Washington Profile
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Interview with Nadejda Victor [re: Gas, Ukraine]
January 6, 2006
Nadejda M. Victor is a Research Fellow at the Program on Energy and Sustainable Development at Stanford University. Her current research efforts focus on the political and economic implications of the shift to natural gas, the role of Russia in world oil and gas markets.
What were Russia’s motivations for increasing gas prices to Ukraine? Were they economic or political in nature?
Victor: My view is a bit different from others, but the major point is that this week’s crisis is the symptom of troubles at Gazpromcreated by its inefficient management and a looming decline in gas production. First, Gazprom won’t be able to produce as much gas as it had originally planned, in large part due to a lack of funds to invest in needed infrastructure and new gas fields development. And, second, Russia will probably consume more gas domestically than was planned before. So I see the main reasons are not political; rather the political reasons are driven by this situation.
Russia’s substantial new gas flows won’t arrive until around 2008 or 2010, so there is a good chance that Gazprom simply won’t be able to meet the growing demand for gas. In 2003, Russia signed a contract with Ukraine for gas deliveries until 2009 at $50 per 1,000 cubic meters, as part of a “Common Economic Space” deal. Since the Ukrainian presidential election, Yushchenko has shown renewed interest in membership in the European Union (which is incompatible with the envisioned Common Economic Space). Also, as I said, in order to bring more gas to market, Russia needs to generate more income to cover the costs of gas infrastructure and development. Thus, its demands from Ukraine for higher priced gas.
Who do you believe came out the winner in the deal, or do you see a clear winner at all?
Victor: I think both sides are the winners, because the Ukrainians got the price they wanted and so did the Russians. The loser is the subsidiary company in between, RosUkrEnergo.
How can Gazprom, which owns half of RosUkrEnergo, sell gas for $230 per 1,000 cubic meters to this subsidiary, which then turns around and sells it to the Ukrainians for $95? It seems like, as you said, someone is losing, and since RosUkrEnergo is partly owned by Gazprom, it seems like Russia is losing…
Victor: I don’t know if the details of the deal are that accurate; it maybe too early to tell. In any event, Russia didn’t lose face, and for Russia that’s terribly important. It may be more important than the Kremlin losing money. But somehow it will all be sorted out, I believe.
From the U.S. press, the clarification given for the discrepancy in buying and selling prices appears to be that RosUkrEnergo is getting gas not only from Gazprom for $230 per 1,000 cubic meters, but also from Uzbekistan, Kazakhstan and Turkmenistan for considerably cheaper…
Victor: This [deal] is all only on paper. In the pipe, you can only approximately determine whether gas is coming from Russia or Turkmenistan or wherever. So, I don’t think that really matters. The real issue, as I already mentioned, is that pretty soon Russia probably won’t have enough gas. Before, in recent years, Turkmenistan covered this difference. It’s not a huge amount – around 15 billion cubic meters annually – but it’s horribly important for Russian gas balance. The danger that I see here…Russia right now has [gas delivery] agreements with Turkmenistan, and in 2010 they will be 70 billion cubic meters – it’s a lot, and Turkmenistan already has too many obligations, and honestly I don’t think that it will be able to provide this amount. The situation in other Central Asian countries is also unstable, so I see some serious problems in the future. Russia has always provided gas to Europe with no problems at all. This is the policy and I don’t think it will change. The only situation that might cause this to change, however, would be if Russia were not able to produce enough gas. This, I believe, is the real danger.
So Russia won’t have enough gas to meet European demand…
Victor: Yes, there could be a time in the mid-term that Russia won’t be able to provide enough gas. It wouldn’t be forever, because after 2010 new fields will come into full production. But there could be one or two years when the gas balance is really tight, so Russia might not be able to satisfy its own needs. And Russia consumes incredible amounts of gas inside the country. It’s the second largest consumer of gas in the world after the United States, although Russia’s GDP is just five percent of that of the United States. So, the first problem is with Russia’s inefficient internal use of gas and, second, that the country’s old sources of gas are being quickly exhausted. By my calculations, old fields gas production is decreasing by three percent.
In your view, then, what kind of obstacles does Russia have to overcome in order to increase gas production?
Victor: Huge investments are needed to replace this dwindling supply, and all the options for new production will prove costly and difficult. New fields in the Far North and East of the country are distant from where most of Russia’s people and export markets are, requiring wholly new transport systems such as pipelines. Gazprom controls neither the capital nor the technology that will be needed. The state-controlled company is already highly indebted and faces many expensive obligations that drain its coffers, such as supplying Russia’s population and friends with cheap gas.
So, as you said earlier, this standoff between Ukraine and Russia is more about this imminent shortage of gas…
Victor: Yes. Caught between a growing internal consumption of gas, continued inefficiency, and mounting external obligations a crisis is brewing for Russia’s gas industry. Given Russia’s vast resources, in principle many producers could fill the void. In practice, however, a series of policy decisions have created two roadblocks that Gazprom has been happy to fortify. One is the lack of access to the country’s Gazprom-controlled pipeline network, which explains why few companies even bother to look for gas since they know they can’t get what they find to market. The other barrier to investment are the low internal prices that make gas production uneconomic except for companies that can sell their products outside. This crisis helps to explain the Russian-Ukrainian gas crisis. Gazprom needs cashmuch more cashfor investment. And, at the same time, they need a strong incentive for Ukraine to cut its own consumption.