Ukraine crisis: Would Putin shut off gas again?

Ukraine crisis escalates as Russian and Ukrainian troops mobilize for a possible war in Crimea. The US and EU threaten sanctions as Russia uses its natural gas dominance as leverage over Ukraine and the West.  

Rich Clabaugh/Staff
Andrew Lubimov/AP
Ukrainian seamen stand guard on the Ukrainian navy ship Slavutich at harbor of Sevastopol, Ukraine, Monday. Ukraine gets about 70 percent of its natural gas from Russia.

With the standoff between Ukraine and Russia showing no signs of easing, energy markets pushed European crude oil prices up $1.71 a barrel to start the week.

As it has done in the past, Russia is using its role as Europe's dominant natural gas supplier to hold sway over Ukraine and the West. Over the weekend, Russia's gas-export monopoly Gazprom warned it may boost prices to Ukraine if the former Soviet republic doesn't pay the $1.55 billion it reportedly owes for the heating fuel.

Russian President Vladimir Putin has a history of shutting off the gas to Ukraine when it falls behind on its bills, and there's some concern Mr. Putin might make such a move again. But a lot has changed since the Russia-Ukraine gas disputes of 2006 and 2009. Europe has diversified its natural gas sources to some extent, and Ukraine has long-term options for boosting its own production.  

"Russia is in a much weaker situation now than in 2006 and 2009 because they have overplayed their hand," says Anders Åslund, a senior fellow at the Peterson Institute for International Economics who has advised Russia and Ukraine. "Given that they’ve managed this so badly before, I would not exclude that they would be foolish once again, but the cost would be for Russia, not Europe or Ukraine." 

Europe certainly needs Russia's gas, but it can increasingly rely on other, more secure sources, and it has significant storage capacity that could keep it supplied for months. A decade ago, Gazprom made up half of Europe's gas imports, according to Mr. Åslund in a telephone interview. But today, it's down to about 30 percent. 

Norway briefly overtook Russia as Europe's dominant supplier in 2012 after implementing an aggressive pricing strategy. Gazprom regained the lead in 2013 as it loosened its system of linking natural gas prices to oil. Liquefied natural gas (LNG) is another competitor.

New supplies of North American natural gas mean that LNG once shipped to the US is now available elsewhere. Europeans have been building up their LNG import capacity, hoping to take advantage of the newly available gas supplies. But producers in Qatar, Algeria, and elsewhere are showing a preference for Asia and Latin America's higher-paying markets. European LNG imports are expected to have fallen 24 percent in 2013, according to Société Générale, a French multinational bank. 

Ukraine, which gets about 70 percent of its natural gas from its eastern neighbor, is looking to further develop its own conventional and unconventional supplies of natural gas. But that would likely take five or seven years to completely substitute the natural gas it gets from Russia, Åslund says.

The heating fuel has long been a source of price disputes between the two countries. In January 2009, Russia shut off gas to Ukraine for two weeks, impacting supplies across Southeastern Europe. Tensions have calmed since then and the two countries signed a deal late last year for a 33 percent price cut in Russian natural gas. Over the weekend, however, Gazprom threatened to cancel the deal, according to media reports, suggesting Moscow is still willing to use natural gas as a diplomatic weapon. Its effectiveness largely depends on timing.

"For Ukraine, turning off Russian gas supplies in winter is a catastrophe," Mikhail Korchemkin, head of Malvern, Pa.-based East European Gas Analysis, writes in an e-mail. "In summer, nobody would notice it."

Russia, meanwhile, is overwhelmingly dependent on Europe as a customer. In 2012, Western Europe bought 76 percent of Russia's natural gas exports, according to the US Energy Information Administration. Oil and gas make up half of the Russian government's revenue. In 2012, Gazprom finished construction of a 760-mile-long twin pipeline system through the Baltic Sea, which circumvents Ukraine. It plans to expand that pipeline's capacity and is already constructing an additional pipeline through southern Europe that is expected to come online by 2018.

Last year, Russia's share of Europe's natural-gas imports rebounded somewhat from 25 percent to 30 percent – a trend Gazprom expects will continue.  

"Gazprom has increased its share in European markets because Europe's domestic production has fallen in countries such as Britain and Norway ... we see no signals that the situation in Europe will change," Gazprom's deputy head Alexander Medvedev said Monday, as reported by Reuters. "Europe simply won't see the arrival of gas suppliers of such caliber [as Russia, Norway or Algeria] anytime soon." 

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