Why the Russia-Ukraine Gas Dispute Worries Europe

(Bloomberg) -- Europe was shaken in 2009 when vital midwinter supplies of Russian natural gas, piped through Ukraine, cut out because of a price dispute between the two former Soviet countries. Although Europe has since diversified supplies and increased stockpiles, it’s still heavily dependent on Russian gas. A feared repeat of 2009 was averted when Russia and Ukraine reached a new accord with just one day to spare -- a relief all around, especially since Russia’s key alternative pipeline is hindered by U.S. sanctions.

1. Why is this a big deal?

Russia supplies almost 37% of the gas market in Europe. Ukraine earns $3 billion a year from carrying Russian gas to Europe. And Russian gas giant Gazprom PJSC sends more than 40% of its exports to Western Europe and Turkey via the pipeline network run by Ukraine’s Naftogaz JSC. The new deal will allow Russian gas to flow to Europe through the end of 2024. It also ends a plethora of related legal battles and signals a potential resumption of Ukraine purchases of Russian gas that ended in 2015. European officials mediated discussions, which were entangled in the broader conflict between Russia and Ukraine.

2. Where does that stand?

The relationship between countries that share a land-and-sea border of 2,300 kilometers (1,400 miles) has been fraught since the collapse of the Soviet Union almost three decades ago. But tensions flared in 2014 when protests in Kyiv led to the ouster of Ukraine’s Kremlin-backed president and Russia annexed the Crimean Peninsula. Under President Vladimir Putin, Russia also stoked conflict in breakaway regions of eastern Ukraine. Calling Russia an “aggressor state” in 2019, Ukraine sought support from the European Union and U.S. to end that conflict.

3. How relieved is Europe with the new deal?

Greatly, although it’s much less vulnerable than after the three-week gas cutoff in 2009. (There was another in 2006.) Balkan nations then had to ration gas use, close factories and cut power, while other countries curbed supply to industrial users. Slovakia even weighed restarting a Soviet-era nuclear plant. The EU has since prioritized development of liquefied natural gas terminals and ensured that vulnerable states in the east and southeast have connections to alternative gas sources. Gas storage sites in Europe are at their fullest levels in 10 years as a global LNG glut brought record supplies to the region.

4. Why is this a big deal for Russia?

Another shutoff would have hurt its credibility as an energy supplier. The deal was especially crucial after U.S. President Donald Trump imposed sanctions on an alternative link beneath the Baltic Sea, called Nord Stream 2. That pipeline would permit annual deliveries of as much as 55 billion cubic meters directly to Germany, doubling the capacity of an existing undersea route. By comparison, the new deal with Ukraine allows for 65 billion cubic meters in 2020. Still, Russia is also broadening its options: Gas is now flowing to Asia, via a new pipeline to China, and will go to Turkey -- and potentially on to southeastern Europe -- through the TurkStream line, which is due to open in January.

5. And for Ukraine?

Gas transport fees account for 3% of the country’s gross domestic product. The new five-year agreement can be extended through 2034 and includes an almost $3 billion debt repayment by Gazprom, as ordered by a court in Stockholm. If Naftogaz resumes direct purchases of Russian gas, prices will be linked to a European hub rather than dictated by a Gazprom formula. As a concession, Naftogaz met European demands to “unbundle” its gas production and transit businesses, potentially bringing in international companies to help manage storage facilities and 35,000 kilometers of pipelines -- one of the largest networks in Europe. Furthermore, Putin said at his annual press conference on Dec. 19 that Ukraine wouldn’t be isolated.

6. So everything is resolved?

On the gas front, pretty much. Putin and Ukrainian leader Volodymyr Zelenskiy met with their French and German counterparts in December for talks aimed at ending the military conflict in eastern Ukraine. Their involvement may have spurred progress in the gas negotiations. Terms of the final deal were agreed and revealed some 10 days before the New Year’s deadline and it was signed late Dec. 30 in Vienna, allowing Russian gas to continue to flow via Ukraine for another five years.

The Reference Shelf

• QuickTakes on Russian gas, the conflict in Ukraine, Nord Stream 2 and the Power of Siberia pipeline.
• A paper on the gas transit talks by the Oxford Institute for Energy Studies.
• Bloomberg Opinion’s Leonid Bershidsky on Putin’s grand gas project.

--With assistance from Volodymyr Verbyany.

To contact the reporters on this story: Dina Khrennikova in Moscow at dkhrennikova@bloomberg.net;Anna Shiryaevskaya in London at ashiryaevska@bloomberg.net;Daryna Krasnolutska in Kyiv at dkrasnolutsk@bloomberg.net

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Reed Landberg, Grant Clark

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