The ordinary Russian, who has been glued to the TV screen for the entire New Year holidays, has no doubts over which country (Russia or Ukraine) disrupted gas supplies to Europe. The situation has been made clear to him. Kommersant-Vlast sought to explain what was really happening and why.
It is not the first time that Russia has shut down pipelines supplying natural gas to Europe. The last significant Russian-Ukrainian confrontation on gas export prices occurred in January 2006, when Russia's Gazprom and Ukraine's Naftogaz failed to reach an agreement over gas supplies to Ukraine. At that time, some three years ago, the Ukrainian president said that the gas price of $230 per 1,000 cubic metres demanded by Russia was unacceptable. Soon after, Gazprom entirely cut off its gas supply to Ukrainian consumers from January 1, 2006.
In spite of this, export gas continued to flow to Europe via Ukrainian gas pipelines. In the same way as today, the Russian side accused Ukraine of siphoning off gas intended for European consumers. As before, Naftogaz's representatives denied all accusations. The main difference between what happened three years ago and what is happening now is that the events of three years ago had not led to the complete disruption of gas supplies to Europe, like what happened on January 7. Let us try to understand what was going on with the Ukrainian pipelines from January 1 to6.
Gas does not flow via a pipeline by itself: it is pumped into the pipeline by gas compressor stations. For this, the pipeline needs technical gas, that is, natural gas which is usually taken from the same pipe and directed to the turbines of gas compressor stations. There, it is burned to produce energy necessary for pumping large amounts of gas through the pipeline.
For reasons of commercial confidentiality, neither Gazprom nor Naftogaz say how much technical gas is actually needed (in percentage of the total amount). In truth, this is not really a case of commercial confidentiality. The issue is that the amount of the burnt gas depends on a number of factors, such as the volume of gas supplies, pressure in the pipe, the gas pumping speed and other technicalities. There cannot be any fixed figures on technical gas consumption in gas transportation via a pipeline, in the same way there cannot be any fixed amount of petrol needed by a car; it will differ depending on its speed. However, it is possible to calculate an average percent for Ukraine. As early as January 1, 2009, Oleg Dubina, head of Naftogaz, said that his company took 21 million cubic metres of gas a day for technical needs from Russian gas supplies to Europe. Later, Vladimir Putin confirmed this figure in an interview with foreign journalists.
Daily gas transit to Europe via Ukraine was estimated at about 300 million cubic metres. In comparing these figures, we see that nearly 7% of the daily gas transit amount is needed in order to export Russian gas via Ukraine.
The question arises as to which country should provide this gas and pay for it. Russia claims that, under the transit contract with Ukraine, the transit country should buy technical gas at the domestic price, that is, at a price Ukraine pays for Russian gas supplies for its domestic needs. . There is no such price now. At first, Gazprom offered the price of $250 per 1,000 cubic metres (the offer was rejected by Ukraine), which was later changed to $418 and then to $450 (Mr Putin said that the average price for Europe was $470). On January 1, 2009, Ukraine was ready to agree to the price of $201, though the price negotiated by Oleg Dubina at the Moscow talks was $235. The same figure was mentioned by Ukrainian Prime Minister Yulia Tymoshenko on January 14.
However, a new gas contract between Russia and Ukraine had not been signed by January 1, and even by the time this issue was being put to bed. Russia regards the previous contract as invalid. The transit agreement, which stipulates the price of $1.6 per 1,000 cu m/100 km for gas transit, is another matter; according to Vladimir Putin, it must be valid till the end of 2010. Ukraine, however, thinks that Russia must pay no less than $2 per 1,000 cu m/100 km this year.
Now let's make some calculations again based on the numbers given.. The pipelines from the eastern to the western border of Ukraine are about 1,100 km long. Thus, with the rate of $1.6 per each 1,000 cu m of gas transported to Europe, Ukraine must receive $17.6 from Russia. Proceeding from the Russian price of $450 per 1,000 cubic metres for Ukraine, it will spend $31.5 on gas injection (burning technical gas). At a press conference on January 8, Vladimir Putin said that, should Ukraine agree to the price of $450, the transit tariff could be raised to $3 or $4. However, Mr Putin made these remarks on January 8, not earlier (in December, for instance) when gas deliveries had not yet been stopped.
It is clear that such business is unprofitable, to say the least of it. This means that Naftogaz must transport Russian gas to Europe at a loss, receiving no profit from gas transit via Ukraine and paying extra in order to maintain the gas volume at the exit point equal to that at the entry point to the gas pipeline system.
Note that the injection gas is taken from the same pipe, but not from volumes bound for Europe but from Russian deliveries to Ukraine. However, Russia suspended its gas supplies to Ukraine on January 1. The Russian side thinks that in this case Ukraine must start injecting technical gas into the pipeline taking it from its own gas depots, or elsewhere. For logical reasons (that is, fearing that it will lose the accumulated gas reserves during the gas blockade), Ukraine is not doing this taking the injection gas from the same pipe, as it did before.
It is obvious that if Gazprom had really wanted Russian gas to reach Europe in the amounts written into contracts with European consumers, that is, if it had wanted to fully meet its obligations to them, it should have pumped more gas (by 7%) into the system at the Russian-Ukrainian border.
What did Gazprom do in this situation? Starting on January 1, when Ukraine refused to sign a new contract, Gazprom supplied the exact amount of gas required by Europe under the contracts. The very next day it became clear that Europe received less gas than required by 7%, while Naftogas spoke openly about that. Gazprom declared that gas had been stolen by Ukraine and that it would cut supplies by the stolen amount. The following day, the European gas companies anxiously saw that supplies had fallen by 15%. Two days later, Gazprom said that Ukraine had stolen 65.3 million cubic metres of Russian gas (in fact, it should have stolen more, some 84 million cubic metres, which is the amount of gas that should have been burnt at gas pumping stations in four days, provided that the gas flow continued as before). However, since Russia sharply cut gas supplies to Europe, smaller amounts of gas were burnt, only 65.3 million cubic metres to be exact.
On January 5, Gazprom CEO Alexei Miller had a meeting with Prime Minister Vladimir Putin. After brief consultations, looking grim before the cameras, they took an arbitrary decision to cut gas supplies to Europe by 65.3 million cubic metres a day. Time passed, but Ukraine had not signed the contract. On January 6, Naftogaz said that Gazprom had cut gas supplies to Europe fourfold against the planned volume. On January 7, Russia completely stopped gas supplies to Europe.
On January 8, Vladimir Putin convened a press conference at which he accused Ukraine of stealing Russian gas for its own needs, of partially stopping gas supplies to Europe on January 6, and of stopping them completely on January 7. He spoke rather amusingly on the matter: "21 million cubic metres is needed for technical needs, and 86 million cubic metres has been taken. Can you see the difference? Where is the rest of gas?" In the same interview but a bit earlier, the Prime Minister said that 86 million cubic metres was "the volume of gas illegally siphoned off by Ukraine from January 1 to 6." If we calculate again and multiply 21 million by seven days, we shall see the difference but not in favour of the version that Ukraine has stolen gas for its own needs.
As a result, nearly all of the Balkan countries were left without Russian gas, while gas supplies to Germany and Austria were tangibly cut. Meanwhile, the frost was not yielding in Europe, and even in Chisinau with its warm climate the temperature dropped to -10°C at night. In all, over ten European countries suffered from cuts in Russian gas supplies during a rather severe European winter this year.
Why was Ukraine so stubborn in its unwillingness to sign a new contract? Why should it choose to terminate talks on this issue? One of the reasons was that Ukraine's gas accumulated in its Transcarpathian gas depots would suffice for the next six months, or even longer if it were used it sparingly. However, the main reason was a steep fall in world oil prices.
In December 2008, Russian oil was priced at about $40 per barrel, having fallen from the July record of $147. World gas prices are based on current oil prices. Given the whole spread of experts' assessments, with the oil price at $50 per barrel, 1,000 cubic metres of gas should cost about $150-$160, but no more than $200. In defending its right to set high gas prices, Gazprom says that gas prices are usually lagging behind a change in oil prices by nine months. In other words, Gazprom is ready to discuss a drop in gas prices by next autumn, if the prices do not surge again. This is acceptable for most European countries, since gas prices are fixed for them every quarter. The Germans, for instance, still pay $280 for gas supplied to them: they can tolerate this price without a grumble.. Initially, it was planned to fix the gas price for Ukraine for the whole year, without the right to change it. However, on January 12, Alexander Medvedev, Gazprom deputy CEO, said for the first time that the gas price of $450 for Ukraine would stand only for the first quarter of this year.
Last week, when Ukraine signed for the second time an agreement on international monitoring of gas supplies to Europe via its pipelines, Gazprom tried to resume gas deliveries to Europe. The agreement had to be signed twice because of the technical gas issue: Ukraine demanded that Russia should inject the gas into the system. Russia refused to sign such an agreement. On January 13, Gazprom injected pilot gas into the system and warned that, if Ukraine continued taking technical gas from the pipeline, gas supplies would be suspended again. In fact, they were immediately suspended, though this time it was Ukraine that shut off the valve. Ukraine said that Gazprom set impracticable terms on the use of technical gas. Oleg Dubina, head of Naftogaz, sent a letter to Gazprom asking it to lend technical gas to Ukraine. Instead, Russia proposed that an international consortium
What is not clear in all of this is why Russia cannot issue an invoice for technical gas post factum, without disrupting supplies to Europe. Even if Ukraine refuses to pay it, the supplier's reputation is more costly than money.
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Homes left without gas
The Russian-Ukrainian gas conflict had an immediate effect on all Russian gas consumers in Eastern and Central Europe.
Bulgaria
Bulgaria, which is 96% dependent on Russian gas, suffered the most from the conflict. According to the EU Commission's data for 2006, natural gas made 14% of the country's energy basket. When Russian gas had been cut off, dozens of kindergartens and 68 schools heated by gas-fired thermal power plants were forced to close. Bulgargaz, the local gas monopoly, reported the complete suspension of gas supplies to 72 major industrial companies. Gas supplies to over 150 companies were tangibly cut. The economics ministry reported the Bulgarian companies' total daily losses in excess of €4 million. Georgi Purvanov, Bulgaria's President, considers that the operation of the old nuclear power plant in Kozlodui may be resumed. Massive protest rallies were held in front of the Ukrainian embassy in Sofia. In Varna, where 12,000 homes were left without heat, locals burnt a Russian flag in front of the Russian consulate demanding an end to "Putin's gas war."
Slovakia
Russian gas accounts for 100% of the country's gas consumption and meets 30% of its total energy needs. When Russian gas supplies fell by 70% on January 6, a state of emergency was declared in Bratislava, Slovakia's capital. The government issued an executive order limiting gas consumption for over 1,000 companies operating in the country. Slovakia also declared its readiness to restart the old nuclear power plant in Jaslovske Bohunice which was closed down in late 2008 at the order of the European Commission; this closure was a major condition for Slovakia's entry into the European Union.
Austria
Russia provides 51% of Austria's gas needs, with another 31% provided by Norway and 18% produced by Austria itself. As of 2006, natural gas accounted for 22% of the country's energy basket. Russian gas supplies to Austria were stopped completely on January 7. OMV, Austria's major oil and gas group, said it was ready to use its own reserves which amounted to 1.75 billion cubic metres (61.78bcf) by that time, enough to last the country for three months. Reinhold Mitterlehner, Austria's minister of economy, said that the government was not planning to restrict gas consumption in the country and added that it was necessary to ensure full-scale support for the construction of the Nabucco gas pipeline bypassing Russia.
Bosnia
Bosnia is 100% dependent on Russian gas supplies, with natural gas accounting for a mere 8% of the country's energy basket. Gas supplies to Bosnia were cut off on January 6, with dozens of thousands people left without heating and several industrial enterprises forced to close. Some 72,000 families in Sarajevo were left without heat. Sven Alkalaj, Bosnia's Foreign Minister, sent an official note of protest to Ukraine and Russia. The letter of Bosnia's ministry of foreign affairs reads that the suspension of gas supplies "endangers the lives of 4 million people who should not become hostage to differences between Ukraine and Russia."
Hungary
Russian gas accounts for about 60% of domestic consumption, with the rest of gas produced by the country. Natural gas makes 42% of Hungary's energy basket. Experts claim that Hungary can supply gas to private consumers and state organisations for two months, but only if it stops all its enterprises. Some of them stopped operating. According to Ferenc Gyurcsany, Hungary's Prime Minister, the situation when "Russia and Ukraine exchange blows and Hungary suffers from it" is unacceptable.
Serbia
Serbia's energy consumption is 15% dependent on natural gas, with 87% of its needs for it met by Russian supplies. When Serbia was fully deprived of Russian gas on January 6, about 170,000 homes were left without heating. Two days later, heat supply was partially resumed due to gas supplies from Germany and Hungary. The Srbijagas state gas distribution company said it might file a lawsuit against Ukraine. At the same time, protesters in Kragujevac staged an anti-Russian rally where they set a Russian flag alight. The Serbian Employers' Association accused its government of its failure to ensure natural gas reserves. It estimated the losses to local businesses due to the suspension of Russian gas supplies at approximately €20 million.
Poland
Russia provides 47% of Poland's gas needs, and gas makes 13% of Poland'a energy basket. Apart from Ukraine, Russian gas flows to Poland via Belarus. The Polish gas distribution company PGNiG said that, despite the disruption of gas supplies via Ukraine from January 7, Poland received 84% of the paid Russian supplies. Nevertheless, the Polish government announced a cut in gas supplies to enterprises.
Greece
Russia meets 82% of the country's gas requirements. As of December 31, 2007, natural gas made about 9% of Greece's energy basket. Russian gas supplies to Greece were completely stopped on January 6. Greece has underground gas storage facilities with the amount of gas to last for about three months, and also two alternative sources of gas supplies - a Turkish pipeline and the Athens LNG storage terminal that receives LNG from Algeria.
Czech Republic
Russia provides about 80% of the Czech Republic's gas needs, with gas making 16% of its energy basket. Russian gas supplies to the republic were completely stopped on January 7. RWE Transgas, the leading Czech gas transportation company, said that the amount of gas in its gas storages would last for several weeks.
Croatia
Russia meets 37% of Croatia's annual gas requirements, while gas makes about a quarter of the country's total energy consumption. Croatia's gas depots can provide gas to enterprises and private consumers for three weeks. Nevertheless, the local oil and gas group INA reached an agreement with Germany and |Hungary on immediate gas supplies. The government instructed INA to draft alternative projects of gas supplies from Italy and North Africa.
Romania
Russia provides 28% of the country's gas needs, with gas making 35% of its energy basket. When gas supplies stopped on January 7, the local energy companies, Romgaz and Petrom, began using gas stored in gas depots, of which there was measured at 2.2 billion cubic metres - enough to last for 60 to 80 days.
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Standoff on the pipe
Kommersant-Vlast presents a timeline of events in the Russian-Ukrainian gas conflict.
On December 24, 2008, Gazprom held talks with a delegation of Ukraine's Naftogaz in Moscowwhere the Russian energy giant demanded that, prior to signing the contract for 2009, Ukraine must pay its debts for supplies in 2008, $2.118 billion in all. Russian President Dmitry Medvedev said in an interview broadcast on Russian television channels: "It is impossible to go on like this. Let them pay all the money.
On December 26, Gazprom warned European consumers about possible disruptions in gas deliveries via Ukraine.
On December 29, Russian Prime Minister Vladimir Putin said at a press conference that telephone talks with Ukrainian President Viktor Yushchenko ended in failure, as "they [Ukraine] do not want to pay." Gazprom said that, starting January 1, Ukraine would have to pay $418 per 1,000 cubic metres of gas.
On December 30, Ukraine transferred $1.522 billion to Gazprom in debt repayment.In terms of the remaining part of the debt (fines and penalties for the delay in payment), Ukraine agreed to pay it only upon court order. Oleg Dubina, chairman of Naftogaz's board, sent a letter to Gazprom, saying for the first time that Ukraine may withdraw Russian gas from the pipelines because of the absence of transit agreements for 2009. The news media published Alexei Miller's draft reply letter in which he described this position as "blackmail."
On December 31, Vladimir Putin said at a meeting with Dmitry Medvedev that Ukraine refused to pay $250 per 1,000 cubic metres of gas. The delegation of Naftogaz left Russia.
On January 1, 2009, at 10 a.m., Gazprom cut off gas supplies to Ukrainian consumers (about 110 million cubic metres a day). Naftogaz offered to pay $235 per 1,000 cubic metres. Viktor Yushchenko and Ukrainian Prime Minister Yulia Tymoshenko said that the "acceptable price" was $201. Naftogaz reported the withdrawal of 21 million cubic metres of transit gas for technical needs.
On January 2, Poland reported a 6% drop in gas supplies via Ukraine, while Romania - a drop of 30%-40%.
On January 3, Rosukrenergo filed a claim with the Arbitration Court in Stockholm to recover Naftogaz's debt of $614 million for December 2008 and to ensure gas transit.
On January 4, Gazprom said that Ukraine had stolen about 50 million cubic metres of gas and announced its new gas price - $450 per 1,000 cubic metres. The Czech Republic reported a 5% drop in gas supplies.
On January 5, Greece, Hungary, the Czech Republic and Croatia reported cuts in gas supplies. The Kiev Economic Court forbade Naftogas to transport Russian gas at $1.6 per 1,000cu m/100km. Gazprom announced cuts in supplies "by the amount stolen from Russia" (65.3 million cubic metres).
On January 6, Russian gas supplies to Bulgaria, Turkey, Greece, Croatia, Hungary, Bosnia and Macedonia were suspended. Naftogaz said that Russian gas supplies dropped fourfold against the planned volume. Gazprom said Ukraine shut off three out of the four transit pipelines.
On January 7, Gazprom announced the suspension of gas deliveries to the Ukrainian gas transportation network until Kiev grants transit guarantees. Austria, Romania, Slovakia and Poland reported the complete stoppage of gas supplies via Ukraine. On the night of January 8, Alexei Miller and Oleg Dubina held talks in Moscow, but reached no agreement.
On January 8, Russia, Ukraine and the European Commission negotiated in Brussels gas transit monitoring. Vladimir Putin met with foreign journalists in Moscow to explain Russia's position in the conflict.
On January 9, Dmitry Medvedev instructed Gazprom to continue work with the Ukrainian side only after Ukraine signs the necessary agreements.
On January 10, the Hungarian gas operator Emfesz filed a lawsuit against Naftogaz in the European Court of Justice. Russia and the EU signed in Moscow a protocol on control over gas supplies via Ukraine.
On January 11, Kiev signed a trilateral protocol on transit control making some amendments to it. New items were added to the document, which said that Ukraine had not withdrawn any gas from January 1 and that it had no debt to Russia. The demand for Russian gas supplies for technical needs was also written into the document. Dmitry Medvedev instructed the Russian government not to execute the contract.
On January 12, Ukraine signed a protocol on transit control without any additions or reservations. At the same time, Kiev said that it would continue to take technical gas. Gazprom announced its readiness to resume gas supplies on the morning of January 13, provided Ukraine ensured gas transit on its own. Alexander Medvedev, deputy CEO of Gazprom, said that "the impression is that the whole musical comedy played in Ukraine is conducted from another country," obviously pointing the finger at the United States.
At 10.46 a.m. on January 13, Gazprom resumed gas deliveries to southern Europe via the Sudzha gas measuring station. According to Gazprom's data, by 12.48 p.m. Moscow time, Ukraine received 1.6 million cubic metres of gas and then shut off the entry valve. Naftogaz said that it could not ensure gas transit via Sudzha for technical reasons, as this would lead to the termination of supplies to local consumers. Instead, it proposed to use the Valuiki and Pisarevka gas measuring stations. Gazprom rejected the proposal saying that the Sudzha station was meant for gas transit while the other stations were oriented towards Ukraine's domestic supplies. Naftogaz rejected the request to transport an additional 22.2 million cubic metres of gas for Slovakia via Sudzha. Vladimir Putin and Alexei Miller commented on the situation in front of foreign journalists at the Gazprom dispatching centre.
On January 14, Gazprom sent a request for the transit of 98.8 million cubic metres of gas via Sudzha. Naftogaz refused this request once again. The prime ministers of Bulgaria, Moldova and Slovakia arrived in Moscow and discussed the situation with Dmitry Medvedev and Vladimir Putin. Mr Medvedev proposed that the heads of states using Russian gas should meet for a summit on January 17. Viktor Yushchenko said that Ukraine supplied gas to Moldova and Bulgaria from its own reserves.
On January 15, Naftogaz rejected yet another Gazprom's request to transport 99.2 million cubic metres of gas via Sudzha. Russia began sending out invitations for the summit. Vladimir Putin and Yulia Tymoshenko agreed to meet in Moscow.
Konstantin Kutsyllo