Russia-Ukraine Gas Conflict Hits Europe

Posted by: Mark Scott on January 06

As the spat between Russia and Ukraine over natural gas trundles towards its seventh day, European countries now are being left out in the cold. On Jan. 6, Ukrainian gas company Naftogaz said Russian energy giant Gazprom had cut gas supplies to Europe by two-thirds. In response, Gazprom’s deputy Chief Executive Officer Alexander Medvedev claimed the Ukrainians had shut down three of its four export pipelines.

Whoever is to blame, the underlying fact is that Russia’s natural gas supply to Europe — about a two-fifths of the EU’s total gas imports — has been slashed (for the time being). That’s bad news for (predominantly Eastern) European countries that are highly dependent on Russian imports, particularly as temperatures plummet. It also raises questions over the EU’s push towards energy independence. Despite talk from European policy-makers about finding alternatives to Russian gas, the most recent Ukrainian-Russian stand-off just highlights the continent’s reliance on its Eastern neighbor.

The Jan. 6 cut fell most hard on Eastern European countries. Austrian energy company OMV, which operates a gas hub used by many in the region, said its daily supply of natural gas had fallen to 10% of the normal level. Not surprisingly, that had a knock-on effect: Romania reported a 75% reduction in gas supplies, Hungary's levels dropped by 25%, and Bulgaria confirmed between a 10% to 15% fall. Others, such as Croatia, Poland, and the Czech Republic, reported smaller shortfalls.

[UPDATE -- On Jan. 7, Gazprom shut down all supplies to Europe through Ukrainian pipelines. Both sides blamed each other for the ongoing argument. The further reduction in gas supplies exacerbated shortages across Eastern Europe. Slovakia said it was facing a state of emergency because of dwindling reserves, and Hungary now has limited the gas consumption by industrial users. Others, including Slovenia, Croatia, and Turkey, also have had their supplies either severely reduced or shut off completely. This Reuters article provides a full list of the countries affected.]

So which of these countries will be most affected by the taps being turned off? To answer that question, Pierre Noel, a researcher at the European Council on Foreign Relations, recently published an interesting study (from November, 2008). According to his calculations (on page 15), the most at risk – based on the amount of Russian gas imported and the level of natural gas as a percentage of total energy generation – are four countries: Latvia, Lithuania, Hungary, and Slovakia. All are highly dependent on imports, although, to be fair, natural gas still only constitutes less than 40% of the countries' total energy mix.

According to media reports, local authorities have stressed there's currently no need to place energy restrictions on consumers.

As for Europe's largest countries, Germany and Italy buy the most Russian gas, but again, the total percentage of imported natural gas viewed within the countries' total energy mix runs between 10% and 15%. What does that mean? Well, that while these countries import a lot of gas, they are by no means dependent on Russian supplies and will be able to call on other sources (including domestic storage facilities) to ride out any shortfalls.

Apart from individual countries feeling the pinch, the back-and-forth between Russia and Ukraine brings back memories of January, 2006, when Gazprom similarly cut gas supplies to its Western neighbor. That spat was eventually calmed through EU intervention, and led many European policy-makers to call for a new push towards 'energy security.' Along with finding new gas supplies away from Russia, the European Union outlined plans for more domestic gas storage, a unified gas pipeline network across the continent, and a united negotiating position towards Russia.

Three years on, analysts give the EU a scorecard of 1 out of 3. Gas storage (particularly in Italy and Spain) has been increased significantly. But on the other two goals, Europe mostly has passed the buck. Plans for a more efficient continent-wide gas pipeline network remain on the drawing board, while individual member-states -- specifically Germany -- have negotiated separate deals with Russia that have often undermined a possible unified negotiating position for the EU.

That could possibly change now that the Russian-wary Czechs hold the 6-month rotating EU Presidency, although most analysts don't expect European countries to alter their status-quo approach. And just like back in January, 2006, the Russians and Ukrainians will eventually make a deal. But the fact Europe still is beholden to these often arbitrary tiffs shows just how far the continent's energy policy still has to go.

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