Russia’s takeover of Ukraine’s Crimea may cost it a lot financially – but only if the West makes a concerted, sustained effort to come up with alternative supplies.
With energy exports serving as the key driver of the Kremlin’s economy, Russian President Vladimir Putin’s military invasion of a neighbor is not going over well in Europe.
The European Union is suspending help with construction of South Stream, the gas pipeline project backed by Gazprom, Eni of Italy, EDF of France and Wintershall of Germany. Any reduction in Europe’s dependence on Russian gas will hurt Gazprom’s profits.
Negotiations on the South Stream construction will be postponed, said Gunther Oettinger, European Commissioner for Energy, on March 10. European countries are not afraid of short-term gas supply interruptions with warm weather coming.
“I think the EU is very serious about reducing its dependence on Russian gas. It is too risky to rely on such an unpredictable partner. It is possible to reduce Russian gas imports by about 40 percent within a year without serius consequences for the European economy,” said Mikhail Korchemkin, executive director of Pennsylvania-based East European Gas Analysis consulting firm, in an interview with the Kyiv Post.
Germany is also sounding the right notes in boycotting Russia.
Germany could live without its Russian gas supply if necessary, Philipp Missfelder, foreign policy spokesperson for German Chancellor Angela Merkel’s ruling political coalition, told CNN’s Christiane Amanpour on March 17.
“If the Russians would stop the gas supply for us, or we would raise sanctions on the oil and gas sector, we will be able to have in the interconnected and linked European energy market – of course with higher prices – the energy supply for Germany.”
However, other experts say that replacing Russian energy supplies will not be quick or easy for Europe or its American ally. They expressed pessimism about how quickly the US could get liquefied natural gas and other supplies to Europe. “The potential in the short term is nothing,” said Edward Chow, an energy and security analyst at the Center for Strategic and International Studies, in an interview with McClatchy news organization’s Washington bureau.
EU purchased 161 billion cubic meters of gas from Russia in 2013, which was approximately 30 percent of its needs. Normally Gazprom’s share on the European gas market does not exceed 25 percent.
On March 13, Gazprom cancelled planned contracts for constructing several land segments of the South Stream, which bypasses Ukraine’s gas pipeline network entirely by connecting Russia to southern Europe through the Black Sea.
“Transit flow through Ukraine can be interrupted any day. For Gazprom, it would mean a loss of at least one-third of export revenue. I think the company may be trying to save cash for this type of emergency. It may also indicate that Gazprom takes seriously the European Commission’s promise to slow down the South Stream talks,” explains Korchemkin.
There are definitely mixed messages.
In a sign of the EU’s continuing economic ties to Russia, South Stream announced that it had signed a contract worth about $2.8 billion with Saipem of Italy to build the offshore stretch of the route under the Black Sea from Russia to Bulgaria. Construction is scheduled to start in June.
The chances for abandoning the land segment of the South Stream project are very high, says Korchemkin. However, the first line of the offshore section is likely to be commissioned on time. The new line with the annual capacity of 15.75 billion cubic meters can be connected to the existing Trans-Balkan pipeline that runs through Romania and Bulgaria to Turkey (with the extension to Greece). The second offshore string may be built as well.
According to initial plans, the overall cost of the South Stream project would reach $50 billion, but in December this figure was changed to $73 billion. Its planned capacity is 63 billion cubic meters per year, while the project’s completion date was 2018.
With South Stream operating at full capacity, the role of Ukraine’s gas transportation system will be substantially reduced. Last year, it transported 86 billion cubic meters of Russian gas to Europe, while this year the planned figure is only 70 billion cubic meters and it may be even less as the relationship between Ukraine and Russia remains tense.
Yuriy Korolchuk, analyst at Kyiv-based Institute for Energy Strategies, said Ukraine’s challenge is to remain a relevant energy provider and transporter, no matter what Moscow’s aims.
Chornomornaftogaz’s karma
The future of the Crimean subsidiary of Ukrainian state oil and gas monopoly Naftogaz – Chornomornaftogaz – is uncertain.
The Kremlin-backed government in Simferopol nationalized all Chornomornaftogaz and Ukrtransgaz assets on March 17 and plans their privatization through auctions. Crimea’s pro-Russian first deputy Prime Minister Rustam Temirgaliev sees Russia’s Gazprom as the main bidder.
Korolchuk estimates the price of Chornomornaftogaz at $1.1 billion, while most of this figure comes from the compound price of two recently purchased sea drilling platforms – Nezalezhnist and Petro Godovanets – that cost $700 million.
Besides, Naftogaz is suing Chornomornaftogaz in Crimean commercial court for not repaying the debt of $614 million. Energy Minister Yuriy Prodan said that Naftogaz’s ownership rights over Chornomornaftogaz will be protected by international courts.
One of the former Chornomornaftogaz key managers, Volodymyr Plechun, said that Gazprom is expecting its own capitalization to grow by $50 billion after acquiring Crimean gas assets.
Korchemkin of East European Gas Analysis thinks that Russia ultimately will have to pay Ukraine for Chornomornaftogaz. “Expropriation of Chornomornaftogaz may end with Russia owing Ukraine a lot of money,” he says.
Russian media have conducted extensive coverage of the giant energy prospects of the Crimean shelf that will increase the Chornomornaftogaz price, while foreign investors – EDF, Eni and Exxon Mobil – may stay out of the company’s project as economic sanctions against Russia are being introduced. Royal Dutch Shell has already stepped out of the negotiations over the drilling projects on the Black Sea shelf.
Further development of the shelf is going to be too expensive for new Chornomornaftogaz owners, Korchemkin emphasized. “It’s easier and cheaper to give it back to Naftogaz,” he said.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
