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A little more on gas – before moving on

October 4, 2014

In yesterday’s entry, the issue of gas supply was briefly touched upon.  Today, another quick glance before moving on from what will remain a topic of commentary for many for months, with increasing intensity as the cold winter months approach and The Kremlin in all probability in no rush to close any deal until it believes it is in the best possible negotiating position – namely Ukraine is literally freezing.

Recent weeks have seen Hungary cave completely to Kremlin pressure and stop its reverse flow to Ukraine, Poland suffer “unexpected” shortfalls in delivery and Slovakia up to 50% decreases as of two days ago.  In short all nations with pipelines capable of reversing the flow of gas from Russia to the EU and back to Ukraine have not received what they expected to receive, thus having something of an impact upon the contractual deliveries to Ukraine anticipated via the EU nations.

No surprise to anybody that such a tactic is being employed by The Kremlin – nor is it a surprise Hungary caved in, or that Poland remained defiant.  That Slovakia bemoaned Russian action as political and then went to the European gas Spot Market, and completed a deal with Eon for supply via Austria, rather than caving to The Kremlin, no doubt upset somebody in Moscow.  Bravo Prime Minister Fico and Slovakia.

Today, Romania reported a 13% decrease in expect volumes from Gazprom too.  Something dismissed by Energy Minister Razvan Nicolescu – “Romania had grown accustomed to such behavior Gazprom.”

However, whilst the tactics of Gazprom are clearly Kremlin led to force itself upon Ukraine, they are hardly tactics that will encourage support within the EU Member States to scupper the 3rd Energy Package to which The Kremlin has very strong objections, enable South Stream, nor provide any reason to question the need to diversify away from Russian gas.

Just as annexing Crimea and invading eastern Ukraine have done nothing other than harden opinions unfavourably toward Russia, realpolitiking with gas supply is not going to lessen the European mood when it comes to diversification.  All in all, in the medium and long term, a counterproductive policy on all fronts.

So what?  There is the Power of Siberia pipeline between Russia and China that will be operative very soon yes?

Aside from any argument over whether this pipeline even breaks even for Russia given the strong Chinese negotiating position when agreeing the price, the pipeline as yet, does not exist.  There is also the need to consider any Russian quotes on infrastructure/construction costs will be grossly underestimated, as they always are.

Despite any nonsense coming from Gazprom or The Kremlin stating otherwise, it seems 2020 will be the earliest any gas deliveries will reach China via this pipeline – although expect to be sacked from Gazprom for saying so.

Has China even begun to construct its end of the pipeline or any associated pumping stations?

Whilst 6 years from a project moving from upstream to downstream may not be too shabby, 6 years is a long time economically for Gazprom and Russia should the Europeans now make a meaningful move to diversify.  Particularly so when the Russian budget for 2015 – likely to be signed of by President Putin today – sees an $18 billion cut in social programmes (and a 20% rise in military complex spending).  All of this notwithstanding the western technical and economic sanctions currently in place.

It is in this interesting position, we move on from the gas story until any real developments occur – don’t hold your breath.  If only the hot air generated by rhetoric between parties over the next few months before any deal is struck – or not – could be used for heating.

The next development may not be a gas deal between Russia and Ukraine, but the dismemberment of Naftogaz Ukraine by the Ukrainian authorities when a new RADA sits – in line with the European 3rd Energy Package, which will irk The Kremlin even more.

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