GAZPROM ON THE DEFENSIVE

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No end in sight to the gas dispute between Russia and Ukraine

Gazprom’s deliveries to Europe have fallen short by an estimated $500 million worth of gas. There is no end in sight to the gas dispute, so this sum is set to grow substantially – along with complaints from consumers. European consumers are sure to take legal action over gas delivery disruptions.


“Efforts to resolve the gas dispute between Russia and Ukraine are unlikely to succeed within the next few days. The situation has become much more complicated. It will take some time to unravel this knot with the European Union’s mediation,” said Reinholdt Mitterlener yesterday. He called on European consumers to hold back on suing Gazprom for gas delivery disruptions. “Tension in the situation must be reduced first, and the dispute between Moscow and Kiev must be resolved,” said the minister.

Meanwhile, the Interfax news agency reports that Gazprom’s deliveries to Europe have fallen short by an estimated $500 million worth of gas. There is no end in sight to the gas dispute, so this sum is set to grow substantially – along with complaints from consumers. Understanding that Gazprom won’t comply with their demands anyway, Gazprom’s European partners are demanding maximal volumes and hoping to receive corresponding penalty payments from Gazprom. According to the terms of gas contracts, penalties are set at 5% of the shortfall – which is currently around 200 million cubic meters per day.

Gazprom has declined to comment on the latest reports or disclose contract terms.

Sergei Pravosudov, director of the National Energy Institute, says that European consumers are sure to file lawsuits regarding shortfalls in gas deliveries: “The only question is who will be on the receiving end of the legal action. Gazprom is sure to appeal against the lawsuits and redirect them at Ukraine, so this saga will be drawn out for at least 12-18 months.”

But the grievances on both sides could be resolved if Moscow agreed to change the current arrangements for selling Russian gas. As experts point out, Gazprom could sell gas to the Europeans at the Russian-Ukrainian border – rather than in each consumer country, as it does now. Any problems with gas transit across Ukraine would then become the responsibility of the Europeans, who would have to sort them out on their own.

Arbat Capital analyst Vitali Gromadin attributes Gazprom’s reluctance to start selling gas to foreign consumers at the Russian border to apprehensions that Gazprom might then have to sell all its gas to Ukraine, rather than to EU countries directly. And Kiev could resell the gas to Europe, with a profit margin for itself. Gromadin says: “This option clearly doesn’t suit Gazprom, which a declared strategy of aiming to deal with end consumers in Europe. So it is clear that in the case of Ukraine, Gazprom would at least like to adopt the gas arrangements it uses with Belarus – where Gazprom will get a 50% stake in BelTransGaz in exchange for preferential gas pricing.”

Andrei Chernyavsky, a consultant with the due diligence department at 2K Audit Business Consulting, says that although the current situation is detrimental for Gazprom in many respects (failure to meet commitments to European consumers are damaging Gazprom’s reputation), it also has some advantages: “Firstly, Gazprom could indeed attempt to gain control of Ukraine’s gas transport system, which is not in the best condition and requires repairs. But the Ukrainian government can’t afford the investments that the Ukrainian energy sector needs. Gazprom’s second interest is to take advantage of this situation by actively lobbying for the construction of bypass gas pipelines to Europe.”

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