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Ukraine Crisis Boon For South Stream?

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The construction of the Russian-backed South Stream gas pipeline, bypassing Ukraine, may be accelerated if the situation in Ukraine deteriorates further. The pipeline is meant to diversify to Russia’s export routes through Europe.

“Russia will be watching the situation in Ukraine very closely and, if things do not develop in a way that they like, I am sure that it will give a boost to plans for South Stream,” Julian Lee, senior energy analyst at London’s Centre for Global Energy Studies (CGES) told New Europe on 28 February.

Russian gas monopoly Gazprom told New Europe on 28 February that “the South Stream project is progressing as scheduled”. “No comment on the Ukraine can unfortunately be offered,” Gazprom added.

Meanwhile, Russian Prime Minister Dmitry Medvedev hinted on 24 February that gas prices for Ukraine, reduced as part of a Russian bailout in December, may revert to higher levels. Ukraine consumes about 55 billion cubic metres of gas each year, and more than half is imported from Russia.

In December, Russia agreed to reduce the gas price for Kiev to $268.50 per 1,000 cubic metres, a cut of about one third from around $400 which Ukraine had paid since 2009. Under the deal, gas prices are revised quarterly.

Lee said it is unlikely that the price discount given to Ukraine will continue in its current form under a new government. “I am sure that Russia will want concessions. The price cut was a reward to (Ukraine’s ousted President Viktor) Yanukovich for turning his back on the EU and will not remain if the new government turns back in Europe’s direction,” the CGES energy analyst said.

The last dispute over gas pricing between Russia and Ukraine caused shortages in Europe over the winter of 2009. Most of Russia’s natural gas for Europe runs through a Soviet-era transmission system in Ukraine. Gazprom exported 161.5 billion cubic metres of gas to Europe last year.

Upheaval in Ukraine, which has seen the opposition take power and Yanukovich seek refuge in the southern Russian city of Rostov-on-Don where he told reporters he would continue to fight for Ukraine’s future, has stirred fears that Moscow or Kiev may use gas transit for geopolitical pressure. In the latest sign of conflict, Kiev accused Russian troops of seizing two airports in Crimea – charges denied by Moscow.

Slava Smolyaninov, chief strategist at Russia’s Uralsib Bank in Moscow, would not rule out another gas crisis but noted that would be unlikely. “If Ukraine does something such as stop transiting gas, it will probably shoot itself in the foot because it’s as much in its interest to get revenues from transportation as it is in the interest of Gazprom to ensure that all the flows go smoothly,” he told New Europe.

Lee said he believes that a gas crisis can be avoided, as long as all parties wish to do so. “Equally, a gas crisis could easily be engineered, if that was felt to be in somebody’s interests,” he said. “I do not believe, however, that Russia wishes to engineer a crisis at this point and we are, in any case, moving out of the winter period when a cut-off of gas supplies would have its biggest impact.”

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Co-founder / Director of Energy & Climate Policy and Security at NE Global Media

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