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Page added on March 5, 2014
Energy Risks of the Ukraine Crisis
- Russia’s intervention in the Crimean Peninsula poses few risks to Europe’s energy supplies, but escalation or Western sanctions could change that assessment.
- If the crisis expanded to mainland Ukraine, the integrity of that country’s pipelines and the natural gas they carry to EU members would be the most immediate energy concern.
Although Ukraine’s energy assets don’t appear to be a major focus of Russia’s occupation of the Crimean peninsula, any escalation of the crisis could have serious energy consequences, regionally and globally. The initial reaction of energy markets has been cautious, with Monday’s jump of around 2% for Brent crude and nearly 10% for European gas futures largely erased in Tuesday’s trading. While some of Russia’s oil exports to Europe transit through Ukraine, the latter’s natural gas pipelines are the bigger worry, especially in light of Russia’s past use of the “gas weapon.”
It’s always dicey commenting on an unfolding event of this magnitude, which various observers have nominated as the most serious geopolitical crisis in post-Cold War Europe. I’ve spent the last few days following developments, listening to conference calls, and speaking with a Russia expert of my acquaintance. Dismissing the current events as out of tune with the 21st century ignores the complex history of a region that has seen multiple episodes of great-power conflict, just as trying to impose a Western mindset on President Putin’s intentions is likely to come up short.
His latest reported comments suggest that he may have achieved his initial goals, at least insofar as giving him, rather than the new government in Kiev, control over Russia’s access to the strategic Black Sea naval installations. Any broader goals are unclear at this point, and as a military expert highlighted in a media call hosted by the Council on Foreign Relations, the current confrontation in Crimea runs the risk of “unintended escalation.” Wars have started this way.
So what’s at stake, in energy terms? An infographic from Business Insider puts the gas situation in perspective. Russia’s share of Europe’s gas supply has fallen to 22% as EU members diversified their sources of supply in the aftermath of past interruptions in Russian gas deliveries. Still, roughly two-thirds of Russian gas sent to the EU passes through Ukraine’s territory, and the pipelines that transit Belarus and the Baltic Sea lack sufficient capacity to reroute the entire volume should Ukraine’s pipelines be disrupted.
Whether that occurred as an intentional reaction by Russia to steps that the US and EU are considering in response to its intervention in Crimea, or as a result of armed conflict in mainland Ukraine, natural gas prices in Europe would spike, even with ample gas in storage after a relatively warm winter. That would adversely affect EU economies still recovering from recession and the EU’s financial crisis.
European natural gas prices are already much higher than those in the US, and any further increase would ratchet up the pressure on the EU’s manufacturing sector. Nor is there nearly as much LNG available globally to make up any shortfall as there will be in just a few years, once US exports gear up and several large Australian LNG projects come onstream. Ironically, Ukraine is building its own LNG import facility to diversity its supplies–luckily not sited in Crimea.
The threat to oil deliveries seems less acute, short of an embargo that would hurt Russia as much as its customers. In 2012 Russia exported around 6 million barrels per day of oil and condensate to European refineries by various routes, including the southern leg of the Druzhba pipeline that crosses Ukraine on its way to the Czech Republic, Hungary and Slovakia. While a disruption of this flow could force refiners in those countries to scramble for alternative supplies, Russian oil would probably still find its way to world markets via other routes, including to the Baltic ports. Ensuing world oil price increases would likelier reflect an overall risk premium than a more localized physical shortfall.
Even if the situation doesn’t progress beyond its current state, longer-term energy impacts could still follow. These include a recognition of heightened political risk for investments in Russia and its “near abroad” neighbors, along with the results of any financial sanctions that might be imposed.
If Mr. Putin is satisfied to engineer greater Crimean autonomy or independence from a more EU-oriented government in Kiev, and if the EU/US response is limited to financial measures to prop up that government, then the consequences–similar to those for Russia’s ongoing occupation of part of Georgia–could be minimal. The EU can’t go any farther than Germany will support, and thanks to the Nordstream gas pipeline led by its former Chancellor, Germany has less at stake in Ukraine than some of its neighbors. It has already distanced itself from suggestions of evicting Russia from the G8 group of nations. In that context, the US administration seems unlikely to sustain a harder line than Brussels.
8 Comments on "Energy Risks of the Ukraine Crisis"
CAM on Wed, 5th Mar 2014 6:42 pm
Clearly this writer is ill informed particularly about Russia. Russia stopped the flow of gas only because the Ukraine was stealing it and refused to pay. Russia had no way to stop only gas to the Ukraine, because all of its gas to Europe goes through the same Ukrainian pipe lines. And Europe didn’t care if the Ukraine was stealing Russian gas, so Russia shut it all down. It wasn’t a “gas weapon” as this author claims, but an attempt to get paid. And buy the way the Ukrainians were receiving big discounts from Russia, and still would not pay what they owed. It continues to this day with Ukraine two billion in arrears to Russia for gas even at heavily discounted prices. Does anyone think any other country is going to offer the Ukraine a 33% discount on gas and oil. Well, even that is gone now!!
DC on Wed, 5th Mar 2014 7:33 pm
Quite right-Russia is upset, because Ukraine simply wont(cant really) pay its bills. This is hardly anything new. Ukraine has been a ‘problem’ customer for years. Only thing ‘new’ is the US installed neo-fascist regime in Kiev pretending to be the ‘government’. EC, as usual, has no real idea what they are talking about. Another mouthpiece for US corporate imperialism really…
Northwest Resident on Wed, 5th Mar 2014 7:46 pm
A good question at this point might be, why is Ukraine so desperately poor, so poor that they have to steal energy and go so deeply into debt. Ukraine appears more to be a basket case, rather than a bread basket. But why?!
Here is a good place to start understanding the answer to that question:
“Fundamentally, because Ukraine has not done away with Soviet state structures. If one follows Anders Aslund in the book I quoted above, what happened to the country is the following: Ukraine focused on becoming independent in 1991. Nationalism went over structural reform in the political priority list of the day. There was a grand bargain of sorts between the state Nomenklatura and the Ukrainian nationalists. The Nomenklatura accepted democracy and independence but was allowed to stay on in power. It has captured the political process ever since. Economic reforms started in 1993-1994 only. Poland, Russia and others started years earlier, and it took a while for Ukraine to realize that the country was plunging even deeper into poverty than its neighbours. Before 1990, Ukraine was considered richer than Russia and Poland. Now it is the poorest of all. In the mid 1990s, there was some privatization, and a crackdown on hyperinflation leading ultimately to the creation of the national currency in 1996. Then nothing until the 1998 financial crisis, due to President Kuchma’s blockage of reforms. In this period, civil liberties suffered too. The media were curtailed. Journalists died. The country’s economy was in the hands of shady gas traders. Tax levels were extortionary – with massive tax evasion and exemptions for the privileged.”
http://neverendinghistory.wordpress.com/2010/09/01/32/
dissident on Wed, 5th Mar 2014 10:34 pm
Actually the explanation for Ukraine’s condition is that it is run by oligarchs. It is not a matter of reforms. It got them to the same level and more compared to Russia. Natural gas was discounted for domestic consumers in Russia as well. Both countries imploded economically during the 1990s thanks to the shock therapy witchdoctoring from the likes of Jeffrey Sachs. The bifurcation happened in the late 1990s, specifically after 1998. Russia threw out the monetarist model and after Putin arrived, threw out the oligarchs from the driver’s seat as well. Ukraine kept on the 1990s trajectory as a fiefdom of 3rd world-like tycoons who control the media and the politicians.
Ukraine’s problem is that it is following the banana republic economic model. This is why it just experienced a banana republic coup. (As if Yanukovitch couldn’t have moved the legislature to another city and ensured the safety of the majority members of the Rada). You will note that the usual oligarch suspects are running the show now after the coup. The only wrinkle is that some neo-nazis have become major players as well. The Orange revolution in 2004 did not change anything. This is why the Orange parties lost in the 2010 election.
Makati1 on Thu, 6th Mar 2014 12:22 am
Russia is not going to let the US get close to it’s borders by setting up a puppet government in the Ukraine. At best, the Ukraine will split East/West and Russia will control the Eastern part and the Crimea. At worst, it will end in war.
GregT on Thu, 6th Mar 2014 6:45 am
Yes Makati,
And if I might add, the Ukrainians will not allow the US to set up a puppet government within it’s borders, not without a bloody civil war, and a major blow to the global economy. Russia is doing everything that it can, to stop both.
Makati1 on Thu, 6th Mar 2014 7:05 am
GregT, you are correct. Putin has basically told Obama to go f–k himself.
I like it when the Empire gets blocked by a power equal or greater. Too bad Americans don’t have some of the active citizenship that is obvious in most of the rest of the world.
Davy, Hermann, MO on Thu, 6th Mar 2014 11:38 am
@Makati said – GregT, you are correct. Putin has basically told Obama to go f–k himself.
I like it when the Empire gets blocked by a power equal or greater. Too bad Americans don’t have some of the active citizenship that is obvious in most of the rest of the world.
Makati, be more precise, Putin told the world to go f-k himself. Russia is a 3rd rate power with a degenerating population of alcoholics and heroin addicts with rampant AIDS, TB, and low life expectancy. Its military has been in decline since the fall of the Soviet Union. The military is over staffed with conscripts who hate their stint in the military. Their officer corps is corrupt and has little stomach for readiness. The old Soviet styled arsenal and strategies, well we have seen that in action in other wars being swept from the field. It’s leader, Putin, is a borderline political personality bent on a “new Brezhnev Doctrine”. This de facto “dictator” has put personal ambition ahead of what is best for his country and his neighbors. The Russia of today is in decline in almost every indicator. Its natural resources exploitation for which most of the hard currency is generated is in decline. It is a typical 3rd world country with an economy subject to the commodities market volatility.