The Ukraine crisis – will it affect our gas supplies?

Some 30% of Europe’s gas supplies come from the Russian Federation and about 50% of these imports, or 15% of Europe’s total gas supplies, are transported through the Ukrainian gas pipeline system. Ukraine itself relies heavily on Russian gas for its own use in industry and for heating homes and offices with about 70% of its gas being supplied by the Russian gas company Gazprom.

For a long time the Ukrainian pipeline system has been the principal route for transporting Russian gas to Eastern and Western Europe. As the map shows the principal pipeline route to Germany and France – the largest importers of gas in Western Europe – is through Slovakia (International Energy Agency – gas trade flows). There are also pipeline links to Hungary, Poland, Romania and the Balkans as well as to Turkey and Greece.

Gad Pipelines to Europe

However over the years since Ukraine’s independence, there have been several disputes between Ukraine and Russia, principally over the price of gas and periodic high levels of debt as Ukraine has struggled to pay for its gas imports. In the most serious cases, Russia has reduced supplies drastically – for example in 1994, 2006 and 2008. In the most extreme case in January 2009, it cut off supplies altogether which in turn cut supplies to Western European users (principally in Germany and France as well as other Central and Eastern European countries) in the middle of a cold winter.

More recently Ukraine had an agreement, negotiated in 2013 by President Yanukovych’s government, to buy gas at a discounted rate until the end of March 2014. In the days following the fall of the government last month, Russia’s prime minister said the deal could be honoured under a new regime. That’s now changed. Ukrainian Energy Minister Yuriy Prodan told reporters in Kiev on 1 March 2014 that he was unsure when payments to Gazprom could be made. Russia responded by saying that the discounted gas price has been cancelled.

To counter the risks of so much gas flowing through Ukraine, a new pipeline was built via the Baltic to Germany (the Nord Stream pipeline, opened in 2011); without that some 80% of Russian gas would come through Ukraine. There is also a major pipeline through Belarus and Poland (the Yamal pipeline) that avoids Ukraine but that has its own risks. In the longer term another pipeline via the Black Sea (The South Stream pipeline) may provide a further alternative route avoiding Ukraine.

While the UK now imports half of its gas, none comes directly from Russia; most comes by pipeline from Norway and the Netherlands or as Liquefied Natural Gas (LNG) by ship from Qatar and elsewhere.

However, should supplies from Russia become disrupted, then wholesale gas prices in Europe including in the UK are likely to rise depending on the degree of disruption and the availability of alternative gas supplies. Bloomberg reports that the UK wholesale gas price rose by 10% on 3 March 2014 in response to the crisis in Ukraine with similar increases for Dutch and German wholesale gas prices, although this was partly reversed the following day as tensions eased.

The January 2009 gas crisis did not result in a significant increase in wholesale gas prices across the European gas trading hubs. However, spot prices were much more volatile than in normal times. For the first three weeks of January 2009, the UK wholesale price increased by more than 15%. However, this was less an effect of the gas disruption in Eastern Europe than of the harsh winter conditions affecting the UK at that time (European Union Quarterly Gas Report).

Europe accounts for around a third of Gazprom’s total gas sales and around half of Russia’s total budget revenue comes from oil and gas, as reported in the Guardian (3 March 2014).  Thus while Russia might consider reducing its supply of Europe’s gas it would be at a considerable economic cost to itself. Also, as we have noted, there are now a number of alternative supply sources that would mitigate the impact of any disruption in supplies including the use of considerable gas storage facilities in the main gas importing countries.

David Hough