25 May Friday, 2012

Ukrainian and Russian attempts to adjust the gas contracts signed in 2009 seem to be a never-ending story. Ukraine insists on changing the price of Russian gas supplies. In its turn, “Gazprom” wants to get control over the Ukrainian gas transportation system, but so far the parties have been unable to reach a compromise.

1990-2009: Gas Disputes between Ukraine and Russia Burst into “Gas War”

After the dismemberment of the Soviet Union, Ukraine, with its strategically important location as a transit country delivering Russian gas to Europe, finds itself in a dual position. On the one hand, Ukraine now is an independent state; on the other hand, it is still a brotherly country in the post-Soviet space. Therefore, Ukraine still has ambitions for historically-rooted beneficial prices for Russian natural gas.

Nonetheless, historical ties between Russia and Ukraine seem to fade away in light of economic realities. Since the early 90s, several gas conflicts occurred between Russian “Gazprom” and Ukrainian “Naftogas” due to Ukrainian debts. Moscow threatened Kiev with cutting off its gas supply and the Ukrainian response was to block the transit of Russian gas supply to Western Europe through Ukraine. 

With the Orange Revolution in Ukraine in 2004, tension in the gas question between the two formerly brotherly countries has drastically increased and burst into a conflict labeled by some columnists as a “gas war.” The Orange Revolution marked a pro-European vector in Ukrainian policy-making and, consequently, indicated the abolishing of price cuts for Naftogas. 

The gas tariff has been the most disputable issue in Ukrainian-Russian dialogue since 2006, when President Viktor Yushchenko stated that the gas price for Ukraine is unacceptable. As a result, Russia stopped gas supplies to Ukraine while still using Ukrainian pipelines for transit purposes. Later on, Moscow accused Kiev of unauthorized usage of gas intended for European buyers. Eventually, the dispute was solved and the sides agreed on the price. However, the gas war left its indelible mark on Moscow-Kiev relations and regional gas supply in general. Europe faced its dependency on Russia and made several attempts to overcome it. Thus, one can observe emerging plans for the construction of new gas terminals and gas pipelines which would connect continental Europe with gas sources in Norway, North America and Central Asia. 

Blind Alley in Gas Negotiations: Ukraine and Russia Go Separate Ways

Inefficient negotiations with Gazprom on gas tariffs resulted in the Ukrainian will to find new partners. Ukraine tries to minimize its dependency on Russia in the energy sector. The figures speak for themselves: In January-March 2012, Naftogas reduced its import of Russian gas to 59% in comparison with the same time slot in 2011.

Failure to bargain with Gazprom led to new policies in the Ukrainian energy sector.

Prime Minister of Ukraine Mykola Azarov announced that “Ukraine is working hard to diversify gas supplies.” Therefore, diversification became the key strategy in Ukrainian gas policy-making. Considering its dependency on Russia in the energy sector and risks of losing Gazprom as a main gas supplier, Ukraine is trying to find multiple alternatives from what we can observe from its negotiations and recent agreements in the energy sector with Germany and Qatar.

As Korrespondent reports, Naftogas of Ukraine and German RWE Supply & Trading GmbH agreed on a natural gas-selling contract in May 2012. RWE Supply & Trading GmbH (RWEST) is one of the biggest companies in Europe working in the field of the electric power industry and electroenergetics.

An ironic part of this agreement is that in the case of RWEST, Ukraine will buy Russian gas from Germany. Russian gas will be supplied to Ukraine not by Gazprom but by another company, and even more surprisingly, for a more moderate price. 

Ukraine is not the first country to draw attention to the fact that Russian gas is cheaper to buy from German suppliers. Poland has already spoken about it and Lithuania was hinting at it.

One more way to go for Naftogas is Qatar. As Prime Minister of Ukraine Mykola Azarov reports, Ukraine is negotiating gas deals with Qatar. According to him, gas from Qatar even with the delivery expenses will be three times cheaper than Russian gas.

Cooperation in the energy sector between Ukraine and Qatar does not fall in line with Russia-Qatar relations. There are disagreements between Russia and Qatar in the international arena with regard to the Syrian issue. While Russia continues to protect Damascus from the U.N. sanctions, Qatar is perceived as one of the active players in the Arab League, which stands against Bashar al-Assad’s regime.

In the Gas Exporting Countries Forum in November 2011, Qatar made a statement that “it will reduce its gas supply to Europe or at least will not increase it.” The traditional supplier for the European market is considered to be Gazprom, while Qatar is selling gas to Asian buyers. This newly-appeared possible friendship between Ukraine and Qatar can strain relations in the energy sector, as many experts claim.

Besides Germany and Qatar, which are considered to be the main two diversification alternatives for Naftogas, the mass media highlights other Ukrainian attempts at diversification. Kiev’s negotiations with Turkey and Bulgaria to use a Turkish LNG terminal for gas supply to Ukraine, and dialogue with American Frontera Resources Corporation are just a few of them to name.

As a response to Ukrainian diversification policies, Russia in its turn works on the expansion of North Stream and the designing of South Stream pipelines (the main rival of the Nabucco project) to bypass Ukraine as a transit country.

Indisputably, Ukraine and Russia are interdependent in the energy sector. Realistically, Ukraine cannot stop buying gas from its main supplier Gazprom, and Gazprom in its turn needs Ukraine both as a big market and as a strategically important transit partner. However, both Kiev and Moscow are now testing the waters to find alternatives to brotherly tandem by means of new allies and new roots.