European Battle Against Gazprom Continues

Europe is tired of the Gazprom monopoly and isn’t going to take it any more.  At least, that appears to be the message from Lithuania, which will take over the European Union’s rotating presidency in July.

Vilnius has been looking for alternative suppliers.  Moreover, when Prime Minister Algirdas Butkevicius met with Russian Prime Minister Dmitry Medvedev in early April, the former explained that the EU would not adjust its Third Energy Package despite Moscow’s objections.

Said Butkevicius:  “I explained to him that we will not change [the] Third Energy Package in Europe because I presented this plan in Brussels … and our position is very strong — to strengthen energy security in Lithuania and in all the European Union.”   Gazprom had complained that the measure required third party access to storage and transmission facilities, discriminating against the Russian giant.

Although talks between experts from the two countries are expected to begin soon, Butkevicius indicated that his government intended to hold off signing a new contract with Gazprom, currently its only natural gas supplier.  He observed:  “I think we will have new suppliers at the end of 2014 and then I think discussions with Russia will be easier.”  Moscow had been offering a price discount if Vilnius dropped plans to reform the gas industry and abandoned damage claims in a Stockholm arbitration court.

Although it won’t be ready to start serving Lithuania next year, Ukraine is moving ahead to develop its resources.  In January, Kyiv signed a $10 billion production-sharing agreement for the Yuzivska Shale Gas Field with Shell.  Moreover, explained Energy and Coal Minister Eduard Stavytsky:  “We plan by the end of the year to sign at least four more PSAs on top of the existing two.  As a result, investors will be able to start exporting gas to Europe in four or five years and Ukraine could become a net gas exporter by the middle of the next decade.”

Kyiv also is in the process of reforming its gas sector to European standards, breaking up its gas monopoly Naftogaz.  Deputy Minister Volodymyr Makukha said the process will be completed next year.  According to Worldwide News Ukraine, the legislation, adopted in 2010, “introduces clear and transparent rules for the functioning of the gas market in Ukraine, regulating gas extraction, storage, transporting, purchasing, selling, and associated activities.”  Rules adopted last year increase access to the country’s pipeline network.

Stavytsky also pointed to Ukraine’s existing abundant gas storage facilities in discussing plans for his nation to create a gas hub.  He added:  “We are interested in such a European gas market in order to diversify gas supplies to Ukraine as a source of revenue for gas transit services to Europe, and for gas storage under both long-term contracts and in spot trading, and as a stable and sizable market for future exports of our own gas.”  The EU is interested.  European Commission for Energy Guenther Oettinger said:  “The EU is willing to explore the possibility of establishing a ‘gas corridor’ to bring more long-term diversification options for Ukraine using, inter alia, existing pipelines in Western Ukraine.”

Ukraine has begun purchasing natural gas through Europe and is looking at Azerbaijan and Turkmenistan as possible sources of additional supplies.  In fact, in February Kyiv reached a new supply agreement with Turkmenistan which, however, requires Russian consent to use pipelines through that nation.  And so far Moscow has not responded well to Ukraine’s attempt to diversify natural gas supplies, hitting Kyiv with a $7 billion bill for failing to fulfill prior purchase commitments.

Gazprom also is threatening to build a new pipeline which would ship most supplies to the European Union from Belarus through Poland and on to Slovakia.  The Kobryn-Velke-Kapusany pipeline would not expand Russian exports.  Rather, explained Vladimir Socor of the Jamestown Foundation:  “The operative goal of this project is to increase Russian pressure on Ukraine to cede control over its transit pipelines to Gazprom.”

It is not clear whether the proposal is serious, and especially whether Poland and Slovakia are willing to go along with the Putin government’s plans.  Warsaw, at least, is not interested in strengthening Russia’s hand.  Kyiv has planned to use its transit fees to upgrade its energy infrastructure.

Natural gas exports have provided Russia with its greatest source of post-Cold War influence in both the former Soviet republics and Europe proper.  America’s shale revolution has begun putting global downward pressure on natural gas prices, while Moscow’s energy clients have begun putting greater political and legal pressure on Gazprom.  The struggle is likely to grow ever more intense in the coming months.

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