GasWars: The Empire Strikes Back

[Max_the_Highlander]

Hello people, I have rather anxious news from Ukraine now when we have holy celebration time between New Year and Orthodox Christmas.

Many hot heads here predicted the future war between Ukraine and Russia and it seems we have a sort of it. Not military conflict yet. It’s just gas war which is about to grow into global economic withstanding. The reasons are obvious – Medvedev-Putin’s Empire of Evil strikes Ukraine back for Georgia events and many other things like making EU, NATO, WTO choices and friendly relations with US.

In a nutshell, now we have hard conflict between two largest gas corporations – Russian Gazprom and Ukrainian Naftogas which both deliver gas to EU. And the political background of this conflict became crystal clear already. At the beginning it looked as ordinary every year business debate about terms of new contracts however today we are completely confident this is beginning of global informational and economical war.

At the moment delivery of Russian gas which is around 46 billons of square meters annually is completely cut. Ukraine has not any import of Russian gas anymore. On the other hand we prepare to cut delivery of 300 billions of square meters of Russian gas to EU because of technical reasons – the supply is cut and the pipe pressure is high not enough. This will stop 90% of Russian export to EU.

The development of conflict is following. In December Russia claimed about $ 1,5 billions of Ukraine debt which really existed and was paid completely till 31 of December accordingly to agreements. This was reason for Gazprom to begin informational war against Naftogas and Ukraine declaring money was not paid and so they can’t sign any new contracts with Ukraine for next year. And they refused to deliver gas to Ukraine without new contract since 1of January. However the terms of contract appeared to be completely unacceptable and non-market like putting price twice higher then market level, up to 418$ for 1 000 square meters (1 195,99 square yards). For comparison, its stock price in US is around 218$ and in Europe from 230$ to 250$. Since the price of gas is closely tied with price of oil, it goes down all over the World. The price of 418$ is tied with oil price of 150$ for barrel which is deep past already.

Later they told about “privileged” price of 250$ which us still not market level because Ukraine has not costs of transportation like Germany and our market price should be around 230-235$ and this is our main condition now.

Such prices in fact denounced former memorandum signed just few months ago by prime minister Putin and prime minister Tymoshenko about 3 year transitional period for gas prices and its transportation costs to European level.

The contract contains other humiliating bondages as draconian fines for everything and requirement to solve debates in… arbitration board of Russia. This is one of the most ridiculous moments because Russia now is dictatorship and has not independent court system at all.

This contract was logically denied by Ukrainian talkers and nothing was signed. The reaction was immediate - delivery of Russian gas to Ukraine was cut however transit to EU still remains.

The situation with transit is also ridiculous. Our price is in fact nothing, it’s paltry, only 1. 7$ per 1 000 square meters (1 195,99 square yards) for every 100 kilometers (62,14 miles). For example in nearby Slovakia and Czech Republic this service costs 4$ and in Western Europe from 4$ to 13$. We bound by agreement to remain price till 2010 however transportation of Russian gas for 1.7$ with price of 250$ causes loss of $ 500 millions. Why? To execute European transportation Ukraine buys at own expenses around 6-7 billions of square meters of so called “technological gas” annually. Price of 250$ gives $ 500 million of loss, 418$ gives a $ billion of loss.

New Russian price makes the Ukrainian service of transportation completely unprofitable. And we talk about 300 billions of square meters annually which are around 90% of all Russian gas export.

Ukrainian conditions suppose price of 235$ for gas and transportation price of 1.8$. This makes transit barely profitable. However these modest requests are violently denied by Gazprom racketeers. On the whole Russian position and intonation is sure-fire racket.

And the moment we have not supply of Russian gas to Ukraine so we use under level stores and own production. Ukraine takes from stream 21 millions of square meters of “technological gas” daily to guarantee safe transit to EU. This gave imperialistic Russian medias reason to yell about “robbery” however Ukraine is not ready to give out own resources. Without this taking away entire transportation system would stop.

However soon it could stop anyway. Russia gives less and less gas to Ukraine transportation system which causes lowering of required high pressure. This leads to so called “misbalance” when pressure is different in different pieces of system. As result system may stop its work particularly or entirely. It will happen during 10-15 days.

Russian gas export to EU will be stopped same as Russian export to Ukraine which is stopped already. At first sight these abnormal event could looks as business misunderstanding however they have obvious political background. This is direct continuation of Georgia events and paltry attempt to punish Ukrainian democracy. We are still unbreakable military that’s why ruling KGB cabal of Mevdedev-Putin applied nasty and cowardly economic pressure.

I’d like to see comments of respected board members and discuss this situation together.

[peter3030]

I commented on all these issues in another thread here yesterday.
I have read sources from approximately 15 different places-since its easy to use facts and figures from one scource but they are not always totally correct,much depends on the political influence of the source.
However,what you point out is generally a good picture of the facts of the matter.
My understanding is that Navtogas paid a Swiss third party the outstanding arrears.
Its the $500 m that Gazprom imposed in fines for late payment that is still outstanding,although Moscow deny that ANY money has been paid.
A scenario which would see the whole deliveries halted to Europe is unthinkable-and if that were to happen,then Europe would without doubt work quickly for a fast end.
There is already a meeting planned for tomorrow,which will be chaired by the new Czech EU boss.
There is absolutely no doubt that all 27 representitives will seek a resolution-and a fast one.
The Yulia and Putin arrangements are another issue-there are many who expect them to do a deal-and so make Yulia appear as the saving wonderwoman-but no one will be fooled.
I dont want to repeat all that I have posted already-maybe you can read it.
But its no secret as you suggest that the whole business is politically motivated.Ukraine knows it,the West knows it-only Medverov denies it-but that is to be expected.

[Max_the_Highlander]

This business is motivated both politically and economically. There is political motivation to punish Ukrainian democracy and there is economical motivation to untie the price of gas from lowering price of oil. This allows dictating prices to Europe in perspective.

It’s not secret bankrupting Gazprom as other gas exporter suffers huge losses. The only way to survive is to untie gas prices and make conspiracy of exporters which actually they tried to make on forum of gas exporters. This idea is about to fail because Arabs will not play this game. However Russia fought big share in Europe supply and this is big mistake of trustful Europeans.

Ukraine is first experiment where political and economical motivation is combined. If they will push the “untied” price of 418$ or latest 450$, next step is to do it with Europe. We are just frontline, avant-garde. If Ukraine will give up this will create danger for entire EU because it’s signal to Europeans primarily.

I believe I have the greatest bank of information on this issue already. I spent few days on website of Russian radio station “Echo of Moscow” which belongs to Gazprom. They have there all interviews of both Russian and Ukrainian spokesmen on problem, documents, analytics, so I think I understand Russian relation. Besides UNIAN published basic text of Gazprom - Naftogas contract for 2009-2010. It explains everything.

The Gazprom aim is to impose bondage and ruin the Ukrainian corporation. That’s why they use the hardest pressure - they want to impose dangerous unacceptable conditions. The ruination of Naftogas will give them property rights for Ukrainian GTS (gas transportation system) which will lead to monopoly for EU supply. Belarusian GTS already belongs them and btw they played the same trick earlier. So they really want to monopolize the gas transit to Europe. This means “untied” prices for EU first of all.

I don’t think they will get Ukrainian GTS ever but this is primarily economic aim of this gas war.

And yes of course Naftogas paid all money to Swiss third party Rosukrenergo. The further destiny of funds is not our problem because in 2008 Naftogas and Gazprom didn't have direct relations.

[peter3030]

Well the price of oil has always figured in stable markets,the speculators fixed prices when there is uncectaincy-the crisis in the middle east will push up the cost price in Oil quite consderably-just after we saw some stabilising recently.
Gazpom published a profit of $400m for the first 6 months of 2008-so they are not exactly losing money.
They need to raise revenue to balance their budgets because their stock markets lost 75% of in the last months of 2008.
Europe is already looking at buying its gas from other countries-there remains a suspicion of Russias but it will not be a quick fix
The capacity so far only suggest above that the 5% will be capacity and routing through via Turkey...this is only a token for whats needed.
Britain has already a programme a supply for gas from from Norway and the pipeline already is a advanced.
But we have to look at alternative energy needs for the future-Europe cannot have dictating Russia threatening Countries as a political pawn,it cant be allowed to happen.

Yes of course there are Russian information such as Pravda.Ru who continually try to establish a justification-they lie and suggest there is blame from the US Europe and everyone who questions the policies of Putin and Medverov.....

[Max_the_Highlander]

Yes Middle East crisis definitely pushes up prices for oil but global economical crisis pushes them down. I don’t think price of oil will go up 100$ in nearest 2 years… besides the issue is about complete “untying” of gas prices. To put it simply Russia says EU pays. I think we can already label this as monopolist or cartel collusion. Please note Ukraine refuses to participate from beginning.

Accordingly to independent Russian sources Gazprom has $ 20 billions of debts, all its projects except the EU supply are unprofitable or barely profitable.

I believe both for Ukraine and Europe the real exit is strict diversification. There is gas in Norway, Northern Africa, in Persian Gulf. Countries as Kazakhstan and Azerbaijan are ready to supply Europe directly, there are agreements in Kyiv. The gas is everywhere, everyone wants to sell it, and we only need to take it.

Russian “gas needle” is only dangerous illusion. I’m sure democracies which cooperate with obvious dictatorship will necessary get into a scrape.

[Albatross]

Hello Max,

Thanks for furnishing this information to us. I agree Ukraine and Europe should diversify as much as possible. It's gonna take time to realise that though.

I predict the conflict will not completely escalate now, as Russia is dependent on its EU gas revenues. But the conflict will resurface and become more dangerous in the future as Russia will add more and more polictical demands to its list.

Where do you think the Crimea fits in? It's mentioned often as one of Russia's targets.

[peter3030]

Crimea is still a long way off at 2017-but it will still remain a strategic area for Russia-they are already making provisions for another port.
Putin is on record as saying he thinks Ukraine remains the jewel in his crown.
Over the weekend I was reading about the previous disputes Gazprom had with Belarus and Bulgaria.
Bulgaria signed a 5 year deal in 2006 which saw them pay only an additional 20% rising to 45% oer the 5 years.
Belarus had similar disputes to Ukraine.In 2006 they was paying $46.On January 1 2007 Gazprom threatened to cut off their supplies and restrictions were put in place.The dispute lasted only 8 days before Belarus paid its arrears by 2 instalments.
Gazprom wanted to buy the Belarus Gas company for 25% of its actual value.Belarus refused this.
In the end a 50% sale was agreed,but not before Belarus saw a big increase in the transit payments.As far as I can see Belarus are currently paying just over $200 for their gas but lets remember that Gazpron now have a 50 % share in any profits on that.
It seems Moscow wanted to have controlling interests in ALL gas supply to Europe-although Belarus sends most of its Gas to Germany and Turkey.
Likewise the transit fees Gazprom were paying were considerably under market value.
Belarus was also being short changed on its Oil deliveries.At one stage Gazprom refused to maintain the Belasus supply unless the comapany was taken into state ownership-something Moscow hae managed to do many times-their behaviour to the private business,completely disregards and moral or scruple-they simply take control of whoever they want by using false claims and forcing directors aside.
The BP fiasco was a classic example.
British Petroleum which is Britains biggest company spent years and millions building an efficient and stable operation having a 50% share.
Then one day Moscow decided they wanted to take control of the whole operation and invented a series of false allegations,withdrew visas raided offices and forced directors to resign.
Is it any wonder that no one likes to do business with a country who makes all their own rules when it suits them ?

Back to the Gas disputes-With Belarus

Europe was very fast in helping to resolve this crisis,and although the Czech EU leader has openly stated that the EU can not get involved in the commercial aspects between Russia and Ukraine-it is hard to see how they can expect to have any influence without expressing an opinion.
It is quite clearly a case of laying cards on the table.
Moscow knows that Europe has no alternative at the moment and so has the Ace cards-but Moscow also knows that their economy will be reliant on its energy partners for some time to come.
I believe therefore that the current dispute will be resolved within the next few days-with a deal being struck.
Gazprom probably expected to be given rights to buy a share in Naftogas just as they did in Belarus-and when any deal was refused they have thrown their toys out of the pram.

Ex bloc countries should continue to stand up to Putins agression.