Russia's Gazprom settles Ukraine gas row, but profits could dip

It's been an important week for Russian energy giant Gazprom's bid to strengthen its hold on oil and gas markets.

After withholding 50 percent of Ukraine's gas supplies in a brief dispute last week, Gazprom on Thursday struck a deal that cuts out middlemen and gives it more access to the ex-Soviet country's industrial gas customers. But while putting the squeeze on Ukraine, Gazprom also felt new pressure from increasingly bold Central Asian states, whose energy resources are being sought by the US, Europe, and China, as well as Russia.

Facing the heightened competition, Gazprom agreed to pay European prices for gas from key energy partners Turkmenistan, Uzbekistan, and Kazakhstan. Although it could result in lower revenues for Gazprom, experts say Russia has effectively bought control of Central Asian exports.

"Russia will maintain its control on gas supplies even though its profit will go down," says Sergey Smirnov, energy expert from the Expert Kazakhstan journal. "All other alternative routes that are on paper today become unreal."

The deal is likely to affect Europe most, which analysts say will face higher prices. In addition, the European Union is likely to find less receptivity now from Central Asian states for a proposed Trans-Caspian pipeline that would diversify energy supplies from Russia.

"High import prices can force Russia to raise export of its own gas," says Mikhail Krutikhin of Russian Energy, a consultancy firm in Moscow.

Ukraine, particularly, may be in the worst situation as most of its imported gas comes through Russia from Turkmenistan, which is likely to raise its gas prices from the current $130 to $150 per 1,000 cubic meters (tcm) to $250 to $350 tcm.

Russia's role as sole exporter

Because all operational pipelines in Central Asia date to the Soviet era, all gas exports go through Russia. Russia has effectively used this position to dictate prices to ex-Soviet states. Just two years ago Russia was buying Turkmen gas at $65 per tcm and sold it to European countries at $250 to 300 per tcm.

Such price inequalities drove Central Asian nations to seek alternative gas export routes – a task not difficult when China and the West were looking to diversify energy supplies away from Russia and the Middle East.

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