Russia–Ukraine gas disputes

Natural gas pipelines from Russia to Europe

The Russia–Ukraine gas disputes refer to a number of disputes between Ukrainian oil and gas company Naftohaz Ukrayiny and Russian gas supplier Gazprom over natural gas supplies, prices, and debts. These disputes have grown beyond simple business disputes into transnational political issues—involving political leaders from several countries—that threaten natural gas supplies in numerous European countries dependent on natural gas imports from Russian suppliers, which are transported through Ukraine. Russia provides approximately a quarter of the natural gas consumed in the European Union; approximately 80% of those exports travel through pipelines across Ukrainian soil prior to arriving in the EU.[1]

A serious dispute began in March 2005 over the price of natural gas supplied and the cost of transit. During this conflict, Russia claimed Ukraine was not paying for gas, but diverting that which was intended to be exported to the EU from the pipelines. Ukrainian officials at first denied the accusation,[2][3] but later Naftogaz admitted that natural gas intended for other European countries was retained and used for domestic needs. The dispute reached a high point on 1 January 2006, when Russia cut off all gas supplies passing through Ukrainian territory.[4] On 4 January 2006, a preliminary agreement between Russia and Ukraine was achieved, and the supply was restored. The situation calmed until October 2007 when new disputes began over Ukrainian gas debts. This led to reduction of gas supplies in March 2008. During the last months of 2008, relations once again became tense when Ukraine and Russia could not agree on the debts owed by Ukraine.[5]

In January 2009, this disagreement resulted in supply disruptions in many European nations, with eighteen European countries reporting major drops in or complete cut-offs of their gas supplies transported through Ukraine from Russia.[6][7] In September 2009 officials from both countries stated they felt the situation was under control and that there would be no more conflicts over the topic,[8][9] at least until the Ukrainian 2010 presidential elections.[10] However, in October 2009, another disagreement arose about the amount of gas Ukraine would import from Russia in 2010. Ukraine intended to import less gas in 2010 as a result of reduced industry needs because of its economic recession; however, Gazprom insisted that Ukraine fulfill its contractual obligations and purchase the previously agreed upon quantities of gas.[11]

On 8 June 2010, a Stockholm court of arbitration ruled Naftohaz of Ukraine must return 12.1 billion cubic metres (430 billion cubic feet) of gas to RosUkrEnergo, a Swiss-based company in which Gazprom controls a 50% stake. Russia accused Ukrainian side of diverting gas from pipelines passing through Ukraine in 2009.[12][13] Several high-ranking Ukrainian officials stated the return "would not be quick".[14]

Russia plans to completely abandon gas supplies to Europe through Ukraine after 2018.[15][16] Gazprom has already substantially reduced the volumes of gas it transits across Ukraine, and expressed its intention of reducing the level further by means of transit diversification pipelines (Nord Stream, Turkish Stream, etc).[17]

Historical background

After the dissolution of the Soviet Union, oil import prices to Ukraine reached world market levels in 1993. However, gas import prices and transit fees remained below European levels for Russian exports to Europe through pipelines in Ukraine; these were set in bilateral negotiations.[18] At the same time Ukraine remained the main transit corridor for Russia's gas export. In 2004–2005, 80% of Russian gas exports to the European Union were made through Ukrainian Territory.[19][20] Two-thirds of Gazprom's revenue comes from the sale of gas that crosses Ukraine.[21]

Ukraine's own annual gas consumption in 2004–2005 was around 80 billion cubic metres (2.8 trillion cubic feet), of which around 20 billion cubic metres (710 billion cubic feet) were produced domestically, 36 billion cubic metres (1.3 trillion cubic feet) were bought from Turkmenistan, and 17 billion cubic metres (600 billion cubic feet) were received from Russia in exchange for transport of Russian natural gas. The remaining 8 billion cubic metres (280 billion cubic feet) were purchased from Russia.[22] The gas trading system differed substantially from the gas sale to the European Union and caused problems in the form of large-scale deliveries of relatively cheap Russian gas causing an increase of energy-intensive industries and supporting Ukraine's status as one of the world's least energy-efficient countries and largest gas importers, the accumulation of Ukrainian debts and non-payment of same, unsanctioned diversion of gas and alleged theft from the transit system, and Russian pressure on Ukraine to hand over infrastructure in return for relief of debts accumulated over natural gas transactions.[18]

Gas trading was conducted under a framework of bilateral intergovernmental agreements which provided for sales, transit volumes, gas prices, gas storage, and other issues such as the establishment of production joint ventures.[citation needed] Commercial agreements were negotiated between the relevant companies within the guidelines and dictates of that framework and supplemented by annual agreements specifying exact prices and volumes for the following year.[citation needed] Gas sales prices and transit tariffs were determined in relationship to each other.[18] Commercial agreements and trade relations have been non-transparent and trade has been conducted via intermediaries such as Itera, EuralTransGaz, and RosUkrEnergo. RosUkrEnergo's involvement in the Russian-Ukrainian gas trade has been controversial. There are allegations that the company is controlled by Semion Mogilevich and its beneficiaries include strategically placed officials in the Russian and Ukrainian gas industries and governmental structures related to the energy sector.[21][23] Russian Prime Minister Vladimir Putin has made accusations that RosUkrEnergo is owned by a business ally of Ukraine's ex-president, Viktor Yushchenko.[24] The Ukrainian investigation into RosUkrEnergo, during Yulia Tymoshenko's first term as Prime Minister, was closed after she was fired by Yushchenko in September 2005.[25]

According to a contract between Gazprom and Naftohaz signed on 21 June 2002, payment for the transfer of Russian natural gas through the Ukrainian pipeline system had been made in exchange for no more than 15% of the gas pumped through Ukrainian territory to be taken in lieu of cash.[citation needed] This contract was supposed to be valid until the end of 2013.[citation needed] On 9 August 2004, the two companies signed an addendum to the contract, according to which the amount of gas given as a payment was calculated based on a tariff of US$1.09 for the transportation of 1,000 cubic meters of natural gas over a distance of 100 kilometres (62 mi); the addendum further stated the price of the natural gas supplied to Ukraine was to be $50 per 1,000 cubic meters (approximately $1.40 per million Btu).[26] This price was constant notwithstanding the gas prices in the European markets.[27] According to the addendum the price was not subject to change until the end of 2009.[26] Gazprom argued that this addendum was only applicable provided that the two countries sign an annual intergovernmental protocol that has higher legal status for specifying the terms of gas transit.[28] According to Gazprom, the addendum becomes void as the annual protocol had not been signed for 2006 under the required terms.[29] Russia claimed that Gazprom's subsidies to the Ukrainian economy amounted to billions of dollars.[30]

According to the agreement of 2006, RosUkrEnergo was to receive no more than 20 percent of the total delivered gas, which in 2007 was 15 billion cubic metres (530 billion cubic feet) of 73 billion cubic metres (2.6 trillion cubic feet).[citation needed]

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