 There’s
Enough Gas for Everyone!
It almost seems
like déjŕ vu as Gazprom (Russia) dominates the news yet again over the
Christmas & New Year period. Last year it was with their dispute with
Ukraine (see our article at
http://www.mjmenergy.com/MZINE/2006/February_06.htm) this year
Belarus. Maybe it is a strange coincidence that these things happen at
the coldest time of the year which is an interesting time to be having
an argument over how much you want to charge/pay for your gas.
If you have followed this story over the
last couple of months, you will know that Gazprom have not been slow to
announce that they will cut off gas supplies to Belarus if their terms
were not agreed and a new gas supply contract signed by January 1st.
You would also know that Belarus were not slow to respond by threatening
to interrupt Russian gas supplies flowing through Belarus to Europe,
which accounts for around 20% of Russia’s export to Europe. But what are
the real facts and what was the motivation behind this latest squabble
between Russia and another former member state.
The Price of Russian Gas
There has been much speculation recently
as to what Russia is doing with these large price hikes that they are
insisting former member states must now bear. Any niceties in
negotiation are swept away as Russia’s tough negotiators quickly get to
the heart of the matter. That Russia wants all it’s customers to pay a
similar price for Russian gas is their prerogative, the gas after all
belongs to Russia, but to expect customers to accept a 300% or 400%
overnight price increase would to most seem somewhat unrealistic. What
we are experiencing here are market forces beginning to come into play
in an area that has been previously protected by an old regime. That
Russia can supply gas there is no doubt. But as far as Russia is
concerned the supply of cheap gas is coming to an end and that is where
part of the trouble lays.
Russia’s neighbours have enjoyed gas at
an unrealistically low market price, subsidised by Russia, but we are
beginning to see that the real price has now to be paid. For Russia the
price of selling gas at a below market cost has undoubtedly been the
underdevelopment of other gas fields within its borders, for Belarus the
price is 50% of its gas transportation system, which Gazprom will pay
for over the next four years, as well as the shock of more than double
the price for its gas for 2007.
Belarus may well struggle this year to
pay the extra $1.2 Billion for its gas, but it doesn’t stop there,
because the prices will rise again next year and the next and so on
until it comes in line with the price that Russia sells gas to Europe,
currently around $250 per 1000 cubic metres. At the beginning of
negotiations Gazprom wanted to raise the price from $46 per 1000 cubic
metres to over $200 per 1000 cubic metres, although they did also offer
to take shares in the gas transportation system to help reduce the 2007
price.
It is no secret that Gazprom has shown
interest in adding at least 50% of Beltransgaz to it’s portfolio for
several years, which the President of Belarus, Alexander Lukashenko, has
been openly against. So for this year at least Gazprom has managed to
more than double the price of gas to Belarus and obtain what it desired
from that country. The cost to Russia, apart from upsetting an ally, is
to pay an increase to $1.65 per 100 Kilometres for gas transportation to
Europe, instead of $0.75 per 100 Kilometres, which will of course be
passed on to the customer in the long term.
But where will this unexpected rise
leave Belarus both now and in the future? It is becoming clear that if,
as Gazprom insists, Belarus will be paying the same for its gas as
Europe by 2011 that this will make a big difference to its economy. In
fact if the price remains at $250 per 1000 cubic metres then the price
to Belarus will be over $5.2 billion per annum supposing that national
gas demand remains as it is today. That’s a jump of $4.2 billion from
2006 prices and a wake up call for a country that, as President
Alexander Lukashenko puts it, “faces a new economic reality”.
Economic Retaliation
Even though Belarus appeared to accept
the gas price increase to ensure that their gas supplies were not cutoff
as threatened, they are not taking this action lying down and are even
now showing to Russia and the world their displeasure at the treatment
their economic partner has shown them.
Playing with the same rules as Russia,
Belarus has slapped a transit charge of $45 per tonne of oil that passes
through their country via the Druzhba
(friendship) pipeline to Poland and Germany. Because Russia felt that
this charge is illegal they have refused to pay it. Belarus is reported
to have siphoned off an equivalent amount of oil to cover these new
charges. Russia therefore has turned off supplies. Despite this
disruption, neither Germany nor Poland are in any immediate danger of
experiencing oil shortages as both maintain substantial reserves.
Azerbaijan, also suffering
from higher Russian gas prices, are now using oil they were going to
export to Russia to fuel their power stations instead of the more
expenses gas.
A year on from the Russia – Ukraine gas
dispute, still clear in the minds of European decision makers, these new
developments are now rekindling discussions in Europe about the
reliability of Russia as a supplier of energy.
Russia’s Other Neighbours
But Belarus is not the only country to
have faced large price increases over the last twelve months from
Gazprom. Georgia faced having its supplies cut off if it didn’t agree to
pay more than double for its gas. Even though Georgia has been keen to
source supplies from neighbouring Azerbaijan the Georgian Prime
Minister, Zurab Nogaideli, said it would be several months at least
before Azerbaijani gas could come on stream, leaving them with no option
but to buy from Russia. Under the new deal, prices will more than double
to $235 per 1,000 cubic metres.
The head of Gazexport Alexander Medvedev
has been reported as saying that unless Tbilisi signed a new contract
for 2007 on terms demanded by the Russian company, Gazprom would turn
off the taps and make only transit deliveries to Armenia through the
pipeline that crosses Georgia.
“If there is no contract, we will be obliged to supply only consumers in
Armenia. I wouldn’t call this a cutoff. The lack of a supply contract
means no supplies,” Medvedev said, as quoted by Associated Press.
He added that Georgia could negotiate a lower price only if they offered
some power assets in exchange.
Medvedev also said that this option had
been offered to all of the Caucasus states, but so far only Armenia had
agreed to such a deal, which secured lower prices of gas deliveries.
Armenia is currently paying $110 for
1,000 cubic meters of Russian gas and this price will stay fixed
supposedly until the end of 2008. In exchange for this price Armenia
agreed to hand over control of key energy facilities, including the
Armenian segment of a planned pipeline bringing Iranian gas to the
country, which is due to open later this year.
Moldova managed to fair slightly better
for 2007 with an increase to $170 per 1000 cubic metres, although the
hidden cost was losing yet a further stake in the country’s pipeline
operator, Moldovagaz, which brings Gazprom’s share to around 63%.
Ukraine, which carries 80% of Russian
exports to Western Europe, also faced a price increase up to $130 per
1000 cubic metres, still not as much as Gazprom wanted.
Future Outcome
So where you may well ask is this all
heading? Will large price increases benefit Gazprom and the people of
Russia? Or will demand for Russian gas reduce as Gazprom’s customers
seek to purchase their gas elsewhere? For some time now Poland has been
looking to diversify its gas supplies and reduce their dependence on
Russian gas. This appears at the moment to be uneconomical as Russia is
still a cheap source of gas for them, but that, as we have seen, can
always change.
Researched and written by Paul Cassar,
MJMEnergy Ltd |
