Gas stand-off raises demand for change

By Ed Crooks

Published: January 6 2009 19:27 | Last updated: January 6 2009 19:27

Any remaining hopes that the confrontation between Russia and Ukraine could be treated as a bilateral dispute were blown away on Tuesday as analysts said the impact of the gas crisis was greater than in the previous most serious confrontation, in 2006.

With customers in western Europe facing the threat of gas shortages that are already a reality in eastern Europe, the crisis has escalated to the point that looks likely to force a resolution.

Map As the flow of Russian gas through Ukraine slowed to a trickle on Tuesday, European countries from Germany to Greece reported shortfalls in their supplies.

Freezing weather across Europe, with some countries suffering their coldest temperatures for decades, heightened fears of gas shortages.

Gazprom, Russia’s state-controlled gas company, accused Ukraine of “unprecedented” actions in cutting off the flow of gas through three pipelines across the country. Ukraine responded that it was Russia that had cut the supply.

Gazprom said the flow of gas leaving Ukraine had slowed to about 65m cubic metres per day, when it had hoped to put through 225m.

For countries in eastern and central Europe, where supplies were already down, the position has become alarming, and large economies in western Europe, which had until now remained unaffected, have begun to suffer.

On Tuesday Italy reported that its gas imports from Russia, which account for about 25 per cent of its demand in the third largest gas market in Europe, had dropped by 90 per cent.

In Germany, which is the biggest gas market and imports about 40 per cent of its needs from Russia, Eon , the energy group, said it expected a sharp drop in deliveries.

France, which is a much smaller gas market because of its dependence on nuclear power and imports only about 20 per cent of its gas from Russia, reported a 70 per cent drop.

Many countries, including Poland and Croatia, resorted to emergency measures such as urging industrial users to shut down, to save gas for domestic heating and public services.

In western European countries, which have relatively strong gas storage capacity that was well stocked when Russia first cut off supplies to Ukraine on January 1, the loss of Russian gas had not yet hit customers.

The sharpest effect was in the UK, where the price of gas always tends to be more volatile: wholesale prices rose sharply on Tuesday. Gas for delivery on Wednesday rose 12 per cent to 68p per therm.

However, the escalation of the crisis makes it more likely that western Europe will be affected. Eon warned on Tuesday: “Our options will also reach their limits if these drastic supply cuts continue and temperatures stay at their very low level.”

While some western countries have capacity to import more liquefied natural gas, and the economic downturn has eased the global pressure on LNG supplies, it would be impossible to replace the whole of Russia’s gas exports that way.

StatoilHydro, Norway’s national oil and gas company and the second biggest supplier into Europe after Gazprom, warned on Tuesday its ability to increase supplies to the European Union to compensate for the loss of Russian gas was “limited”.

In 2006, the Russian gas shut-off that begun on January 1 lasted just three days. This confrontation has lasted longer, possibly because the effects were not felt in western Europe so quickly.

Jonathan Stern of the Oxford Institute for Energy Studies argued that the scale of the disruption meant the pressure from the EU to resolve the dispute would soon become irresistible. “This cannot now go on any longer than two days,” he said. “Once this starts to happen, leaders tend to get involved, and I think this has got to be finished by Friday.”

Once the immediate crisis has passed, the EU’s response may also be similar to its reaction after the last crisis, according to Dieter Helm of New College Oxford.

The reactions to that crisis did not include heavy investment in gas storage and progress on an integrated network in the EU, to minimise the vulnerability of individual countries. Instead, bilateral deals with Russia were signed by countries including Italy, Germany and France. The EU also has a strategy of investment in wind power, which will need more gas-fired power plants to keep the lights on when the wind does not blow.

“It was very clear in 2005-06 what Europe should do, and nothing has happened since then,” Mr Helm says. “Indeed if anything, the situation has been allowed to get worse.”