What’s really at stake in Ukraine: Natural gas

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Michael Bastasch DCNF Managing Editor
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What would you do if about one-third of your natural gas supply was threatened by political instability? That’s the question Europe currently faces with Russia’s occupation of Ukraine.

Europe gets one-third of its gas from Russia, primarily through pipelines in Ukraine, and the worry is that Russian President Vladimir Putin might use these pipelines to get his way in Ukraine — which explains why American allies across the Atlantic don’t seem eager to intervene.

Putin does have the power to shut off one-third of Europe’s natural gas supplies and could potentially use this leverage to punish any country that moves to aid Ukraine. And he has been willing to use such tactics in the past.

In the last decade, Russia has cut of gas supplies to Ukraine, the most severe being a 22-day cutoff in January 2009 which even stopped gas from flowing into Europe. And now, Putin has threatened to do away with the gas price discount the state-owned Gazprom gives to Ukrainians.

“If you are not paying us anyway and we are only noting a growing debt, let’s better note it under a regular price, not a lowered price. This is the commercial element of Gazprom operations,” Putin told reporters earlier this week. This would cause Ukraine’s debt to Russia to spike to $2 billion from about $1.5 billion if it can’t pay for Februaries gas deliveries.

But Ukraine’s “gas debt” to Russia aside, there are risks to Putin cutting off gas supplies to Europe. For one, Europeans are sitting on larger than normal gas stocks right now due to this year’s mild winter. Germany, for example, has enough supplies to last for about 60 days.

Cutting off gas to Europe would mean that Gazprom would forgo crucial revenues from gas sales. Could they last 60 days or even longer without selling their high-priced natural gas to Europe? Some analysis don’t believe so.

“It would be highly counterproductive for Russian interests at a time when Europe is considering how to respond to Russian actions in Crimea, to take steps that would have a major and negative direct impact on Europe,” Laurent Ruseckas, a senior associate at IHS CERA, told Politico.

“With everything else going on, I think it would only be in the context of if things somehow got much worse,” Pulitzer Prize-winning energy historian Daniel Yergin told Politico. “From the viewpoint of Russia, part of its value-proposition is that it’s a reliable supplier.”

Russia’s oil and gas production make up up about 40 percent of the country’s budget and are being threatened in the long run by the specter of U.S. liquefied natural gas exports to Europe and Asia.

Putin and Gazprom have tried to downplay the U.S. oil and natural gas boom, but energy analysts predict that Russia’s days as the world’s top gas producer are numbered. Furthermore, worries about Russian gas supplies have ignited calls from U.S. lawmakers to fast-track approvals of LNG export terminals.

“The US has an entire continent of affordable natural gas,” said Texas Republican Rep. Pete Olson. “Now is the time to move forward with more energy exports.”

“I’m a strong advocate of cutting red tape to expedite gas exports at every level. It’s time to act — energy exports are good for our economy, our national security, and global energy security for allies like Ukraine,” Olson added.

Russia is also threatened by the potential for Europeans to begin using hydraulic fracturing, or fracking, to tap into vast shale resources spread throughout the continent. Britain, Poland and Romania have begun to embrace fracking to get at cheaper gas beneath their feet. Even Ukraine had signed a fracking deal with Chevron before the Russian invasion.

U.S. LNG exports and domestic fracking are good medium to long-term solutions for the region, but there seems to be no good short-term relief for Europe’s energy worries. the continent already faces power costs that are at least twice as high as in the U.S., and higher gas prices would only cause tensions to rise.

The real wild card in this scenario is Ukraine. More unrest in the country could put the gas pipes to Europe in peril, harming Europe but being especially harmful to Ukrainian residents who rely on discounted Russian gas.

Most of Ukraine’s natural gas storage capacity is located in the western region of the country, which is anti-Russian. Putin’s forces have been confined to the eastern, pro-Russian side of the country, meaning that much of the country’s gas capacity is safe from seizure.

Regardless, the conflict has underscored the need for Europe to find new sources for its natural gas supplies, whether they be from domestic shale or U.S. exports. It’s also a wake-up call to Russia that it may need to look elsewhere for new pipeline infrastructure to minimize the impacts of civil unrest in former Soviet satellite countries.

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