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
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
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
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
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
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
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).
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.
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)
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
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.
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.
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.
References http://www.gks.ru/dbscripts/Cbsd/DBInet.cgi Energy Charter Secreteriat: Gas Transit Tariffs in Selected ECT Countries (2006), Brussels 2006, p.65, http://www.encharter.org/index.php? Research Centre for East European Studies, Bremen International Energy Agency, Ukraine Energy Policy Review 2006