Russia says it will not shut off the gas – for now

During the winter, you might recall several posts on Atomic Insights about the actions of the Russian gas company – Gazprom – which holds essentially a monopoly on gas exports from Russia to the rest of Europe. One of Russia’s former satellite countries, Ukraine, had taken some actions that caused Russian angst. Gazprom, supposedly in an unrelated action, decided that it was time for Ukraine to stop receiving gas at a subsidized rate appropriate for a well controlled satellite and instead begin paying a rate more similar to that paid by other European customers.

Ukraine resisted the price increase, which was originally proposed to be an increase from $50 per thousand cubic meters to $160 per thousand cubic meters. The price of $160 was still a bit below the $200 or more paid by other customers, but Ukraine was not happy at all.

That change in rates would have added about $1 billion to Ukraine’s annual gas bill and would have put a number of industrial companies out of business. Many of the industrial customers in Ukraine are still operating inefficient factories built during the Soviet era and depend on cheap energy to remain remotely competitive.

Gazprom said pay up or we shut off the gas; Ukraine said try it; Gazprom throttled the supply of gas into its pipes to Ukraine and almost immediately customers in other countries noticed that their gas pressures had nearly disappeared. In this dispute, Ukraine gently reminded Gazprom that the pipelines used to deliver gas to the more lucrative markets in Europe happen to pass through Ukraine first.

Russia and the G8 financial ministers met last weekend in preparation for a summit to be held in Russia next month. Despite the fact that the meeting attendees were financial ministers, not energy ministers, energy was a primary topic of interest. Many European leaders are very concerned about their vulnerability to gas supply interruption and Russian representatives tried to reassure them that there would be no repeat of last winter’s disruptions, at least this coming winter.

There is apparently an Energy Charter for the EU that governs gas supply relationships; Russian representatives signed the Charter but it was never ratified. Russia apparently now does not like some of the Charter requirements; specifically it does not think that Gazprom should have to allow other suppliers to be able to use its pipes if there is available capacity. That would reduce considerably its monopoly pricing power.

There are many nuances to this discussion and it is one that bears a lot of watching. I will try to sort out some of the more important aspects during the coming weeks, but I would love it if people with more direct knowledge would chime in and help us better understand the issues, deals, and lack of agreements.

Here are some links to help you get started in your reading efforts:

• A War of Words on Energy at G8 Talks – The Moscow Times
• Russia promises to keep its gas pipelines flowing – The Telegraph.co.uk
• Russia defends its record on gas supply reliability – The New Zealand Herald

As an example of the need to read carefully and look for the meaning behind the statements, consider the following which came from the New Zealand Herald article listed above:

“We have quite stable growth of [energy] supply, but we are encountering a demand shock,” said Russia’s finance minister, Alexei Kudrin.

Mr Kudrin said energy exporters needed greater “security of demand” to justify major energy investments.

I also found another quote from Mr. Kudrin in the article from the Telegraph that provides food for thought for devious minded English majors who are used to getting warned in bureaucratic lingo that they are stepping into dangerous territory. (That would be me in my day job on a large staff in Washington.)

Over the weekend Russian finance minister Alexi Kudrin said he was still reluctant to make the much-vaunted charter law, claiming it was riddled with shortcomings and had failed to prevent the Ukrainian incident. He also said that consumers were as much responsible for energy price spikes as producers.

“There are parts of this energy charter which are unacceptable to us,” he said, adding that it did not take into account nuclear energy, which is now gaining support in power-starved European countries, including the UK.

Add in one more quote from the New Zealand Herald article, and you get a very interesting new interpretation of what Mr. Kudrin was saying:

Russia’s finance minister, Alexei Kudrin, pointedly trumpeted the fact that he saw “no obstacles” to increasing Gazprom’s access to Italian consumers.

No such description was applied to Britain, where any bid for Centrica would be highly controversial.

Let me try to frame my thoughts for you. Mr. Kudrin first says that Russia is reluctant to invest in supply infrastructure at a time when customers are looking for a more reliable source of a vital commodity. He then indicated that some sort of agreement about nuclear energy needs to be included in the Energy Charter and finally indicated that Russia like Italian policies better than those of the UK.

Italy, of course, has no nuclear power plants and does not even seem to be talking about building any now that they have had another change in government leadership. Britain, on the other hand, is resisting a bid by Gazprom to purchase one of the largest pipeline operators in Britain and is also has a leader that has claimed that new nuclear power plants are being considered “with a vengeance.”

Russia loves having captive customers; take a good long look at its history. The potential for nuclear power developments in Europe provide customers a choice and threaten Russia’s considerable economic and political clout as energy suppliers.

Oh yeah, one more thing. Mikhail Gorbachev recently reminded Tony Blair how dangerous nuclear power can be. (See Gorbachev warns Blair on nuclear power Some of you may remember Gorbachev – he was the Russian leader that failed to inform Ukrainians about Chernobyl for several days while the plant was spewing its most dangerous materials into their sky after Russian trained and directed plant operators violated a number of important procedures.