Russia and the Ukraine have not yet resolved the issues

With the return to an approximation of the original natural gas flow conditions through the Russian-Ukrainian pipeline, the immediate crisis would appear to be over.  The consensus would appear to be that Russia made a diplomatic mistake by suggesting that, albeit courtesy of the Ukrainians, it is no longer a reliable source of supply.

But I am just a little tempted to say "so, what?"  There was no immediate switch over to other pipelines that would have allowed maintenance of supply, since these alternatives are not immediately available.  In the case of Ukraine the second string to their bow, the Turkmenistan supply, comes through Russia and is equally vulnerable to the same pressure as Ukraine applied to Western Europe. And when all the dust settles, I suspect that Ukraine will have to pay the price that has been asked.

The fall-back suppliers to Western Europe have, in the past, been the reserves in the North Sea.  But the UK is now importing gas and has its own worry about supply stability.  Norway has a problem also.  From the Scotsman

And in another risk to western European economies, Norway, Britain's biggest gas supplier, warned it would not be able to increase output to meet any shortfall from Russia.
As the News Hour tonight observed, natural gas is different from oil.  Gas comes through pipelines and if your supplier shuts you off, then unless you have a second available pipeline from someone else, you have no gas.  Tankers cannot appear magically through the mist to save the day.  

So the problem that Europe has now to confront is that of alternate supply.  The current situation has demonstrated the vulnerability of many countries to changes in the current supply scenario.  But there are no long-term answers to dependence on the limited number of suppliers that exist, short of changing to a different fuel. The suggestion this time is that those who can should switch to oil.  Or alternately the business can close, or move to another country where a more reliable supply exists.

That is in large measure what is currently going on in regard to the American situation, businesses can either no longer afford to use gas, or have moved to places where it is more reliably available.  This reduction in demand has apparently been sufficient to offset the reduced supply from GOMEX and thus there is less immediate pressure on supply.

There are some industries that will find it hard to change, or alternately to find an alternate source of energy in the volumes that will be needed.  This change in the supply picture for different countries will also change the demands for oil, and it will be interesting to see how that will, in turn, alter the demand for oil.

I would end today on a different note.  I have written about the dangers of coal bed methane earlier. With the current doubt about the fate of the miners in West Virginia following the underground gas explosion at the Sago Mine, I would ask your prayers tonight for them, and for their families.

Our Top Story: Reporters from The Associated Press forget about the simple rules of supply and demand.
Natural Gas Falls Despite Gazprom Dispute
The Associated Press
Monday, January 2, 2006; 11:13 PM

SINGAPORE -- Natural gas prices dropped Tuesday, seemingly unaffected by a pricing dispute between Russia's Gazprom and Ukraine that threatened European gas supplies, though the Russian monopoly has promised to maintain deliveries.

So less people are getting gas for next-to-nothing and the price goes down and we are told there's no effect?  OK the weather is warm for January but it was warm last week too, but why would it be surprising that when demand drops the price drops too?  If the price went up now then I'd say the "Gazprom dispute" was not having any affect on the prices.
I too doubt the consensus that the Putin people blew it on this one and have lost credibility in the EU (as well as G8). The Putin people may of course be simply incompetent. He misread public reaction to the sinking of the Kursk, for example. Or perhaps they're as hubristic as the Bushies, based on energy supplies rather than the Bushies' military dominance (now stuck fast in the sands of Iraq). But just as the Bushies had thought through at least a few things (albeit unrealistically), I doubt that the Putin regime didn't anticipate reaction from the EU in their gas pressure on the Ukraine. In fact, maybe they were counting on it.

Consider the fact that the only card (aside from unusable nukes) that the Putin people hold is energy. Their economy is a dwarf among the big countries. The EU and the US thus encourage him to join the big-power club based on their convenience: "sell us your supplies cheaply and we'll treat you like one of the club." If I were the Putin regime, I wouldn't want to be sitting at the big-power table merely by grace of offering up cheaply and eagerly the lifeblood of my regime. That smacks of the pathetic, fawning role of a 19th century Indian local worthy invited to tea (outside of course) at some colonial British club in Bangalore. The stiff smiles on the white faces and the tentative seat at the table might have been enough back then, making the Indian a very big man among the locals in Bangalore and thus one very willing to help grease the wheels of empire.

But the Putin people aim to rebuild a state-capitalist superpower with global reach. Now they can sit at the G8 table feared for the very visible power they wield (and their evident willingness to use it) more than they are loved, so to speak, for their willingness to be the waterboy, the waiter, the loyal sepoy. After several years of watching the Bush regime put their Coles Notes reading of Machiavelli into practice, we should hardly be surprised that the Putin people are signalling that energy supplies are the functional equivalent of the American military and potentially a much more effective tool of foreign policy (and a money-maker to boot).


I think you maybe correct and I have expressed similar sentiment in my blog, yet such a move by Putin would only be a short to medium term gain. In the long term, it would motivate Europe to diversify away from Russia - be it building nuclear power plants, alternative sources of natural gas and so forth.

I think its a dangerous gamble to make, if such was the intention.

- Daniel

I doubt that the Putin regime didn't anticipate reaction from the EU in their gas pressure on the Ukraine. In fact, maybe they were counting on it.

The one thing I learned is that the Ukrainians resell their subsidized gas.  That's really rude like selling a precious gift and biting the hand that feeds you all at once.  That leaves Gazprom having to lose sales because they are giving someone a discount.

The state of EU natural gas production:

Italy - peaked in 1995, production falling at a rate of 5 - 6%

Germany - peaked in the '70s, production flat.

Denmark - peaked probably in 2005, official forecast up to 2009 is decrease by about 1%.

Netherlands - peaked on '70s, production essentially flat.

Poland - peaked in '70s, production has been flat at the level of about 4 billion cubic-m/year, but small increase lately.

UK - peaked in 2000, production falling at accelerating rate.

So all EU gas producers have peaked and most of them are quite small - the only really significant are the UK and Netherlands that account for about 80% of the EU domestic production. The total EU production peaked in 2001. The Netherlands have been able to compensate for the falling UK production - but this is clearly not possible in the future. The Netherland could, maybe, boost its production still by about 10 Bcm above the present level, but this cannot offset North Sea depletion.

So, we can see that the EU domestic gas production is going to decrease considerably in the near future. In 20 years time North Sea (UK, Denmark, Germany, Netherlands) will be almost totally depleted. This means that 80 - 90% of the EU domestic gas will be off. This will increase the imports demand considerably. But probably no outside supplier will be able to cover the EU consumption at the present level.

As we know, Norway cannot increase its exports to the EU. Algeria is a big exporter to the EU, but peaked in 1999. Russia and Central Asia will be more important in the future. Here we have the background.  

You are wrong about Norway. The "Ormen Lange" project will come online in 2007 with 20 billion cubic metres pr. year or about a 25% increase most of which will be piped to the UK. I also believe that they have a significant LNG project coming online this year (Snowwhite).
To be exact, Norway can increase its exports to the EU, but only next year. Ormen Lange will be about 10% of the present EU domestic production, so it will not be able to help much in the little longer run. Besides, part of the new production coming online will only replace depleting wells and, if I remember right, part of the production is already sold to the US as LNG. So, if we look only five years forward, Norway doesn't have much ability to help EU by exporting more gas. There is also the nasty example of gas peaking and production decreasing unexpectedly in the UK sector. The same can happen in the Norwegian sector, too. (The new Norwegian production is not really in the North Sea).

Russia will remain crucially important for the EU as a natural gas supplier. Gas prices will inevitabe rise as China gets its pipelines connected to Central Asia and Caspian Region and Russia and LNG exports to the US increase. There is few real alternatives or substitutes for natural gas in Europe in the required scale. Coal has mostly depleted and it is not possible to increase oil use that much. Nuclear would help, but not in short run - and there is the uranium shortage waiting.  

It seems bizarre to me that this move by Russia is being seen as a diplomatic mistake.  By basically allowing supplies to Europe to wobble for a couple of days, they've sent a subtle but very clear message.  "You rely on us, and we can cause you serious problems at the flick of a switch".
Putin is an exceptionally astute politician, and what he understands particularly well is [political] power, and how to grab it.  He has forced Western Europe to take a stark look at the realities of their energy situation, which inevitably involves acknowledging the position of power in which Russia now sits.  What's more, he can blame it all on Ukraine.
I could not agree more! The message was intented for Ukraine but almost all European countries got affected and it's clearly deliberate. I'm just worried about what are Putin's real plans. It's like saying: "Respect Russia, we are still powerful, we could crush your economies!".
Exactly, bugmenot.

Look back at Yukos, Khodorkovsky,

Khodorkovsky, once the richest man in Russia, now doing hard labor.

The negotiation at the end of this gambit was between the EU/E3
and Russia.

Russia wil not allow the Ukraine to join NATO and purchase hardware from Lockheed and General Dynamics with subsidized Russian gas.  Not going to happen.

Eventually the Ukraine will be getting the blame for the EU's lack of gas.  The game has only just begun.  When it's all over the Ukraine will be joining the Shaghai Cooperative.

Exactly. The following statement says it all:
"Ukraine continues to steal gas...Gazprom will once again compensate its European consumers but it cannot continue eternally...," said Sergei Kupriyanov of state-run Gazprom.
Sorry for my bad english.

I seriously doubt Putin is worried for the EU reaction (buying gas somewhere else). First of all because our suppliers from, say, North Africa have already stated they can't pump more.

But more important, you forgot about China: EU buying gas from other suppliers means Putin will simply sell his gas/oil to the energy craving China... and I think EU doesn't like to witness Russia-China bonds getting tighter.

Yes, Putin is very smart...

Gas Attack! The Ukraine Gives Itself Indigestion

For an entertaining and thought-provoking Russian perspective  on the background to this crisis, check out this link:

Incidentally the whole website is worth reading if you have the time, especially Gary Brecher's regular War Nerd column.



You're absolutely right, that's good stuff. Everybody should check it out.
Hmm, guess there's a limit to how much Russia can push the EU since they still depend on them to make LNG.
Russia Abolishes LNG Export Duties in Search of Investment
15 Dec 2005 10:21 AM


The decision was made to improve investment prospects in LNG facilities within Russia. It is largely a preemptive move, since there is no LNG currently being produced in Russia.


The LNG move, however, is less difficult, since actual Russian production capacity is not anticipated until 2010, with physical exports to start only in 2015. However LNG exports via swaps have already begun.

Sorry, HO, it doesn't look good for those miners. It's a real shame but as regards "the dangers of coal bed methane", the present story is that there is no know cause. I guess we'll know later.