Ukraine given whopping $US7 billion bill for unused gas

COMMENT

In a new development in the centuries-old battle between Ukraine and Russia, a whopping $US7 billion bill has been dropped on Kiev for infringing a natural gas import agreement between the two countries.

Now that is a lot of money and would be a hefty price tag to receive on anyone’s energy bill.

There are some shocking stories about people’s huge gas bills, which are usually paid in full if the gas has been used. But what about if it was never used at all?

This is the astounding situation Ukraine finds itself in this week. Russian energy giant Gazprom presented Ukrainian energy firm Naftogaz with the multi-billion dollar bill for gas it claims was bought but never burned by Ukraine in the 2012 calendar year.

Gazprom is a state-owned energy firm and a favourite tool for Moscow. And this isn’t the first time Russia has used energy exports as an effective political lever

According to Gazprom, Ukraine was committed to import the gas last year under a minimum “take-or-pay” agreement in which at least 80% of ordered gas must be imported.

Last year Ukraine gas imports were expected to close at around 42 billion cubic metres (bcm). However, although Ukraine currently buys the gas at an exorbitant $430 per 1000 cubic metres – way above market price – it only managed to import 33 bcm in 2012.

Given the bill’s price tag, officials in Kiev are understandably motivated to increase energy diversity to nullify Moscow’s influence over the former Soviet republic.

Deal signed with Shell

Of course, the steep bill did not arrive in Kiev’s mailbox in a political vacuum. A few days earlier Ukraine announced it had signed a deal with Royal Dutch Shell for shale gas exploration in the country.

Industry estimates predict Ukraine holds a gigantic 1.2 trillion cms of natural gas. This particular deal with Shell is reportedly worth $US10 billion and will be Europe’s biggest production-sharing agreement.

Shale gas reserve estimates are known to be imprecise at best, and previous drilling companies have pulled out of similar deals citing poor results from test wells.

So it is important to remember the $US10 billion figure is only a top-end figure. It is certainly not a guaranteed result of the deal and Ukraine may find itself in a less-than-optimal position if the reserves do not prove viable.

But with the Shell contract signed, Kiev could unlatch itself from Gazprom’s grasp and may become a major exporter of natural gas to Europe in its own right.

For Russia, continuing Ukraine’s reliance on Gazprom’s natural gas exports is extremely important. Russia receives a great deal of cash from these exports.

2009 fiasco

Because of this, Ukraine has to be careful where it steps.

Kiev’s bold energy moves with Shell must avoid a repeat of the 2009 fiasco when a rancid deal brokered by former Ukrainian Prime Minister Yulia Timoshenko restarted delivery of strangled natural gas supplies from Russia.

Russia’s designs on regaining political control over its former Soviet republic were likely the motivating factor in halting the gas supplies in 2009.

Gazprom and Moscow backed Kiev into a corner securing some of the most exorbitant gas prices in Europe, while including the notorious ‘take-or-pay’ clause in a dark corner of the hastily signed agreement.

The former Ukrainian prime minister is currently being used as a pawn to discredit her gas deal between Kiev and Moscow and now languishes in prison for her troubles.

The $7 billion bill was delivered after Kiev decided to cut its natural gas imports from 42 bcm to 33 bcm last year, contravening the agreement signed by Ms Timoshenko in 2009.

Moscow is potentially looking to concede Kiev into a similar Gazprom-friendly agreement this year by issuing the hefty bill.

Yet this might not be as simple for Moscow this time. The gas cut-offs opened the eyes not just of Kiev, but of many other European countries as well. Russia, it was realised, held a strong arm over the energy dependencies of many European nations.

In response, alternate energy avenues are opening and are set to diversify Western Europe away from Russian natural gas in the coming years.

Ukraine’s deal with Shell will encourage other Europeans to make the necessary moves to develop their deposits of shale gas.

In the short term, Ukraine will continue to import the majority of its natural gas from Russia, despite an upfront $400 million investment from Shell. But in the long term, Ukraine, and much of Europe, will come to rely less on Russian energy as new fields are tapped.

Nathan Smith has a Bachelor of Communications in Journalism from Massey University and has studied international relations and conflict

Nathan Smith
Thu, 31 Jan 2013

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Ukraine given whopping $US7 billion bill for unused gas

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