Gas Interrupted

Europe's Big Russian Chill

Pipeline Ukraine
If Russia turns off the gas this winter, Europe may freeze.
  • Why it matters

    Why it matters

    If Russia cuts off natural gas supplies to western Europe this winter, Germany, the Baltic countries, Finland and Slovakia could all suffer.

  • Facts

    Facts

    • Half of Russian gas supplies to Europe are delivered through Ukraine.
    • “Reverse flow” of gas supplies to Ukraine is one way Europe could thwart a Russian supply cutoff.
    • Europe is already exploring getting more natural gas from Norway if Russia stops its deliveries.
  • Audio

    Audio

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When government officials and energy bosses from Russia and Ukraine meet this afternoon in Berlin, the stakes will be sky high, not just for the two countries but for much of Europe.

The two sides are converging on the German capital for talks on the fraught issue of gas deliveries from Russia to Ukraine, which is a vital transit link for gas supplies to many European countries. In fact, half of all Russian gas deliveries to the European Union flow through Ukraine. As such, the Berlin talks later today are about much more than just Ukraine. The gathering could determine whether or not much of Europe freezes this winter.

And Russia is playing hardball. It is now tacitly threatening to halt deliveries to Europe if the West continues to allow gas deliveries to flow back to Ukraine.

The outcome could determine how far European solidarity with Ukraine goes when that comes into conflict with the bloc’s energy needs.

The negotiations will be chaired by Günther Oettinger, the outgoing European Union’s energy commissioner. He faces a difficult task. The two countries have for months been embroiled in a conflict over the separatist aspirations of the predominantly Russian-speaking insurgents in eastern Ukraine.

“Moscow is attempting to break Europe’s solidarity with Ukraine. ”

Günther Oettinger, EU Energy Commissioner

The energy supply to Western Europe has become a political football in the conflict between Moscow and Kiev. The Russians have long been annoyed that some of their gas deliveries are being funneled back eastward in “reverse flow” to help embattled Ukraine. From the beginning of September, it has been possible to deliver gas to Ukraine by this method. These supplies could in theory cover up to 20 percent of Ukraine’s gas needs if Russia were to cut off the country entirely.

According to the Russians, however, this reverse flow is not part of the gas supply contracts it has negotiated with European countries.

In an interview with Handelsblatt, Russia’s energy minister, Alexander Novak, indicated that if reverse flows continued, Western Europe could itself face gas shortages: “The agreed contracts do not include any re-export,” Mr. Novak said. “We hope that our European partners will stick to the agreements that have been made. That is the only way to guarantee the delivery without interruptions to European consumers.”

Moscow is attempting to “break Europe’s solidarity with Ukraine,” Mr. Oettinger said to journalists in Kiev this week. He has been trying to mediate an end to the dispute for the past few weeks. One option has been that the European Union and the International Monetary Fund act as guarantors for Ukrainian purchases of gas from Gazprom.

Tensions are already high between Russia and the European Union following Western sanctions on Moscow over its backing of separatists in eastern Ukraine.

Mr. Nowak said, the agreed contracts do not include any re-exports. Source: DPA
Russian energy minister Alexander Novak says the contracts do not include any re-exports. Source: DPA

 

The bloc adopted another round of sanctions against Russia earlier this month, and E.U. officials have said they will wait to see how the implementation of a peace plan between the sides holds up before deciding whether to ease sanctions. A ceasefire that came into force on September 5 has been violated by both sides.

The Berlin talks, therefore, are taking place against a particularly tense geopolitical background.

Mr. Novak will be accompanied by Gazprom’s chief executive, Alexey Miller, while the Ukrainian delegation will include Energy Minister Yuriy Prodan and Andriy Kobolev, chief executive of Naftogaz, the Kiev-based energy company.

Reaching a compromise may prove difficult.

Gazprom is looking for €5.3 billion ($6.7 billion) in unpaid bills, while the Ukrainians say the Russians owe them €6 billion for transit costs. The Russians have also previously accused the Ukrainians of siphoning off gas illegally. “That is all Russian propaganda,” Naftogaz’s general director, Yury Vitrenko, told Handelsblatt.

The European economy is still highly dependent on the fuel deliveries from Russia. If Moscow were to turn off the tap, then it could have enormous consequences.

“If the gas stops flowing, then things will get pretty cold in Germany,” investor Mohamed El-Erian, the former chief executive of Pimco, a unit of Allianz, told Handelsblatt. “That would immediately lead to a recession in Europe.”

Gas_durch_die_Ukraine_02

 

European Union leaders are well aware of the danger they face. At a summit in June they discussed just how vulnerable Europe’s energy supply has become. The leaders of the 28-member bloc stated in their summit communiqué that “urgent measures had to be taken,” to secure energy deliveries for this winter.

“Existing emergency and solidarity mechanisms” that were in place for any gas delivery interruptions had to be strengthened, they said. And those measures were to include the storage of gas, building up emergency infrastructures and also ensuring the reverse flow of gas.

If Russia’s president, Vladimir Putin, were to allow deliveries to be halted, even temporarily, it would have a huge detrimental effect on the European Union. The bloc imports two-thirds of its energy needs, and 42 percent of those imports come from Russia. Six member countries — the three Baltic members plus Finland, Bulgaria and Slovakia — are entirely dependent on Russia for natural gas, while Germany gets around a third of its gas supply from the country.

That means that Mr. Nowak’s warnings need to be taken very seriously.

“If the situation gets worse, then the prices will probably rise and the gas producers on the Norwegian continental shelf will do what they can to help their friends in Europe.”

Tord Lien, Oslo’s energy minister

In the worst case scenario, the European Union could try to buy more gas from Norway.

“If the situation gets worse, then the prices will probably rise and the gas producers on the Norwegian continental shelf will do what they can to help their friends in Europe,” said Oslo’s energy minister, Tord Lien, in Brussels on Thursday. Norway’s Statoil is already the second-biggest supplier to the European Union after Gazprom.

The political tension between Ukraine and Russia have come to a violent head this year with Moscow’s annexation of Crimea, and the fighting between Ukrainian forces and Russian-backed separatists. However, the gas dispute goes back much further.

On January 1, 2009 a conflict between Gazprom and Naftogaz over unpaid bills and transit fees lead to the pipes being turned off to Ukraine in the middle of a freezing winter. When gas flows through Ukraine to southeastern Europe were halted, both sides blamed the other for cutting off supplies.

The dispute was resolved a few days later when former Ukrainian Prime Minister Yulia Tymoschenko signed a gas deal with Mr. Putin which saw Naftogaz agree to a 10-year deal with Gazprom. Ms. Tymoschenko was jailed in 2011 for her involvement in the deal, in what many saw as a political retribution by her rival, then-President Viktor Yanukovych.

Ms. Tymoschenko was released last February after Mr. Yanukovych was ousted from office following protests against his decision to reject signing an association agreement with the European Union in favor of cultivating closer relations with Russia.

Mathias Brüggmann is Handelsblatt’s foreign editor and has previously been a correspondent for the paper in Moscow, Brussels and Warsaw. Thomas Ludwig is a correspondent for Handelsblatt in Brussels and reports on European Union affairs. Siobhán Dowling is an editor for Handelsblatt Global Edition and reports frequently on European politics. To contact the authors: brueggmann@handelsblatt.com, ludwig@handelsblatt.com, dowling@handelsblatt.com.

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