas pipeline to Nord Stream, a Russian-German venture that was inaugurated last November.

It allows Russia for the first time to send natural gas directly to Europe through pipes built under the Baltic Sea.

“Nord Stream is part of Russia’s grand strategy to rid itself of its dependence on Ukraine’s gas transmission pipeline and other transit pipelines it does not own,” said Jonathan P. Stern, a gas expert at the Oxford Institute for Energy Studies.

Russia already owns the transmission pipelines of Belarus and Moldova.

But from Russia’s standpoint, Ukraine’s transmission pipeline is the ultimate prize.

Acquiring that, analysts say, would end Russia’s dependence on Ukraine.

Ukraine will not sell. It is too much of an economic and political asset, according to Ukrainian officials.

Rebuffed so often, Gazprom is changing tactics.

With liquefied natural gas now part of the European market and shale gas a potential contender, Russia is in a hurry.

It needs to lock in European markets before it is too late.

Alexei Miller, chairman of Gazprom’s management committee, and Prime Minister Vladimir V. Putin of Russia said last month that Ukraine’s gas transmission system would cost $28 billion to buy and upgrade.

It would cost substantially less than building South Stream, another alternative route, they added.

South Stream, to be built under the Black Sea, would supply Southeastern Europe with Russian gas just as Nord Stream delivers gas to parts of Western Europe.

Mr. Miller, regarded by energy experts as a cool negotiator, said South Stream would cost €16.5 billion, or nearly $21 billion — making it cheaper than buying the Ukraine pipeline.

And construction would begin this year instead of in 2013.

Turkey, which has ambitions to be the regional gas hub, has bolstered Gazprom’s ambitions.

Last month, Ankara dropped its objections to Russia’s building South Stream in Turkish territorial waters of the Black Sea.

“It is a very nice present for the New Year,” Mr. Miller said.

Indeed. By speeding up construction of South Stream, analysts say, Russia is hoping to tie up markets in Southeastern Europe before liquefied natural gas and shale enter them.

That could weaken the viability of Nabucco, the E.U.-backed pipeline that is supposed to transmit gas from Central Asia to Europe so as to reduce Europe’s dependence on Russian energy.

But Nabucco has yet to line up suppliers to fill the pipeline.

Until then, investors will remain reluctant to finance the project, which will cost €12 billion to €15 billion.

These developments mean that Russia is still determined to retain its hold on Europe’s energy market and is still is a very crafty player.

But its grip is not as tight as it used to be.

That has little to do with European strategy, despite the many E.U. meetings devoted to energy security and the construction of Nabucco.

It is the effect of competition, analysts say, that is finally penetrating the gas market.

Source: The New York Times