Russia’s links with transit states, gas customers


Russia holds the world’s biggest gas reserves and is the biggest gas exporter, providing Europe with a quarter of its needs, but fractious relations with the states through which it ships supplies have alarmed many customers.

Russia has branded as parasites the transit states that have benefited from transit fees and cheap energy and it is in the process of raising the gas prices they pay to European market levels. The process will in theory be complete by 2011, coinciding with Russia’s liberalization of domestic gas prices. For now, the prices paid by some of Russia’s neighboring ex-Soviet states -- Ukraine, Belarus and Moldova -- are still much lower, than those paid by western Europe. Russian gas export monopoly and the world’s largest gas company Gazprom wants sales to transit states and those at home to be equally profitable with those to the rest of Europe.

Gazprom charges western Europe around $378 per 1,000 cubic meters (tcm) and prices may hit $400, a Gazprom source has told Reuters. In March, Gazprom said it had agreed to buy gas from the former Soviet states of Uzbekistan, Kazakhstan and Turkmenistan at prices close to those it charges European customers, minus transport and other costs. The implication is that Ukraine, which Gazprom supplies with gas bought from central Asia, must face a big increase in prices from the $179.50 per tcm it is paying Gazprom for the rest of this year. Ukraine would still pay less than western European customers because its prices would not include transport costs. The following is a summary of disputes and price negotiations and brief profiles of transit states.

Around 80% of the approximately 150 billion cubic meters (bcm) Russia sends to Europe annually passes through Ukraine. Ukraine has long haggled over how much it pays Russia for gas and the row came to world attention in January 2006, when it led Gazprom to halt supplies to western European customers, who have been reconsidering their reliance on Russia for energy supplies ever since. The dispute intensified in March this year when Russia halved supplies to Ukraine, but then reached agreement to restore supplies.

By contrast with the cut at the start of 2006, the spat in March was towards the end of the heating season, not during the middle of winter, and it did not affect supplies to western Europe. Analysts have said the peace is uneasy. Russia and Ukraine in theory agreed to remove all middlemen in their gas trade, but RosUkrEnergo, which Ukraine has accused of corruption, still has a role. The intermediary, co-owned by Gazprom and two Ukrainian businessmen, was formed in 2006 after the price row that briefly affected supplies to western Europe. Gazprom sold the gas it imports from Central Asia to RosUkrEnergo, which then sold the gas to UkrGasEnergo, a 50/50 venture between RosUkrEnergo and Ukraine’s state energy firm Naftogaz, for resale in Ukraine.

Officials from RosUkrEnergo and Ukraine have said the intermediary company is selling in Ukraine again. Russia’s differences with Ukraine have led it to propose two pipelines, the North Stream and South Stream, running north and south of the EU bloc, which would bypass transit states entirely. But the Nord Stream faces cost overruns and delays and the South Stream does not yet have a timeframe.

Around 20%, or some 30 bcm a year, of the gas Russia exports to Europe passes through Belarus. In addition to the Druzhba (Friendship) pipeline – which carries Russian oil through Ukraine and Belarus and on to Europe-- the ex-Soviet neighbor also supplies Europe with around one tenth of its oil. During a pricing dispute with Russia in January 2007, oil shipments through Belaruswere halted for three days. Russia has agreed to sell gas to Belarus at $128 per tcm in the Q2 of 2008, up from $119 in the Q1, an economy minister has been quoted as saying. Gazprom has traditionally charged Minsk the lowest price of any of its foreign customers, and any signs it would raise prices have been opposed by Belarussian President Alexander Lukashenko.

Poland is a major transit country for Russian oil and gas exports to Europe. Both the Druzhba and the Yamal-Europe gas pipeline pass through Poland from Russia via Ukraine and Belarus. Along with other transit states, Poland is opposed to the Russian-German Nord Stream link, which will take Russian gas directly to Germany under the Baltic Sea, as it fears it would allow them to be cut off from Russian supplies. Earlier this year, Polish Prime Minister Donald Tusk suggested to Russian President Vladimir Putin that an alternative land route should cross its soil in place of the Nord Stream. Last year Poland rejected a demand by Gazprom for it to lower its fees for pumping Russian gas across Polish territory to Europe.

Following various disagreements with Russia, Turkey has looked to diversify its import sources and has ambitions to be an energy hub, rather than a transit nation for Russia. Turkey’s state-owned Botas is part of a consortium led by Austria’s OMV, which wants to build the US and EU-backed Nabucco pipeline, which would transport gas from ex-Soviet state Azerbaijan through Turkey and onto Europe, reducing dependence on Russia. Many analysts are skeptical about, whether Nabucco can succeed and say it does not yet have guaranteed gas supplies. Currently, the Blue Stream natural gas pipeline connects the Russian system to Turkey. Russia, together with Italian oil company Eni, has a project to extend the Blue Stream pipeline to southern Europe through Turkey. It will also jointly operate with Eni the South Stream, which would bypass Turkey.

The Baltic states of Estonia, Latvia and Lithuania serve as a vital transit location for Russian oil exports. The Russian crude oil pipeline system is connected to three ports on the Baltic Sea -- Latvia’s port of Ventspils, Lithuania’s port of Butinge and the Russian port of Primorsk. Smaller quantities of crude oil and significant quantities of oil products are also distributed by rail to other Baltic ports, such as Tallinn in Estonia. All three Baltic states have raised ecological and other concerns about the Nord Stream pipeline, saying it could pollute the already dirty Baltic Sea. The EU has said it will study their concerns.

Russian oil firms were shipping 25 million tons of refined oil products a year, a quarter of their exports, via Estonia, but volumes have fallen following a dispute with Moscow. Shipments of other commodities, including metals and coal, through Estonia have also been reduced. Relations deteriorated after Estonia in April last year moved a memorial to World War Two Red Army soldiers from a site in the city center to a military cemetery, triggering civil unrest and two nights of riots by local Russian speakers. Estonia said the Kremlin responded by waging a “cyber war” against the Baltic state by launching massive attacks on computer systems. Relations remain uneasy between the two.

In 2006, Russia shut the pipe to Lithuania’s Mazeikiu refinery. Analysts have linked the oil stoppage to Lithuania’s decision to allow Polish company PKN Orlen to buy the refinery in which several Russian firms were interested.

In 2003, Russia closed an oil pipeline to Latvia’s Ventspils oil terminal. Russian officials have said Ventspils had little hope of recovering its crude supplies following Russia’s expansion of Primorsk. (Reuters)

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