The problem with international pipelines

I am bringing a reference from Christie forward, since it is likely to be an indicator of a growing problem.  To summarize the issue Russia wants Ukraine to pay about four times the current price it is paying for gas, to bring it in line with world prices (shades of Iraq). The Ukrainians are balking.  However that is not the ultimate concern which relates to this:
Gazprom supplies about half the gas consumed by the European Union and most of that goes through pipelines that cross Ukraine, raising concerns that the dispute could affect supplies to the West. Gazprom has pledged that European customers won't be affected.
Earlier this year the United Kingdom had a supply problem with getting gas from Russia because of an issue with pipelines in Germany. This time however the risk is spread over Europe The Germans are building a pipeline to bypass Ukraine but it is not yet in place.

The international interconnectivity of pipelines across national boundaries does put them at some risk of becoming trading cards in disputes, as we see potentially developing here. It gives the situation with the oil from the Caspian Sea  an additional level of concern.

Let us hope, however that all this gets resolved, and that you all have a Very Prosperous and Happy New Year as we head out for home.

Here's what I don't understand about this situation. Why only the Ukraine? Gazprom must be the monopolistic supplier of natural gas to lots of the former Soviet republics, right? Are those countries paying "market price" while the Ukraine wasn't for some reason? The Globe and Mail article suggests not:
Officials in Kiev say Gazprom is acting at the Kremlin's behest to punish Ukraine for pro-Western policies, especially as it has sought lower increases from other ex-Soviet states.

So are the Russians really doing this to punish the Ukrainians for their political activity? I find this not only pretty incredible, but a really bad precedent for the increasingly oppressive role that geopolitics will be playing in the supply of oil and gas in the near future.

From Rigzone yesterday: Russia and Ukraine Turn Up the Heat in Dispute Over Gas

"So are the Russians doing this..."?
"If Ukraine holds out and manages to strike a compromise with Russia, then Russia's ambitions to restore its influence in this part of the former Soviet empire could be finished," said Bruce Jackson, president of Project on Transitional Democracies, a U.S. group that has supported former Communist countries' joining the NATO alliance.

"This is Russia's last chance to influence Ukraine," he said. "And it is no coincidence that it is using energy as its tool against President Yushchenko before Ukraine's parliamentary elections that take place in March."
Looks like there's your answer. I'd say Vladimir's a little out of control, wouldn't you?
Just to be sure that Ukraine does wiggle off the hook:
Moscow -- Russia's gas monopoly Gazprom, pressing its demand for big price rises, tightened the screws on Ukraine Thursday as negotiators raced against a New Year deadline to clinch a deal or have gas supplies cut off.
Gazprom limited the country's room for manoeuvre by buying Central Asian gas that would normally have gone to Ukraine...
Gazprom said Thursday that it had agreed to buy 30 billion cubic metres (bcm) of gas from Turkmenistan in Central Asia in 2006, up from the planned 10 billion in 2005, in a move that pointedly made things worse for Ukraine.
In the first quarter alone, Gazprom would buy 15 bcm, which amounts to almost all Turkmenian exports, it said in a statement.
"This deal gives Gazprom one more trump card in its dispute with Ukraine," said energy analyst Valery Nesterov from the Troika Dialog brokerage.

Does NOT wiggle off the hook i mean
In response to Yankee's question: "So are the Russians really doing this to punish the Ukrainians for their political activity?"

From today's (12/30/05) print edition of Lietuvos zinios, a newspaper in Lithuania, Dujotekana (one of the two intermediaries between Gazprom and end-consumers in Lithuania) has announced the terms of its deal with Gazprom. Quote: "The price of natural gas charged to Dujotekana by Gazprom will be re-calculated each month with reference to the average price of fuel oil during the last six months. The formula is based on fuel oil with 1% sulphur content traded on the Amsterdam, Rotterdam, and Antwerp markets."

These terms don't sound unreasonable. Who knows -- maybe somebody at Gazprom reads TOD and believes us more than the IEA?? If this action is political, hey, I'll take it -- Russia can do, and has often done, much worse than this to Eastern Europe in the past. If this is all they can do...bring 'em on!

The Ukraine has a reputation for helping themselves to gas in transit. This would be why there is a pipeline being built to provide a different route bypassing the country. When it is complete, assuming it has the capacity to replace the exports sent via the current pipeline, the Ukraine will be in very deep trouble. It will almost certainly have no choice but to capitulate to Russia.
Yes, I think that's the whole (Putin's) idea. He's still pissed off about the last Ukrainian election and the exposure in the world press about all his meddling there--including, apparently, trying to poison president

Victor Yushchenko

during the election. The Orange Revolution and all that. Can't be having these freely elected democratic governments running around when they are, after all, right next store. This could only spell trouble in the Russian Homeland where people might get it into their own heads that a free press and a democratic process might be good ideas....
I think we can expect to see a lot more of this subtle and not-so-subtle arm twisting directed at countries dependent on Russian natural gas.   The result, of course, is that such countries will now think twice about taking actions counter to the interests of Russia.

This does not bode well for the US should it want to form another 'coalition of the willing' for some future adventure, such as military action against Iran. The unmistakably message is that you better be a good boy if you want to stay warm this winter.

The LATimes has a good story about how this is impacting the Poles too,0,3524321.story?coll=la-home-wo rld
The thing is what sense does it make for the Russians to basically subsidize all these countries when in the past decade all they've done from the Russian persepective is kick them in the nuts and cozy up to the US.

So the Russians now have a commodity they can sell anywhere else, particularily a very ng needy Western Europe at basically a sky's the limit price. Of course what this shows is how for Eastern Europe the century old path of developing with cheap fossils fuels is getting narrower and for Western Europe that high price is going to start crippling growth.

Its not just Ukraine getting hit with higher prices

Yet Gazprom has announced that starting on Jan. 1 it will raise gas prices across the former Soviet empire, from the Baltic States in the north to Moldova and Georgia in the south. In most cases, the increases do not match world market prices; nor are they all the same.
 For example, Ukraine is being asked to accept the greatest price increase, from $50 per 1,000 cubic meters to over $220 per 1,000 cubic meters.
 Moldova, whose government has shifted its foreign policy away from a pro-Russian stance to one seeking closer ties with the EU and NATO, will have its gas prices increased from $70 to $150-$160.
 The Baltic states, which joined the European Union in May 2004, will next month pay $120 instead of $80.
 Armenia, which is trying to reduce its dependence on Russian energy by building a gas pipeline with Iran that should be completed in 2006, will pay $110 for its Russian gas instead of $56.
 Georgia, which has blocked attempts by Russia to buy a stake in its gas pipeline, will pay $110, an increase of 70 percent.
 The only country that will face no immediate price increase will be Belarus, Russia's small western neighbor, which will continue to pay $47.

I just read the LA Times piece in this morning's paper.  [see link above]  If memory serves me, Russia has the largest gas reserves in the world, and as we have well documented in this site these last few months, other producing countries have peaked, and face precipitous depletion rates.  

Putin is no dummy ( I am sure he reads at least the morning paper)...The Russians, no doubt, have been biding their time.  They are now in the driver's seat, nuclear armed, and cozying up to China....

End of Empire anyone?  Looks like the "reality based community" may have the last laugh.  Too bad for us Anglo's our leaders don't belong to it...

The natural gas crisis has been looming in Ukraine for a longer time and has been acute since last summer. The Timoshenko government fell in fact because of it last autumn. Both sides, Russia and Ukraine, has handled this very inaptly.

The Russian have accused the Ukrainians of stealing the gas in transit. The Ukrainians have denied this but probably the Russians have some real reasons for their claim. All this is political, of course. Natural gas imports are crucial to the Ukrainian economy that has the heavy industry as its core. High energy prices make the main export industries hopelessly uncompetitive - if there will be enough gas to keep them going  at all.

Ukrainian economic growth has stalled this year - after the "orange revolution". The Western investments have not flowed in, but energy problems - oil prices and depleting coal - have hit the industry badly already now. The situation is really grim. Now they are facing the reality: the West is praising the "orange revolution" but unable to relieve the energy situation. The EU cannot deliver any gas nor the US.

The real problem behind the situation is the depleting Donbass coal. The Ukrainian industry was built on the large coal deposits in Eastern Ukraine. The coal production there started to decline in the '70s (this was a main cause of economic stagnation in the Soviet Union), but coal and natural gas was imported from the Urals and Siberia during the Soviet times and the Ukrainian, very energy-intensive metallurgical industry survived with that, also after the break-up of the Soviet Union. The Ukrainians got their gas from Russia at sizable discount - the price has been about 25% of the European market price - not only as a political favour, but also because the Russian oligarchs have had stakes in the Ukrainian industry.

So this is a very complex matter - politics, energy supply, markets, competing oligarch groups. This is the second grave energy crisis in Europe at present - the other one is the UK natural gas crisis. The Ukrainian crisis has as background the very tight gas supply situation, depleting coal and energy crisis. This is it.

  oil and gas fungible commodities? may not be the cost of energy, but it's availability that directs our collective future...

   "please sir, can i have some more?"

If I have learned anything this year, it's that Natural Gas is not as fungible as oil. Early on when I first started thinking about peak oil I wrote this

Phase II: Supply Shrinks and Oil Markets Close
Eventually supply will reach a point where the decline rates in the large super-giants that have been overworked, will not be made up for by the ability to increase production in newer fields. If this happens quickly (say a 5-10% yearly decline in supply), this will have a severe worldwide economic impact causing such rampant inflation in the cost of basic goods that many standards of living worldwide will fall dramatically. Some currencies will become so devalued that they may not be able to be exchanged for goods on the international market. As a result, the oil trade may collapse completely on the basis of money for oil. In its place would be a sort of barter system of food or other commodities or manufactured goods for oil. Order may breakdown in some developing countries as economies collapse due to lack of fuel.

By then it will be apparrent to all that oil is a very precious strategic commodity that needs to be secured by military means. China may embark on military operations in Central Asia to get "their share of the pie". Other countries may follow suit and many petty resource wars may occur at a regional level in Africa and Latin America. If there is a major conventional war between the major military powers (US, China, Russia) and some of the oil exporting countries (Iran, Iraq, Saudi Arabia, Venezuela, Nigeria) then even more energy will be wasted securing the remaining oil resources. Even without major wars, I believe the world will revert to a neo-mercantile system of economic/military blocs, which has been the norm of human history except for the post WWII era fueled by cheap oil.

I would revise this now to add that if the world follows a "Last Man Standing" path, long before the oil markets breakdown, natural gas will become the political / economic / military football in many regions around the world. And if anything drove that home for me, it was the final minutes of Syriana...

 (peakguy) I think you are on the money. Hoarding - a natural fear based self preservation instinct -will be part of the reactions, but unfortunately power/ego/greed will be the other instinctual drive.    I have felt that peak oil will be covered up by political/military/terrorist( include goverments) events. If natural gas brings to consciousness the threat and potiential power of peak oil, or peak available (fill in any) energy I guess it will will cause the formation of these neo-mercantile economic/military blocks early on. The sense of scarcity/power will be the driving force.    
Very simple-

'Historically, Gazprom was forced to subsidise neighbouring countries in exchange for those neighbours being supportive of Russia,' says Browder. 'It was an economics-for-politics swap. Now that Ukraine and Georgia no longer want such close ties with Russia, they are being asked to pay market prices ... That will mean greater profitability.,6903,1669716,00.html


Message to Ukraine:

You want to play with the BigBoys here's the price tag.  You were warned not to listen to Condi.  

Here is some more perspective on the problem from the Ukraine side

A few days ago I was playing the board game Risk with my nephews - a world domination strategy game where you are rewarded for controlling territories and even more for continents. In the meantime, the real-world game for controlling the Middle East and Central Asia continues. For more on the latter, I would recommend Lutz Kleveman's book The New Great Game. I've only read 70 pages so far but it's fascinating reading, including why Chechnya is strategically important to Moscow (oil) and why US troops are in Georgia (to protect the BTC pipeline).
From Global Guerillas:

Attacks on Russian infrastructure in 2004:

  • February 18.  Moscow.  2 gas pipelines were blown up with IEDs made from rocket propelled grenades.
  • March 15.  A power transmission line was severed.  A Chechen flag was found at the blast site.
  • April 5.  Dagestan (southern Russia).  The Russian gas export pipeline to Azerbaijan was interdicted for several days.  Additionally, the Baku-Novorossiisk oil pipeline was damaged due to collocation vulnerability with the gas pipeline.
  • April 24.  Volgograd.  The Samara-Lisichansk long-distance pipeline was blown up.
  • May 24.  Dagestan.  The Mazdok-Gazimagomed gas pipeline was damaged.
  • June 5.  Stavropol.  The Baku-Novorossiisk oil pipeline reservoir was bombed.
  • July 5.  Chechnya.  The Mazdok-Gasimagomed pipeline was damaged again.
  • November 28.  Moscow.  A circular gas pipeline was severed.
  • December 8.  Dagestan.  The Russian gas export pipeline to Azerbaijan was blown up.
Thanx for this info, JN2
Gazprom called the demanded price hike a long-overdue shift to free-market price mechanisms.

But Andrei Illarionov, Putin's former economic adviser, blasted it Saturday as a political move signaling the rise of neo-imperialist trends in Kremlin policy.

Illarionov said the Kremlin had asked him to help portray the price hike as a free-market measure, but he resigned this week because the move "had no relation not only to liberal economic policy, but to economic policy at all."

"Energy weapons are being used against neighbors," Illarionov said on Ekho Moskvy radio. "The move toward a policy of imperialism ... has a clear and high price that will eventually be paid by the citizens of a nation that embarks on the imperialist path."

Illarionov said that in August 2004, Gazprom signed a deal with Ukraine's gas company that envisaged five years of gas supplies at $50 per 1,000 cubic meters _ part of the Kremlin's efforts to support presidential candidate Viktor Yanukovych, who lost to the Western-leaning Yushchenko.

"When the political situation changed, they remembered about subsidies," said Illarionov, who long was a dissenter in the Kremlin, which is dominated by Putin's fellow veterans of the Soviet spy agency KGB.

The rest at the Washington Post