Kyiv Stands to Lose EU-Russia Natural Gas Game

European lawmakers this week said they had indications that Kyiv was ready to take a closer look at updating its gas transit system. A substantial portion of the Russian natural gas bound for Europe runs through the Soviet-era pipeline system in Ukraine. Contractual, and perhaps political, problems between Kyiv and Russian natural gas monopoly Gazprom have sparked something of a pipeline war in Europe, however. With two major pipeline proposals sitting on the desk of those with a controlling interest in one of the largest natural gas fields in the world, by the time Kyiv gets its house in order, it might not be needed at the European table.

The European Bank for Reconstruction and Development, along with the European Investment Bank, said in February they were ready to move on a $308 million loan to make “emergency” repairs to the main natural gas pipeline in Ukraine. The European financial divisions said the repairs were “urgently” needed to ensure safe and uninterrupted supplies of natural gas to Europe. The EBRD and EIB said the loan would be ready by the end of the year provided Kyiv takes a series of recommended reforms seriously.

Western concerns over the Ukrainian gas transit system date back to the 1970s and 1980s when Washington expressed concern about Soviet dominance over the European energy sector. The tug-of-war over Ukraine outlasted the Soviet Union, but by 2009, the European community was still vulnerable to regional gas shocks as Kyiv’s alliances oscillated. By then, Gazprom was already working on the South Stream and Nord Stream natural gas pipelines to get around politically sensitive turf in Ukraine, figuring it had plenty of Soviet-era allies left to move ahead with ease.

On Wednesday, the groups behind Nabucco West, a smaller version of the $10 billion mega-project, and the South East Europe Pipeline submitted their proposals to the BP-led consortium controlling the Shah Deniz natural gas field in the Azeri waters of the Caspian Sea. European leaders said last year that Russia delivered about 125 billion cubic meters of gas to Europe. The so-called Southern Corridor, which includes Nabucco, could come close to that volume with 120 bcm. From the Russian side, Nord Stream and South Stream combined would carry about 118 bcm. That’s a lot of natural gas not moving through Ukraine.

Marxist thinker Antonio Gramscii put forward the idea of state spirit, arguing there is some degree of relative sustained continuity in terms of geopolitical decisions that may transcend whatever arbitrary lines we draw on the map. The Reagan administration in the 1980s was as concerned with the European energy sector as policy makers are today. Kyiv at times seems to lean both ways, hoping to secure some of the economic benefits of a European courtship while at the same time seemingly hesitant to walk away completely from the protective cloak of the Iron Curtain. With only $308 million and 31 bcm of natural gas on the line, however, Ukraine could sink into irrelevancy given the geopolitical stakes at play.

By. Daniel J. Graeber of Oilprice.com

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