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Q&A: Why Europe needs Russian gas

The threat from Russian state monopoly Gazprom to cut off the gas flow to one of its neighbours, Ukraine, has again raised questions about the security of Europe’s energy supply. What sparked the latest crisis?

Ukraine and Russia face negotiations over the renewal of gas supply contracts every year, but by midnight on 31 December 2008 they had failed to agree on the price Kiev should pay for gas in 2009.

After initially offering to supply Ukraine at a price of $418 (£288; 299 euros) per 1,000 cubic metres of gas, Gazprom eventually dropped the offer to $250.

Russian Prime Minister Vladimir Putin said that price, less than half of what most countries in Europe pay, was very generous.

But Ukraine rejected this offer and Moscow accused Kiev of blackmail by threatening supplies.

Ukraine later offered $235 – but Gazprom has reverted to its previous demand, of $418.

Meanwhile, Gazprom says that it is owed about $2bn by the Ukrainian state energy firm Naftogaz; $1.6bn in backdated bills and a further in $450m fines for late payments.

Naftogaz claims it has fulfilled its obligations by paying $1.5bn to RosUkrEnergo – a Switzerland-registered gas trading company – and says if Gazprom has not received the money is not Ukraine’s fault.

Is this politics or economics?

Gazprom used to be a Russian ministry before becoming a private company, and it remains very closely connected to the state – Russian President Dmitry Medvedev is a former chairman of the company.

Critics say that Russia is using its energy resources as a political weapon to pressure European and former Soviet countries to adopt favourable stances towards Moscow.

But threats to disrupt exports, and the fact that it has carried out such threats in the past, have damaged Russia’s reputation as a reliable gas supplier.

Meanwhile, Gazprom has suggested that “political forces” in the pro-Western Ukrainian administration are seeking to provoke a wider conflict with Russia.

Mr Putin has been highly critical of Ukraine’s leaders, blaming the dispute on a “clan war” between Prime Minister Yulia Tymoshenko and President Viktor Yushchenko.

Is Europe’s gas supply threatened?

Moscow says it could be, but Kiev has insisted that it will maintain supplies.

Gazprom controls about a third of the world’s gas reserves and it is responsible for a quarter of Europe’s supplies.

Most of Europe’s gas is piped via Ukraine, and when Gazprom shut down the pipeline in 2006, the flow to the rest of Europe fell, in some areas, by 40%. Customers as far away as France were affected.

This time, the Ukrainian authorities say they do have plenty of reserves and have reassured the European Commission, but these supplies will not be unending.

Gazprom had already embarked on plans for pipelines that bypass Ukraine and Belarus, former Soviet states which are currently essential for transit.

Gazprom has two major projects, Nord Stream and South Stream. Nord Stream will run for 1200km along the bed of the Baltic Sea, and South Stream under the Black Sea. Gazprom has signed up big European partners: Italy’s ENI for South Stream, and German companies E.ON Ruhrgas and Wintershall – along with Dutch provider Gasunie – for Nord Stream.

Is the EU happy about relying on Russian gas?

The EU has major concerns about security of supply and is moving ahead with a pipeline plan of its own. Nabucco will bring gas from Central Asia and the Caspian across Turkey into the European Union. But it will have only enough capacity to provide a small proportion, perhaps 5%, of Europe’s needs.

So Europe needs Gazprom, and that is why European companies and their governments have actively embraced the two projects. Austria is likely to serve as a hub for both. EU officials say that even during the Cold War the Russian gas supply was stable, so it is better to rely on Gazprom than potentially unstable sources such as Turkmenistan and Uzbekistan.



January 4, 2009 - Posted by | Uncategorized |

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