German Utility to Break Ukraine’s Russian Gas Habit with...Russian Gas

Michael Teague |

With yesterday’s announcement that German utility firm RWE AG (RWEOY) had begun shipping natural gas to Ukraine, ostensibly an attempt to wean that country from its overwhelming dependence on Russia’s plentiful supply of natural gas, it is hard not to notice the more absurd dimensions of the increasingly volatile situation currently playing out just west of the Russia-Ukraine border.

A Fluid Situation

A brief review to explain: Ukraine meets about 40 percent of its energy needs from natural gas, some 60 percent of which it sources from Russia’s state-run gas giant Gazprom (OGZPY) . Ever since mass demonstrations overthrew Russian-friendly President Viktor Yanukovich and prompted Russia itself to annex the ethnically Russian Crimea region of Eastern Ukraine, however, tensions between the two neighbors have led the larger of the two countries to up the stakes.

In December of 2013, Russian President and apparent crypto-cold warrior Vladimir Putin agreed to an aid package to Ukraine consisting of a $15 billion loan, as well as a 33 percent discount on the price of Gazprom’s natural gas shipments, further cementing Ukraine’s economic dependence on its larger neighbor.

In response to these events, in March Gazprom suddenly changed its mind about the agreement, and threatened to turn off the gas spigot if Ukraine did not pay up.

European Dependence on Russian Gas

It should be noted that Ukraine is not the only, or even Westernmost European nation to depend heavily on Russian gas exports, and further complicating matters is the fact that most of this gas arrives to Western Europe via pipelines that run through Ukraine.

The nations of Western Europe, loathe as they are to see their former Soviet neighbor flex its muscles, remember what happened in 2009, when Gazprom actually did cut off the flow of gas to Ukraine during a terribly cold winter, leaving many countries undersupplied. Western Europe does not want to see a repeat of this scenario, and for the time being seems to have resigned itself to being much less upset about the annexation of Crimea than is the US.

In the meantime, US politicians have not hesitated to come through for their financial backers on K street.

America's Shale Boom to the Rescue

Indeed, since March, six bills have been introduced in the House of Representatives from “both sides of the aisle,” all of which have pushed for decades old export bans on US oil and natural gas to be lifted, and for which weaning Ukraine off of Russian gas has been cited as one of the primary justifications.

In reality, most of these elected officials, as well as the oil and gas companies supporting their efforts, are or at the very least should be aware of the global nature of the oil and gas economy, as well as the significant logistical obstacles that stand in the way of actually bringing US oil and gas to beleaguered Ukraine.

German Gas is Russian Gas

But the always more practical Germans have come up with a solution, albeit a somewhat tentative, if not potentially self-defeating one. RWE AG has begun shipments of natural gas to Ukraine via Poland, and the company is prepared to meet up to one-fifth of the country’s gas needs.

This would be a valiant effort to break the Russian energy stranglehold over poor Ukraine, if not for the fact that about one-third of the gas that RWE would supply would already have come from Russia, according to company spokesperson Helmut Weintoegl, who also told the Associated Press that the price it is charging is a “normal market price,” which he claimed was “currently more attractive for Ukraine than what it pays in its long-term contracts.”

Germany enjoys its own direct natgas pipeline from Russia, and companies there are purportedly able to buy Russian gas at lower prices than what Ukraine pays. And sure, they can then go and resell that gas as they see fit. But that in no way stops Russia/Gazprom either from reaping profits, or from upping the price at which it sells gas to Germany.

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