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Russia Ukraine Gas Conflict


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Gazprom and Ukraine conflict.

Gazprom and Ukraine conflict.

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  • 1. Gazprom-NaftogazUkrainyDispute:Business or Politics?
    Harsh Rautela(10DCP069)
  • 2. Case Overview
    Gas supply contracts between Soviet Union and Europe
    Impact of disintegration of the Soviet Union on Russia and Ukraine.
    World’s largest gas reserves with Russia
    28 Trillion cubic meters
    16% of the world reserves
    Evolution of Gazprom as a major supplier to Europe
    Demand of Europe and Ukraine
    Most Economic route for Gazprom to supply gas to Europe is via Ukraine
    Disputes on price hike
  • 3. Bargaining power of Russia/ Gazprom
    Availability of resources
    Strategic position of Russia
    Mismatch between Ukraine production and consumption of Gas
    Alternate route to Europe
    Alternative Markets
  • 4. Reasons for Dispute
    Dispute between the state controlled companies of the Russian Federation and Ukraine - Gazprom and Naftogaz
    Economic Dispute
    High mismatch between Ukraine production and consumption of Gas
    Illegal siphoning off of gas by Ukraine
    Increasing debt
    Supply of gas to Ukraine at a highly subsidized price
    Political Dispute
    Impact of elections in Ukraine:
    Appointment of Pro-West president
    Signing with EU and NATO
    Black Sea Fleet in Sevastopol
  • 5. Settlement in 2006
    Settlement in January 2006
    A hasty Five Year Contract
    Damage to both the economies if European Nations start searching for alternative suppliers
    Legal obligation for Russia to supply gas to Europe
    Attractive deal for both Gazprom and Naftogaz
    Supply to Ukraine at $ 95 T cm.
    Gazprom will sell at $ 230 T cm.
    Cost involved, gaining territory rights and capacity issues faced by Gazprom for the alternate path to Europe through Belarus and Baltic Sea
  • 6. Critical Issues
    Five Year Contract in January, 2006 : Some Questions Left Unanswered
    Profitability of RosUkrEnergo: 23.3 % of gas $ 230 T cm, will they get the 76.7 % at $ 75 T Cm
    The agreement only sets the price for next 6 months, no planning for future pricing.
    Supply from Turkmenistan ???
    Production at 58 B cm
    Agreement to supply
    30 B cm to Gazprom
    41 B cm to Ukraine
  • 7. Critical Issues (Contd..)
    Problems of a comparatively smaller nation trying to break free from the influence of its dominant neighbour
    Dependence of the European countries on gas imports from Russia
    How a company's exports become vulnerable when its exports are routed through third parties and its efforts to gain control over such transitory routes
  • 8. Current Situation
    On April 21, 2010, Russia and Ukraine signed an agreement
    Russia agreed to a price drop of 30%
    Ukraine agreed to extend Russia's lease of Black Sea port of Sevastopol for an additional 25 years with an additional five-year renewal option (to 2042-47).
    As of June 2010, Ukraine pays Gazprom around $234/mcm (thousand cubic meter).
  • 9. Russia andUkraine – Consensuspossible?
    Even though resolving pipeline dispute will be in the economic benefit of both Russia and Ukraine, because of political reasons (Ukraine joining NATO and Russia-Georgia war), historical differences and ego clashes, consensus of Russia and Ukraine over pipeline issues is difficult to come in near future.
  • 10. Possible Solutions
    1. Focus on North Stream and South Stream Projects
    Details of North Stream Project:
    Planned offshore pipe line from Russia to Germany
    Capacity – 55 billion cubic meters per year
    Cost – Euro 8.8 billion (financed 70% from banks and 30% from equity)
  • 11. Details of South Stream Project:
    Pipeline to run under the Black Sea from the Russkaya compressor station on the Russian coast to the Bulgarian coast
     Capacity – 63 billion cubic meters per year
    Cost - Euro 19-24 billion
  • 12. Possible solutions (Cont..)
    2.Increasing capacity of current existing routes- ( Blue Stream Project)
    Trans Black Sea pipeline, Connecting Russia and Turkey Capacity 16 Billion cm
    Phase II proposed in 2002, as parallel to Blue Stream I, again connecting Russia to Turkey
    3. Alternatives for Gazprom –
    China – Gazprom plans to supply natural gas to China by end of 2015. Currently working on a plan to build natural gas pipelines from Siberia to China, with an estimated cost of US$14 billion. 
    South Korea – Ongoing commercial talks with South Korea's Kogas on delivering at least 10 billion cubic metres of gas a year from 2017.
    USA – In 2009, Gazprom alongwith Royal Dutch Shell decided to deliver 1 million tons of gas to the US market until 2028.
  • 13. All Possible Routes
  • 14. Possible Solutions (Cont..)
    4. Pricing –
    Present price is set politically. Price should be decided based on some standard formulae which is acceptable to both. Also it should be revised monthly (as in case of Europe) rather than yearly.
    5. Reducing dependence of European market on Russia-
    Europe should consider alternative sources like Middle East and Turkmenistan.
  • 15. Possible Solutions (Cont..)
    6. Elimination of intermediary companies like Rosukrenergo and UkrGasEnergo. They are formed by political elite from both sides for self interest, corruption and rent seeking tool.
  • 16. References
    Energy Charter Secreteriat: Gas Transit Tariffs in Selected ECT Countries (2006), Brussels 2006, p.65,
    Research Centre for East European Studies, Bremen
    International Energy Agency, Ukraine Energy Policy Review 2006
  • 17. Thank You !!