Gazprom threatens to plug Ukrainian gas transit to Europe

By bne IntelliNews February 23, 2012

Graham Stack in Kyiv -

Kyiv will have "zero role" in transporting Russian gas exports after the completion of the South Stream and Nord Stream pipelines to Europe, Gazprom said on February 22. Doing the sums, the claim looks empty, and is likely just the latest hardball move from Moscow in the long-winded negotiations over gas between the two.

The threat came as Russia announced it intends to build South Stream - which will bypass Ukraine to carry gas to southern Europe - at its largest forecast annual capacity of 63bn cubic metres (cm), and also plough ahead with a second leg of Nord Stream, which runs directly to Germany. Gas giant Gazprom also accused Ukraine of siphoning gas headed to Europe during the recent cold snap.

"South Stream to full capacity, Nord Stream with additional lines and our existing capacity through Belarus and the Black Sea will reduce Ukraine's importance for transit to zero," Gazprom spokesman Sergei Kupriyanov said in an e-mailed statement according to Bloomberg. Gazprom has always previously stated that the new pipelines being built beneath the Black and Baltic Seas would not reroute gas from elsewhere, but were needed to increase supply to Europe.

However, with Moscow and Kyiv's latest bickering over gas prices entering its second year, Russia clearly hopes to step up the pressure on Ukraine to hand over its transit system in return for a discount. Echoing its central argument in the last gas war that hit European supplies in 2009, it claimed that Ukraine was to blame for lowered gas imports to several European countries in early February. "Ukraine kept up to 40m cm of gas for several days," Gazprom CEO Miller told President Dmitry Medvedev, according to RIA Novosti. "This causes financial and reputational damage to Gazprom."

Ukraine's gas distribution monopoly Naftogaz denied the accusations, saying that its contract with Gazprom specifies maximum quarterly, but not daily, domestic consumption of Russian gas.

Gazprom, which announced a strategy to boost its share of the European market in mid-February, said it will now launch construction of South Stream at maximum capacity, complete a second string of Nord Stream, and fully utilize the Belarusian transit system, in which Russia recently took control. In recent days, Gazprom has diverted a portion of transit volumes intended to travel via Ukraine to the Belarusian system, according to local media.

Belarus agreed to give up control of its pipelines last year after Russia leveraged the currency crisis which enveloped it. Moscow is trying the same tactic with Kyiv, and appears to be heading towards similar success, but is now looking to press home its advantage ahead of the end of the heating season. For its part, Ukraine is resisting the loss of what is its most strategic asset by far; on the other hand it sees annual revenue of around $2.7bn from transporting Russian gas to Europe.

Analysts insist that Gazprom's threat to scrap all Ukrainian transit doesn't add up. "The combined capacity of Nord Stream and the prospective South Stream pipelines can in no way substitute Ukraine's gas transportation system, especially as consumption of Russian gas by Europe is expected to grow," writes Concord Capital analysts in a research note.

"We think the recent accusations are intended to signal Russia's stance in gas negotiations will remain tough while Ukraine should keep gas transit volumes unchanged. We expect Ukraine-Russia gas talks to turn more constructive by end-March as the Presidential election cycle in Russia ends and political considerations become less important."

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