European Energy Security: Reducing Volatility of Ukraine-Russia Natural Gas Pricing Disputes

Article excerpt

On January 7, 2009, the existing energy relationship among Europe, Russia, and Ukraine broke down over a natural gas dispute, just as it had done 3 years earlier. Amid subzero temperatures in many parts of Europe, Russia turned off its gas supply to Ukraine, causing shortages in more than 20 European countries. Thousands across the continent were left in the dark, and government services were closed. (1) While the flow of gas was eventually restored, Russian gas disputes with Ukraine continue, and the prospect of another Gazprom shutoff has become an annual event for European consumers. Despite earlier indications that another breakdown in negotiations would lead to blackouts in Europe early in 2010, the potential crisis was averted via a Russia-Ukraine deal that restructured earlier payment and pricing arrangements. (2) However, it is doubtful that Ukraine can continue timely payments for its domestic gas consumption and maintain its own pipeline infrastructure. Fundamental changes to Russia-Ukraine energy transport agreements are coming.

The annual game of gas brinkmanship played by Russia and Ukraine is of strategic significance for the United States and its allies for two main reasons. First, when talks break down, Europe suffers. If the current situation continues, at best, Europe must live with continuing energy insecurity; at worst, a total breakdown of negotiations between the supplier and transit country could leave many European countries without heat or electricity. Equally important, however, is that this problem's resolution will have important implications for power politics in the region. Russian Prime Minister Vladimir Putin has argued that Russian power in Eastern Europe depends on its role as Europe's energy arbiter. Russia is currently attempting to resolve the dispute with Ukraine by increasing its control over that country's gas transit infrastructure, a solution that would significantly boost Russia's ability to use gas as a political lever against states within the region. The United States has an interest in supporting solutions that will decrease the vulnerability of its European allies to potential Russian pressure.

This paper diagnoses the long-running problem and evaluates the options and opportunities for limiting the impact of future gas pricing disputes on energy security in Europe. There are a number of possibilities for alleviating this problem, including building additional pipelines to bypass Ukraine, developing an international gas consortium between Russia and the European Union (EU), and carrying out reforms to the Ukrainian energy sector. The parties are actively exploring all of these options. Unfortunately, these solutions are partial at best and will not resolve the broader problem. While there is no single solution that will create a secure gas market, the most practical ways to limit the impact of pricing disputes between Russia and Ukraine are to restrict the means by which these two actors can pressure each other and to increase transparency in the transit process. The best way to achieve this outcome is for the EU to increase investment in Ukraine's transit infrastructure.

Nature of the Problem

In Europe, natural gas politics form an enduring economic and political challenge. In its current form, the institutional framework that supplies gas to Europe is based upon the stability of regularly renegotiated agreements between gas supplying and gas transit countries. This system is crisis prone and vulnerable to disruption. While an armed conflict over natural gas transit is highly unlikely, recurring gas disruptions in recent years and brinkmanship during pricing negotiations have led to significant loss of revenue for Russia and considerable hardship in Europe. In the most recent dispute, over the course of a few days, Gazprom lost more than $1 billion during the shutdown and millions of consumers in European countries were left without heat in the middle of winter. …