Russia’s pipeline interest in Ukraine increased natural gas prices

Market Realist

Why could Ukraine's natural gas tension drive urea prices down? (Part 3 of 9)

(Continued from Part 2)

More complication

To make things more complicated, a large percentage of European gas supply actually depends on Russia and Ukraine. Most of the natural gas that’s being supplied to the rest of Europe has to go through Ukraine.

Pipelines to bypass Ukraine

The Nord Stream pipeline, which connects between Russia and Germany under the Baltic Sea, led to less gas being transported through Ukraine. However, Ukraine still remains a significant player. Ukraine earns about $3 billion in transit fees every year as a middle player between Europe and Russia—a very lucrative business. The pipeline was created and agreed upon by EU members in response to historical cut-offs and potential for future supply disruptions, given the history between Ukraine and Russia.

Consider that Russia ordered reduction cuts in January 2009, accusing Ukraine of stealing 65.3 million cubic meters of natural gas over the past few days or weeks, while compensating European customers by sending more gas through Belarus and Turkey.

Ukraine and Russia

Ukraine said it needs to take about 25 million cubic meters of natural gas from Russian shipments every day to fuel its pumping stations and guarantee delivery of its shipments to the rest of Europe, while Russia argues that Ukraine should be using its own gas to run the pipelines because Gazprom already pays for separate delivery under a contract worked out in 2008. Ukraine said no such valid contract existed.

Bohdan Sokolovsky (aide to Ukrainian President Viktor Yushchenko) responded that Gazprom has been sending gas back and forth between destinations in order to force Ukraine to spend more fuel to move natural gas along the pipeline. He also said Ukraine has been forced to dip into its reserves to guarantee shipment and if the Prime Minister of Russia is speaking about gas on TV, gas is not an economic issue but a political one.

These conflicts between the two countries likely drove Gazprom to increase Ukraine’s natural gas price.

Continue to Part 4

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