Russia vs. Ukraine Gas Conflict Goes from Bad to Worse; European Nations Experiencing Major Supply Reductions

Posted by HEAT USA on January 7, 2009 at 12:23 pm

Gas pipes and valves in Butimanu, Romania. Image:latimes.com/Tudor Vintilou/Bloomberg

All supplies of Russian natural gas through Ukraine have been cut off as the contract dispute between the two former Soviet states hits a fever pitch.  The crisis began when, in late December, Ukraine refused to pay Russia’s national oil and gas company Gazprom its set 2009 price of $450 per 1,000 cubic meters of natural gas, which had been $179.50 in 2008.  Ukraine also made a counter-demand of increased payment for shipping Russian gas through Ukraine on to other customers in Europe.  When the previous agreement between the nations expired at the end of the 2008 calendar year, no new agreement had been reached, causing Gazprom to stop its gas exports to Ukraine.

Although the Russian government stated its intention to only cut off Ukrainian gas supplies, other European nations whose supply lines of Russian gas run through Ukraine began to experience supply reductions as well.  Russia blamed Ukraine for siphoning off gas intended for its neighbors, and Ukraine denied doing so.  In response, Gazprom further reduced gas supplies in the amount it claimed Ukraine was skimming.

The crisis hit its peak this morning, when the Ukrainian national gas company Naftogaz announced that Russia had halted all gas shipments through Ukraine.  Russia countered that it was in fact Ukraine that had closed off gas supply lines to Russia’s European and Balkan customers.

The European Union, which relies on Russia to supply 25% of its natural gas, has lodged vehement protests.  EU member state Bulgaria is one of the countries that has suffered most as a result of the gas cutoff.  Bulgarian Prime Minister Sergei Stanishev emphasized that his nation had received no warning of supply reduction. “It is not right to make Bulgaria a hostage in such a conflict,” he said, as quoted in a Los Angeles Times article.  There is at least one political factor to the conflict, as the pro-western government of Ukraine has openly sought membership in the North Atlantic Treaty Organization, which the Putin government considers a threat, according to the New York Times.  To make matters worse, a major cold snap has descended on Europe, putting people affected by the shortage at serious risk.

Although the conflict had been helping to lift crude and heating oil prices last week, both crude and heating oil declined on NYMEX this morning, driven down by fresh data that showed serious demand reduction in the U.S.  Nevertheless, the dispute and resulting European gas shortages could drive prices up again if the two sides do not reach an agreement soon.  Why would a fight over natural gas prices between two Eastern European nations affect oil prices?  Because Russia is a major (the world’s second-largest behind Saudi Arabia) oil exporter as well, fears that a similar dispute could some day disrupt oil supplies led to higher prices.  Just one more clear example of how emotion and theoretical worst-case scenarios can have just as profound (if not more profound) an effect on crude and heating oil prices as do actual events and solid data.

A map of European gas pipelines and countries affected by the Russia/Ukraine dispute from the BBC