Attacking With Natural Gas

20140405_gdm952

Keith Johnson outlines how Russia has used energy as a weapon in its conflict with Ukraine:

Russian President Vladimir Putin raised the prospect Wednesday of making Ukraine pay in advance for the natural gas that it buys from Russia, a potentially ruinous move for the credit-challenged Ukrainian government. Ukraine’s total gas debt to Russia now totals more than $16 billion, Russian officials said. … Moscow has jacked up the price it charges Ukraine twice in recent days by a total of more than 80 percent, making gas sold to Ukraine among the priciest in Europe.

In a brazen display of chutzpah, Moscow justified the second price hike after abrogating a 2010 treaty between the two countries. Under the terms of that so-called Kharkiv accord, Moscow offered price discounts to Ukraine as a lease payment for the Russian naval base in Sevastopol, on the Crimean Peninsula. Now that Russia has forcibly annexed Crimea and taken over the naval base, it argues that discount no longer applies.

Putin is also threatening European countries with gas shortages if Ukraine doesn’t pay its bill:

Russian President Vladimir Putin sent a letter to 18 European leaders Thursday saying that a dispute over Ukraine’s gas debt to Russia could impact gas distribution throughout the continent, urging them to offer financial assistance to the indebted country. … Although the International Monetary Fund has already agreed to provide Ukraine with between $14 and $18 billion to avoid a default,that figure is far smaller than what Putin claims the country owes. In his letter, Putin says that Ukraine owes Russia $17 billion in gas discounts on top of a potential $18.4 billion debt due to a 2009 fine. He said that this debt grows by billions every day.

Meanwhile, as Matt Ford explains, losing Crimea has dealt a severe blow to Ukraine’s goal of energy independence:

The loss of Crimea only further weakened Ukraine’s already-tenuous energy security. Almost all of the fuel for Ukraine’s 15 state-owned nuclear reactors, which accounts for almost half of the electricity the country generates, comes from Russia. Ukraine’s domestic reserves of uranium are paltry, and it lacks the enrichment capacity to turn what it does have into usable fuel. Russia, by comparison, is a net uranium exporter to Europe and owns nearly half of the world’s enrichment capacity.

Ukraine still has some domestic-energy alternatives in the long term, but these require significant investment. The country possesses the third-largest shale gas reserves in Europe, estimated to hold nearly 1.2 trillion cubic meters, but commercial extraction isn’t slated to begin until 2020 at the earliest. That timeline might have been overly optimistic even before the revolution, considering the environmental impact of hydraulic fracturing (“fracking”) and the public resistance that comes with it. Another complicating factor is location: one of the two large fields, the Yuzivska field, falls almost entirely within the Donetsk and Kharkiv oblasts, two of the eastern regions in which Ukraine has accused Russia of fomenting revolts.

The Economist expects that, over time, Europe will decrease its dependence on Russian gas:

The shock of the Crimean annexation should speed up sluggish European decision-making on storage, interconnection, diversification, liberalisation, shale gas and efficiency. And though the decision-makers may detest Mr Putin, in private they will admit that he may thus have done them a favour. They already knew what to do. They just didn’t want to do it.

(Graphic from The Economist)