European Winter Gas Follies The Energy Editorial, January 2009

The gas dispute between Russia and Ukraine is becoming an annual fixture. Other than providing an invigorating policy challenge at the start of the year, the conflict is to no one"s benefit except those few well-placed oligarchs who are able to skim fortunes out of the opacity of the sales arrangements and their influence among their political elite. Billion dollar debts don"t happen over night. Gas flows by the cubic meter and is billed by the cubic meter. Transit gas pays the right of transit in cubic meters. All of these things can and are being measured and when arrears happen, they are settled in commercial tribunals.

Politicians in Ukraine have chosen gas as an appealing football to throw back and forth as they skirmish for political position either in the east/west struggle of Ukrainian politics or in the brother-eat-sister internecine warfare of the Orange revolution. That may be a suitable strategy inside Ukraine, but Europe needs to make clear it is fed up with that scenario and wants gas trade removed from the game.

Why Russian politicians allow themselves to be put into the indefensible positions they have to take publicly while the reputation of Gazprom is (further) sullied is beyond comprehension. Everyone knows Ukraine, Belarus and Moldova will all face European prices for their natural gas. Why not? The political honeymoon with the near-abroad is over and normal business relations will eventually predominate. Gas prices to Europe are indexed and will begin to trail off as a result of lower oil prices. They will probably reach the $250 per thousand cubic meters now being talked about as the price Ukraine should pay about the time Russia and Ukraine stop squabbling about 2009 and begin laying the groundwork for next year"s annual follies. After all, that is when Ukraine will return to the polls.

For Russian politicians, more than gas prices are at play, but it is hard to believe the negative consequences of earlier gas cut offs have not provided enough incentive to ensure they don"t happen again. These disputes merely accelerate Russia"s near abroad to seek comfort in the West and complicate its own dialogue with its only major gas customer.
Why European politicians didn"t read the tea leaves that have stained patterns into the cup over the years is even more surprising. We have been warned of this pending conflict for months. Europe is no less vulnerable to these gas convulsions than it was the first time it happened. Retrospectively, early reporting on this incident has been inadequate and opportunities have probably been missed by system operators to mitigate the impact of the shortfall.

Two courses of action for Europe would begin tackling some of these issues. The first would be to bring whatever pressure is available on all the parties concerned to clean up the commercial channels and introduce at a minimum, a European gas market standard for transparency. That is not a high standard, but getting rid of the intermediaries would put accountable people in charge and give everyone greater confidence in gas flows and transit.

Second, Europe needs to understand that whether a gas disruption is commercial, political or technical, the best defense is a better-integrated European gas market. Europe"s gas market is still “tribal”. If your tribe doesn"t have any geologic storage or alternative routes to different suppliers, the heat goes off. If you, like many in Europe are turning increasingly to gas in electricity, your lights will go off too.