OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

RUSSIAN AND CIS GAS MARKETSAND THEIR IMPACT ON EUROPE:
the January 2009 Russia-Ukrainegas crisis

Professor Jonathan Stern
Director of Gas Research
Oxford Institute for Energy Studies
IEEJ, Tokyo, February 4, 2009

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Forthcoming February 24, 2009
from Oxford University Press

Russian and CIS gas markets
and their impact on Europe
Edited by Simon Pirani
Chapters on: Natural gas in transition: systemic reform issues –Russia – Ukraine – Belarus – Moldova – Azerbaijan – Armenia –Georgia – Turkmenistan – Kazakhstan – Uzbekistan –CIS gas trade and transit
Authors: Julian Bowden – Chloe Bruce – Tatiana Mitrova – Simon
Pirani - Jonathan Stern – Micheil Tokmazishvili – Katja Yafimava –Armen Yeghiazaryan – Shamil Yenikeyeff – Stanislav Zhukov

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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

CIS gas balance 2007
bcm
RussiaProd’n Import Totalbalance
651.0 7.4
658.4

Consump’n
466.5

Export191.9

Belarus

0.2

20.6

20.8

20.8–Ukraine

20.4

50.6

71.0

71.0–

Azerbaijan

11.0

0.5

11.5

11.5

0.1

Kazakhstan

29.2

7.2

36.4

21.2

15.2

Uzbekistan

65.3

–

65.3

50.8

14.5

Turkmenistan

72.3

–

72.3

21.1

51.2

Others

0.5

6.4

6.5

6.5

0.03

Total

849.5

92.7

(942.2)273.0
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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Gas in the CIS: big themes
 The move to market pricing (post-Soviettransition continued)
 Production. The recession means that aRussian supply squeeze may be avoided
 Transit bottlenecks (Ukraine is mostimportant) Gas consumption … the great unknown

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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

1995-2007
Gazprom Exports to CIS Countries 1995-2007(Bcm)
20002003

2004

2005 2006* 2007*Ukraine

27.2

26.0

34.4

37.6

59.0

54.3

Belarus

10.8

10.2

10.2

19.8

20.5

20.7

Moldova

1.8

1.5

1.9

2.8

2.5

2.7

Caucasus

0

0.5

0

6.9

7.6

2.7

TOTAL
CIS

40.8

38.2

47.1

71.1

96.1

81.3

Sources: Gazprom in Figures 2004, p.30, Annual Reports: 2004, p.47; 2005, p.55;
2006 p.49; 2007 Interfax. *includes RosUkrEnergo re-exports; statistical basisof data is different to previous years

All countries expected to pay “Europeanprices” by 2011, Ukraine starting in 2009??

5OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

CIS import prices for Russian gas, $/mcm
2005 2006 2007 2008 2009
Ukraine44-80 95130179.5 240?

Belarus46.68 46.68 100

119.25 n/a

Moldova

60-80 110-160

170 191?
-210

Georgia

65

235

Azerbaijan
Armenia

55

110

235

110

(sales stopped)

110

110

110

235

110
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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

1997-2008($/mcm)
CIS domestic gas prices 1997-2008 ($/mcm)

Exchange rates and non-payment are problems

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

CIS production up to 2015

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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

CIS Gas Consumption ((Bcm)
Bcm)

9OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

The January 2009 Russia-Ukraine
Gas Crisis

Origins are importantOXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Russo-Ukrainian
The Russo-Ukrainian gas trade in outline20052006

2007

2008
(est.)

2009(proj.)

Ukraine – gas (bcm)Consumption
Technical gas

68.9
7.4

65.9
8.1

62.8
7.0

61
761
7Imports
Own production

55.8
20.5

53.3
20.7

49.1
20.7

4820

48
20

Price ($/mcm)$44$80$95$130$179.5 $175$360

Total value ofimports$3.2bn $5.1bn $6.4bn $8.4bn $13.5bn

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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Ukrainian gas transit in outline
2005

2006

2007

2008
(est.)

2009(proj.)

113.8
14.7

112.1
3.1

1133117
3

Cost of transit$1.09 $1.60($/mcm/100km)$1.60$1.70 $1.70

Volumes transported (bcm)
To Europe
To the CIS

Total value oftransit services

121.5
14.9

$1.5bn $2.2bn $2.1bn $2.2bn $2.3bn

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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Putin-Timoshenko
Putin-Timoshenko deal, October 2008
 Import prices and transit tariffs to reach“market, economically based” levels
by 2011...that should mean, European netback Gazprom to sell central Asian gas toNaftogaz Ukrainy… so Rosukrenergo would lose
its lucrative transit contract
 Gazprom subsidiaries no longer

unwelcome in Ukrainian market
 Ukraine to pay off debts by 31.10.08
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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Why that agreement failed:the economic background
Russia• The oil boom is over
• In 2009, European gas prices will follow oil prices down,with serious consequences for Gazprom’s revenues• The state remains heavily dependent on oil and gas• No time to compromise on low import prices for the CISUkraine• Industrial production down 26.6% year-on-year to December• Silver lining on the recession cloud: gas demand falling• The terms of trade turn against Ukraine: steel prices falling,gas import prices rising• Among the European nations most vulnerable in thefinancial meltdown
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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

How Ukraine was cut offUkraine• left it to the last moment to pay its debts• sent a letter threatening to divert gas bound for Europe(a reminder of 2006)• used gas from storage (17 bcm), while hoping forthe price to come downRussia• warned loudly that gas would be cut off

International sympathy for Ukraine faded since 2006
• The Energy Charter Secretariat reminded Ukraineof its obligations• The IMF confirmed that Ukraine had sufficient money to pay
its debts
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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

A Chronology of the Crisis
Started with dispute over unpaid debt which
impacted on….
z 2009 sales and transit contracts
z January 1, 2009 – Gazprom cuts all supplies forUkrainian consumption
z January 1-4, “small” volumes 65.3 mcm “stolen”
z January 6: gas supplies to Europe drasticallyreducedz January 7: gas supplies to Europe cut offz January 11: EU monitors deployedz January 13-15: Gazprom attempted to resume
flows but this proved impossible; Ukraine claims
lack of “technical agreement” prevents
resumption of flows
z January 17-18: Political agreement reachedz January 19: 10 year supply and transit contracts
signedz January 20: European gas flows restartz January 22: European gas flows returning tonormalz

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

2009 RUSSIA-UKRAINE CRISIS WAS
THE MOST SERIOUS GAS SECURITY
INCIDENT EVER EXPERIENCED IN
EUROPE AND ONE OF THE MOSTSERIOUS ENERGY SECURITY
INCIDENTS
EUROPE LOST 20% OF ITS GASSUPPLIES FOR TWO WEEKS IN THE
MIDDLE OF WINTER; SOUTH EASTEUROPE LOST NEARLY 100% OF GASSUPPLIESOXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research ProgrammeCommercial Outcome
The new Russia-Ukraine supply and transitcontracts• Import prices set quarterly. 2009: 80% of European netback,avg under $250/mcm. 2010: 100% of European netback• Separate contract on transit. $1.70/mcm/00km this year,
formula similar to European ones from 2010
• Rosukrenergo transit contract scrapped• Gazprom-Sbyt will supply half of Ukraine industrial market

No information yet public about• The remaining 2008 debts of >$600m• Storage … sales to central Europe (formerly by RUE)

Russia and Europe• Gazprom “disappointed” EU wouldn’t discuss a pipeline
consortium. EU says Ukraine and Russia untrustworthy
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Immediate Consequences
Ukraine• transit reputation wrecked• has to survive until it can benefit from fallingprices• Oligarchs influence politicians, but this is notcritical to the causes or outcome
Russia• Gazprom lost ~$1.5bn of sales+penalties+possible
damages• This is not about an “energy weapon” aimed atEurope• Reputation as a reliable supplier is seriously(fatally?) damaged• This is not just about prices and transit fees (gap
between the two sides was bridgeable)• Ownership and management of the Ukrainian
pipeline is now high on the agenda of all sides

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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

BUT….it wasn’t all about gas
z “unfinished (political) business” between

Yushchenko and the Russian leadershipfrom the Orange Revolution
z Internal power struggle between Ukrainian
President Yushchenko and PM
Timoshenko who are already “running forpresident” (January 2010)z Role of Ukrainian oligarchs, especially
Dmitri Firtash – CEO of Group Firtash
which owns the Ukrainian part of
RosUkrEnergo – which is being excluded
from Russian-Ukrainian gas tradeOXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

And.. problems are likely to continue
z Ukrainian ability and willingness to pay forgas uncertain due to:collapse of Ukrainian economy andcurrency
z bankrupt status of Naftogaz Ukrainez instability of political system andantagonism between president and PMzz January 2009 crisis shows that Russian

exports to Europe cannot continue without
flows to UkraineOXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

European Consequencesz North West Europe – hardly

inconveniencedz Central Europe – some cutbacks,
especially Slovakia
z South East Europe – disaster, especially:
Bulgaria, Romania, Serbia, Bosnia, Croatia
Much discussion of Nabucco and otherlong term supply options
Urgent action needed to supply emergency
gas to SE Europe during winter months ifnecessary

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research ProgrammeLonger Term Consequencesz Monitoring of Russian- Ukraine gas flows –especially in winter, likely to be reinstatedz Russian determination to phase out
Ukrainian transit and accelerate Nord
Stream and South Streamz Any increase in Russian deliveries to any
European country will be under scrutinyz Major emphasis on addressing south andeast European supply security strategies
Russian-Ukrainian – and Russian-European –gas relations have irrevocably changed

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Russian gas transit routes to Europe

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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Nord Stream Gas Pipelines

Will this crisis now overcome Baltic
opposition to the pipeline?

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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research ProgrammeBlue Stream and South Stream Pipelines

South Stream becomes urgent for securityreasonsOXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Russian Gas Pipeline Capacity to Europe 2008-2015(Bcm)

PIPELINE CAPACITY:
FinlandBelarusUkraine
Blue Stream
Nord StreamSouth Stream
TOTAL CAPACITY
Exports to Europe*Spare capacity

2008
likely5481451600214165342010
2015
Max Min Max Min
555548 484848145 125 145 95
16 1616160055
55004730214 194 316 249
180 170 200 180
34 24 116 69*estimated long term contract minimum/maximum commitments

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

CIS Gas Markets and the Russia-Ukraine Crisis:some conclusionsz CIS gas markets are among the biggest in

the worldz Internal and external dynamics arecomplex and unstablez Consequences of this instability are very
important for European gas markets
z Russia-Ukraine crisis was the mostserious breakdown of gas relations everz European customers – especially in SE
Europe - got badly hurt which will lead to…
z Actions in CIS countries and Europe inrelation to new pipelines and storages BUT
z These will cost a lot of money and nothappen quickly