Archives: Economics

Russia, Ukraine & Gazprom

Ukraine

  • depends on Russia for half of its gas consumption
  • has been seeking to renegotiate a 2009 gas contract since before unrest began in Ukraine’s capital in November.
  • hasn’t paid for 9.42 billion cubic meters of Russian fuel, which is equivalent to Poland’s annual consumption from Gazprom
  • owes $3.51 billion for fuel delivered in 2013 and through April this year

Russia

  • is moving Ukraine to prepayments
  • has threatened to stop supplying gas to Ukraine on June 3 unless the country starts paying for the fuel in advance
  • in case of partial prepayment, will only supply what Ukraine pays for.

Dispute

“Ukraine refuses to prepay for Russian gas and is ready to settle the debt if Gazprom returns an “honest, market price” for gas” — Ukrainian Energy Minister Yuri Prodan

Ukraine had received the first $3.2 billion of International Monetary Fund (IMF) aid package last week and is to receive the first EU package of 600 million euros ($823 million) of a total 1.6 billion euros of macro-financial assistance very soon. Despite its potential to pay for what it owes and also for the future consumption, Ukraine is unwilling to pay precisely because Gazprom had raised the price it charges Ukraine for gas by 81 percent in April, to $485 per 1,000 cubic meters, more than any EU member pays. NAK Naftogaz Ukrainy [the state-owned oil and gas company of Ukraine] will seek international arbitration on May 28 if talks with Gazprom fail.

“Russia will consider a compromise on natural gas prices with Ukraine only after its neighbor pays its debt for previous supplies. Moving Ukraine to prepayments will probably lead to problems supplying Ukraine. That in turn may create risks for transit and EU countries may suffer during the winter unless Ukraine has filled its underground storage facilities” — Russian Deputy Energy Minister Anatoly Yanovsky, Moscow

Implications

On Europe: The analysts believe that over the short run, an impact that stopping shipments to Ukraine imposed on the Europe region would be very insignificant for two reasons.

  1. The gas traveling through the Ukraine, accounts for only half (or 15 percent) of total 30 percent of what EU needs. Currently, the Nord Stream pipeline, a direct link under the Baltic Sea from Russia to Germany that opened in 2011, can alleviate part of any gas supply disruption linked to a Ukrainian cut.
  2. Also, due to relatively high inventories that Europe enjoys and lack of demand, the EU can cope with a Ukrainian supply disruption. One consultant suggests that the EU can cope for about 90 days provided that the cooperation between member states and normal flows of Russian gas through routes other than Ukraine.

“Storage in the EU was 55 percent full as of yesterday, the highest level for the time of year since at least 2007” — Gas Infrastructure Europe (a lobby group in Brussels)

“The European gas market is currently in a comfortable position, with ample stocks and little heating-related demand” — Lysu Paez-Cortez, an analyst at Natixis SA in Paris.

On Russia: IMF claims that Russia has already entered a recession while the European natural gas traders are betting that Russia’s economy can’t afford to lose more than $100 billion if the crisis in Ukraine escalates. As its ties with the U.S. and the EU deteriorate, it is indeed struggling to raise investments to stimulate growth, sparking capital flight and a selloff of ruble assets.

“An escalation of the conflict with Ukraine could cost Russia $115 billion on average in 2015, or more than 3 percent of its gross domestic product. The conflict could also cut European economic growth by 0.15 percent” — IHS Inc.

  • On Gazprom: Russia’s state-controlled company is not experiencing any major change yet with its shares closed almost unchanged at 135.71 rubles as of May 13. Due to an uncertainty arose with Ukraine over its gas supply, Gazprom is already preparing a supply contract with China, to be signed when President Vladimir Putin visits the Asian nation next week according to the Deputy Energy Minister Anatoly Yanovsky.

Three important questions I am curious about are as followed:

  1. How would the contract between Ukraine and Russia turn out, given the escalated confrontation on the grounds between Ukraine and Russian-speaking regions of Ukraine?
  2. Will Russia really cut off the gas to the Ukraine and thereby also to the Europe if the deal doesn’t go through after the deadline?
  3. How the decisions and actions of Ukraine, Russia and the Europe will affect the rest of the world and the global economy?

Note: This blog entry makes use of Bloomberg’s May 12 article by Anton Doroshev and Elena Maznev and May 14 article by Isis Almeida.

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Europe’s Current Energy Situation in a Nutshell

This post is a re-organized version of an article by Bloomberg’s Anna Shiryaevskaya and Marek Strzelecki, on an ENERGY SUPPLIES (and also possible PRICE) CHALLENGE faced by European Union mainly due to a decrease in supply from Russia.

Before the Crimea Crisis:

  • Europe gets a third of its gas from Russia, mostly via Ukraine, at an annual cost of about $53 billion, although BG Group Plc noted that it imported the least LNG in nine years in 2013 as demand weakened.
  • Russia supplied 138 billion cubic meters to the EU last year at an average price of $387 per thousand cubic meters ($10.50 per million British thermal units), according to OAO Gazprom, the Moscow-based Russian pipeline gas export monopoly.
  • Dependence on Russian gas: Finland -100%, Lithuania – 100%, Poland – 59%, Germany – 37%, France – 16%, Belgium – 0%, Spain – 0%
  • Europe is Gazprom’s biggest market by sales and it pays more than Russian customers or some other buyers in the former Soviet Union. Within Europe, Germany is Gazprom’s biggest market.

Current Situation: Russia’s annexation of Ukraine’s Crimea region this month sparked the biggest regional crisis since the Cold War.

“Gas is flowing from Russia to the EU as normal and the bloc expects Russia to meet its supply commitments” — Sabine Berger, an energy spokeswoman for the European Commission

“There are no alternatives to Russian gas for Germany” — Economy and Energy Minister Sigmar Gabriel in an interview with the Neue Osnarbruecker Zeitung.

Future: Unavailability of Russia’s Gas Supply this summer >> A need to attract enough cargoes from the global market to replace Russian supplies >> Possibility of a price Increase: Europe’s natural gas prices would have to double; U.K. price to double to more than $18 per million British thermal units

“Benchmark U.K. prices would need to rise 127 percent to attract liquefied natural gas (LNG) if Europe had to replace all its Russian fuel for two summer months” — Energy Aspects Ltd. in London

Implications:

  1. Surging energy costs would threaten the recovery of the Euro area’s economy, which, according to the Bloomberg’s median estimates, is predicted to expand 1.1 percent in 2014, after contracting for two consecutive years.
  2. Increased competition for LNG supply >> 19% increase in costs for Asia [Mike Fulwood, a London-based principal for global gas at Nexant Ltd]
  3. “A halt in supplies would hurt Russia more than the EU. Lost revenue from the EU would also deplete the state budget, 15 percent of which comes from gas sales.” — Georg Zachmann, a research fellow at Bruegel in Berlin

Possible Solutions for the EU:

1. To reduce its reliance on Russia >> to  develop domestic resources

  • Poland will complete an LNG terminal by May 2015. It is already developing Europe’s largest recoverable deposits, estimated at 4.2 trillion cubic meters [U.S. Energy Information Administration] and predicted to meet nine years of EU consumption.
  • Lithuania will receive a floating LNG facility by the end of 2014.
  • France will start an LNG terminal next year.
  • Germany will have to find new investors for a previously canceled project.
  • Croatia and Ukraine will aim to finish reviewing the projects.

2.To buy more gas from Norway and the Netherlands [Each with a capacity to boost pipeline exports by at least 20 billion cubic meters, or enough combined to supply France for a year — Bruegel estimates.]

3.To make use of coal in power plants

“Nothing can be a game changer which will make any immediate and significant difference. The only thing which can be done quickly would be to use massive amounts of additional coal rather than gas. This would massively add to environmental problems.” — Jonathan Stern, the founder of the Oxford Institute for Energy Studies

4. To import LNG from the United States and Australia

“European terminals can import as much as 199 billion cubic meters (7 trillion cubic feet) of gas a year)” — Gas Infrastructure Europe, a lobby group in Brussels

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