The Oil and the Glory
Is Ukraine alone against Russia in the renewed pipeline wars?
Most places ignore the inauguration of new energy pipelines, but most places are not Russia, where the control of the flow of hydrocarbons means raw power. Yesterday, Russian Prime Minister Vladimir Putin inaugurated Nord Stream, a huge gas pipeline linking his country to Germany. It ought to have been an ordinary event, but this 760-mile, ...
Most places ignore the inauguration of new energy pipelines, but most places are not Russia, where the control of the flow of hydrocarbons means raw power. Yesterday, Russian Prime Minister Vladimir Putin inaugurated Nord Stream, a huge gas pipeline linking his country to Germany. It ought to have been an ordinary event, but this 760-mile, $12.5 billion line is steeped in politics — from Putin’s explicitly stated perspective, Nord Stream at last allows Russia to bypass pesky former Soviet Bloc countries such as Poland, Lithuania and Ukraine that resist Moscow’s will.
We thus enter an elevated stage in the pipeline wars, a long-running and turbulent tournament of shadows under way on European soil. But there are signs that time has passed by this strategy for fortifying Russia’s place in Europe.
Gas sales make up some 20 percent of Russia’s state budget, and most of its customers are in Europe, which receives its gas by way of Ukraine. But Russia and Ukraine have almost annual rows over the gas, which as a result has been shut off to Europe at least three times in the dead of winter. No one knows what’s truly the issue — as we’ve discussed, where else on Earth does the leader of a country get involved in a spat over a utility bill? — but Putin has meant to settle the problem once and for all by building new pipelines.
Next year, Putin plans to double the size of Nord Stream to 55 billion cubic meters a year. In Putin’s view, this is not about Russian power, but eradicating the arbitrary, unfair and tyrannical behavior of the states through which Russia’s life-giving gas flows. "We are slowly and surely turning away from the dictate of transit states," Putin said, quoted by the Moscow Times.
From Ukraine’s side, it wants to buy its gas cheaper, and less of it, since European prices have dropped significantly since its contract with Russia’s Gazprom was signed. But Russia is insisting on shipping the same volume, at the same price — unless of course, Ukraine is willing to give up something in return, just a symbolic and friendly trinket.
That trinket is half of Naftogaz, the Ukrainian natural gas company. Ukraine is already losing some $500 million a year in tariffs from the first stage of Nord Stream, but so far it has refused to shift positions, Agence France Press reports.
Matthew Hulbert, an analyst at the Netherlands Institute for International Relations, sees Central and Eastern European states as the losers. Nord Stream’s opening coincides with a certain rise in Europe’s natural gas hunger because of Germany’s decision to switch off nuclear power reactors and France’s resolve to forgo the pursuit of shale gas, Hulbert writes at the Moscow Times. In an email exchange, Hulbert told me that, as a result, he sees a European shift away from gas:
I can only see this ending in tears. … My strong hunch is that the [Central European and Eastern European] states will leapfrog any shale pretentions and crack on full steam ahead with coal.
Given what he sees as Ukraine’s recalcitrance, Putin is threatening another Nord Stream expansion — a third line — and a further reduction of Ukraine’s gas tariffs. That could work — Ukraine could be intimidated into buckling under in the face of the loss of hundreds of millions more a year in tariffs. But that’s only if Ukraine remains alone in the fight.
This time, that appears not to be the case, as Roman Olearchyk and Neil Buckley write at the Financial Times. At least four European countries aren’t sticking by the old ways. In their story at the FT, they write:
Greece’s DEPA gas corporation said this week it had won cheaper gas supplies from Gazprom after renegotiating a long-term supply deal. Germany’s E.on Ruhrgas said in August it was pursuing arbitration with Gazprom, seeking to end the link between oil prices and its gas supply contracts. Meanwhile, Germany’s RWE, Italy’s Eni and GDF Suez are all attempting to bring gas supplies from both Russia and Norway more in line with spot prices.
Russia is only selectively insistent on contract sanctity. Last week, ExxonMobil celebrated its entry into Russia’s Arctic, but consider the company’s previous signature deal in the country — its state-of-the-art Sakhalin-I project just off Russia’s east coast, north of Japan. There, Exxon remains mired in a death-grip with Gazprom.
Exxon finished the project on time, but since then Gazprom has reneged on the American company’s contractual right to sell the natural gas to whomever it wishes, which in this case is China. Gazprom is insisting that it holds the rights to the gas, which it wants to sell cheaply at home. If this reading of the contract holds, and Russian gas continue to sell below world prices, it would hollow out the economics upon which Exxon developed Sakhalin-I.
Frank Verrastro of the Center for Security and International Studies in Washington suggests that the only way for Europe to win its fight for lower Russian gas prices is to provide itself alternatives that make Moscow understand that it has to compromise. In an email exchange, he said that means developing its shale gas, building better pipeline connections around the continent to share supplies, and improving efficiency. None of that will come fast, but the outcome would be to blunt Russia’s pipeline strategy.