Bear hug squeezes nerves of European neighbours

By Catherine Field

A fight over natural gas prices between Russia and Ukraine has given the European Union a rude New Year's warning about energy dependency and opened up worrying questions about its relationship with Moscow.

The squabble caused exports of Russian gas to Europe, most of which transit Ukraine by pipeline, to plummet by up to 40 per cent for two days, prompting panicked concerns that some countries would run short of fuel for power plants, central heating boilers and gas stoves in the depths of the European winter.

The dispute seemed to have been settled, thanks to a complex deal by which Ukraine will pay more for its imports of Russian gas but not the immediate quadrupling that Moscow had demanded.

That demand was widely seen by analysts as a punishment after the Ukrainian people swept aside the country's pro-Russian leadership and installed a Western-leaning president, Viktor Yushchenko, in the 2004 "Orange Revolution."

Mingled with relief in European capitals at the resolution of this crisis is the shuddering realisation that, little by little, Europe has allowed itself to become dependent on an authoritarian country, creating a "Saudi-style" relationship in which shortcomings on democracy and human rights are overlooked in exchange for vital energy supplies.

As well as its gas reserves, Russia is the world's second-largest producer of petroleum.

At present, the state controls around 30 per cent of the industry but analysts predict that could rise to as much as 50 per cent in the near future.

Russia turns out about 8 million barrels of crude each day. It exports 171 billion cu m of gas, 6.11 million barrels of crude a day, and 20.7 billion kWh of electricity.

The episode has highlighted "the frightening dependence of the European continent on Russian gas," said the Independent. "Russia may no longer be a military giant, but it has become an energy superpower."

Germany's Sueddeutsche Zeitung warned: "Today Ukraine is the victim, but no one can say that it will not also spread to Western Europe."

"Russia has become increasingly explicit about its intention to use its energy reserves as a foreign policy tool," the Financial Times said. "The question now is whether Europe should work harder to reduce its reliance on imported energy."

The French conservative daily Le Figaro blasted the EU for "handling Moscow with kid gloves, in the anxiety of preserving its strategic partnership with its main energy supplier."

"The Russians have acted in a very brutal manner, obviously not caring about or underestimating the impact on their image as chair of the G8," said French analyst Arnaud Dubien of the Institute for International and Strategic Relations in Paris, referring to the Group of Eight presidency that Russian assumed at the start of the year.

"For them, there's nothing shocking about what they did, which says a lot about the way they see things."

Despite its economic power, the EU has scant reserves of fossil fuels - Britain became a net importer of gas in 2004, and will follow suit in oil in a few years from now.

Forty per cent of the EU's gas needs are met by imports, with 25 per cent from Russia alone, via pipelines that cross Eastern Europe. The dependence on Russian gas varies widely, ranging from zero per cent for Denmark and Ireland to 36 per cent for Germany, the biggest European economy, and 100 per cent for Estonia, Latvia and Lithuania, the Baltic states that were once part of the Soviet Union and joined the EU in 2004.

On present trends, imports will account for 70 per cent of EU gas supplies by 2020 - and Russia, through its state monopoly, Gazprom, which controls a third of global reserves, is likely to be the key provider. Under an agreement signed last September, German firms earmarked US$5 billion ($7.27 million) to build a 1200km gas pipeline from Russia to Germany across the Baltic from 2010, thus bypassing the risk of a shutdown by land routes.

A study commissioned by the EU last year warned presciently of the risks: "The vulnerability of the EU to a disruption of gas supplies is growing, partly because of the increased gas imports in general and partly because of the high dependence on a single source, Russia, of the new member states."

The scare has now focused minds on weaning Europe off this perilous addiction. The thinking is still in its earliest stages, and may of course peter out if supplies return to normal.

But analysts say that if Russia continues to be seen as unreliable or a bully, Europe could enact far-reaching changes in its energy policy.

The beneficiaries are likely to be Algeria, Egypt and Libya, which export natural gas in liquid form by tanker; renewable energy sources; and even the nuclear industry, which with the exception of France has been on the skids across Europe since the Chernobyl disaster in 1986.

"Europe needs Russian gas, so it will act in a pragmatic fashion. But seeing how Russia is capable of blackmail over its gas, there is no doubt Europe is going to try to find other suppliers," predicted Vladimir Pribylovski of the independent Russian thinktank Panorama.

"We have to draw conclusions from this and learn how we should deal with these sorts of things in the future," said Austrian Economy Minister Martin Bartenstein, whose country took the EU's helm for a six-month term on January 1.

"What we see right now is a certain shift in European energy policy. We have had a decade of liberalisation, of improving competition, and now will focus more on supply security and a new definition of the kind of energy mix we want."

Eastern European countries that are sorely dependent on Russian gas are clamouring for the EU to strengthen its common energy policy, so that members would be encouraged to pool their supplies and use the bloc's enormous clout to negotiate better deals on the world's energy market.

"EU countries must co-operate," said Hungarian Prime Minister Ferenc Gyurcsany. "Supply will remain in the hands of a few countries. These sellers can easily make the buyers naked and vulnerable."

Russia's hardball tactics are also timely for the nuclear lobby. Britain has to make a decision in the next six months about whether to follow France in building a new generation of nuclear plants, while Germany's new left-right coalition Government may be tempted to extend the life of its reactors beyond 2020, the date when the previous Government, in which the Greens were prominent, promised to phase them out.


Russia-Ukraine reach deal

* Under the new deal, Ukraine will pay an average price of US$95 ($138) per 1000 cu m for all its gas imports from 2006, up from US$50 it was previously paying Russian gas monopoly Gazprom and US$44 it was paying for gas from Central Asia.

* Ukraine consumes around 78 billion cu m (bcm) of gas a year, of which it produces around 18bcm domestically and imports the remaining 60bcm.

Gas transit

* Gazprom supplies a quarter of Europe's gas needs and around 80 per cent of these deliveries reach the markets via Ukrainian territory.

* Gazprom and Ukraine's state gas firm Naftogaz have also reached a new deal on transit payments which will rise to US$1.65 per 1000 cu m from 2006 from the previous US$1.09.

* Russia sends around 120bcm a year to Europe via Ukraine. It was the first time Gazprom and Ukraine have agreed to sign separate gas supply and transit deals.


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