DR. Kent Moors – What He’s Telling the Russians about Ukraine

As Ukraine Explodes, Here’s What I’m Telling the Russians

by Dr. Kent Moors | published December 5th, 2013 | Oil & Energy Investor

There is a huge elephant in the room here in Moscow. The issue is permeating everything but remains off the official agenda. Even the media is treating it with kid gloves.

It’s the uprising in Ukraine.

As the protests intensify in Kiev, the Kremlin has now entered into a huge tug of war with the European Union (EU) over access to and influence over Ukrainian energy policy.

At issue is the direction of Ukraine’s future partnerships…and who is likely to end up having influence over the crucial natural gas pipelines that span the country, moving more gas to Europe than any other venue.

For years now, Kiev has maintained a steadfast refusal to allow Gazprom, the Russian gas behemoth, to gain control over those domestic pipelines.

Gazprom, whose moves are clearly extensions of Russian foreign policy, has already taken over both the export pipeline network and the company responsible for the transit in neighboring Belarus.

This arrangement allows Moscow to control the access to Europe – even though the pipeline crosses a separate sovereign state. But Ukraine has since made it clear it would not allow the same result.

However, the situation is becoming more acute and the options are limited. But that doesn’t mean there isn’t a workable solution.

In fact, here’s what I’m about to tell the Kremlin…

The Fall-Out from the “Gas War”

First, though, let me fill you in on the situation…

While the EU in Brussels has provided some financial assistance to Kiev in planning for upgrades on the pipelines, Ukrainian officials have been disappointed by the amount and by the slowness of the European response.

Meanwhile, the energy needs back at home are starting to force the Ukrainian hand.

The country remains dependent upon imported gas from Russia despite a range of pursued alternatives. These include: the gas exploration begun in offshore Black Sea locations, shale gas development underway in western Ukraine, and heavy talk about building a liquefied natural gas (LNG) import terminal outside Odessa.

Unfortunately, each of these will take time. That is something the country does not have.

The bulk of its gas requirements rely on Russia. Even negotiating additional pipelined consignments from the Caspian basin – especially from Azerbaijan and Turkmenistan – requires pass-through permission for delivery across Russia.

Ukraine does receive payment in kind for transporting Russian gas to Europe and buys additional volume from Gazprom. However, the current contract has resulted in protracted political discord in Kiev.

After the so-called January “gas war” a few years ago, when the cross-border disagreement resulted in suspension of deliveries to Europe during a particularly cold snap, Brussels has taken a more avid interest in the situation.

It has resulted in attempts to develop alternative pipeline networks bypassing Russia and the development of an accelerating LNG trade directly to Western Europe.

The Rising Political Blood Pressure in Ukraine

The prospect of relying less on Russian gas has had two results.

The first was heightened angst in Kiev over the future prospects of its own energy situation (less Russian gas going to Europe meant less gas available for Ukraine). The second, on the other hand, sent Ukraine’s political blood pressure through the roof.

The suspension of deliveries to Europe had cost Moscow significant political capital in Brussels. Gazprom was held responsible for suspending the exports that put Europe in the deep freeze. Russia has claimed that Ukraine was stealing gas from the transmissions meant for European utility majors.

Either way, the Kremlin decided to prevent the matter from happening again.

Russia introduced the primary change that is causing the rapid destruction of Ukrainian energy plans. It entered into agreements with major Western European utilities to build huge pipelines bypassing both the political opposition in the EU and Ukraine.

Nord Stream is up and operating across the North Sea floor between Russia and Germany. South Stream, now the most expensive pipeline project ever conceived, will be passing under the Black Sea through the Turkish economic zone into Southeastern Europe and then up to the main users.

The emergence of these new networks will result in the gas moving across Ukraine becoming a backup system only, with volumes cut significantly. For that matter, should additional deliveries to Europe become necessary, they could move across the Yamal-Europe pipeline crossing Belarus, the one now owned and operated by Gazprom.

The result has been a decision by Kiev throwing the country into civil unrest.

The Ukrainian government has decided to move away from the EU (and even shelve its desire to become a member) in favor of developing a closer relationship with Moscow.

Some consider this inevitable, given the options genuinely available. But the decision is likely to tear the country apart.

Ukrainian nationalists centered in Lviv are livid, but the Russian-speaking and Russian-ethnic population in Eastern Ukraine, especially on the Crimean peninsula are ecstatic.

From a policy standpoint, however, Moscow must be careful. There are certainly other players with a stake in this other than the EU. Even there, despite moves to Asia, Europe remains the primary customer for Russian gas (to say nothing of the massive expense in the huge new pipelines projects to move Russian gas there).

What I Plan to Tell the Russians

All of which set the stage for my suggestion on Tuesday. Nobody from Gazprom was broaching the Ukrainian issue.

As you may recall from Tuesday’s issue, I had indicated: (1) they had requested a I revise my briefing to consider the new energy balance; and (2) that there was a particular suggestion I was about to make to the Kremlin.

The suggestion is this…

Given the Russian desire to move into the LNG trade as quickly as possible, combined with the rather low pricing demands being made by China to open the gas export market in that direction, a way to lower the political heat with Ukraine presents itself, one that may allow Gazprom to make a better transition into these new gas export arrangements.

In this case, Russia should jointly build a series of LNG import terminals in Ukraine, providing a new option for moving gas beyond Ukrainian domestic needs to Europe. This would then provide them with a significant bargaining option with Caspian nations for their gas production.

That transit would take place across Ukraine not Russia, a development the EU would accept.

It even opens up a completely new source of gas to meet rising European needs – the Iraqi government in Baghdad and the semi-autonomous northern Kurdistan Regional Government based in Irbil. There is considerable and increasing gas production in both, but much of it is flared for want of a ready customer.

This will involve a number of Western companies that are already in the region. And this suggestion will allow us to move on several exciting new investment opportunities.

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