Like many conflicts before it, the current battle brewing between Russia and Ukraine has a strong energy component.
Russia has a history of using its energy supplies as a control mechanism—such as the 2006 and 2009 gas wars when it cut natural gas supplies in the midst of winter and left many European nations, which rely on Russian natural gas that is shipped through Ukraine, without energy. The supply disruptions were due to “disputes over politics, price, and late payments,” says the Washington Post. Back in November, before the current conflict erupted, Reuters reported: “Ukraine has for years been a politically troubled buffer state between Russia and the European Union, and has used its status as a gas transit corridor to play Moscow off against Brussels.”
Russia supplies virtually all of Ukraine’s natural gas and Ukraine serves as a critical transit route for sending Russian natural gas via pipeline into Europe.
Aware of its reliance on Russia, and seeking energy independence, Ukraine has taken several steps to move away from the grip Moscow holds over its energy supplies—a move that has not gone unnoticed by Russia. In addition to reducing its use, Ukraine is seeking supplies from other sources and has signed deals to develop its own resources that are thought to be “significant” and “similar to those that unlocked a boom in U.S. energy production,” reports the Christian Science Monitor (CSM).
A 2011 announcement in LNGIndustry.comstates: “Ukraine is going to officially put out a tender for a company to perform a feasibility study for an LNG importation terminal on its Black Sea coastline.” It cites Vladyslav Kaskiv, the head of the state agency for national projects management (Ukrnatsproekt), who said: “construction on the terminal and regasification of liquefied gas will help diversify sources of energy carriers and strengthen the country’s energy security while improving the investment climate in Ukraine.”
In January 2013, Ukraine signed a $10 billion shale gas project with Royal Dutch Shell. In November, Chevron signed a similar deal. Regarding the deals, according to the Financial Times (FT), Ukraine’s president Viktor Yanukovich said: the agreements “will allow us by 2020 to become self-sufficient in gas, and, under an optimistic scenario, to become an exporter.” Before being ousted, the Yanukovich government was in negotiations with a group led by ExxonMobil, which wants to explore for oil and gas in a deep-water block in the Black Sea.
The November 2013 FT report suggested that the Shell and Chevron deals “could increase tensions with Russia.”
Ukraine—which pays some of the highest natural gas prices in Europe—asked Moscow, according to Reuters, to “ease terms it considers excessive and unaffordable.”
In November, weeks before Kiev was due to sign a free-trade agreement with the European Union (EU), Ukraine’s state energy company, Naftogaz, halted natural gas imports from Russia in a dispute over pricing. President Yanukovich then did an “about face” and backed away from the European integration deal in favor of repairing economic ties with Russia. Russian President Putin had been pressuring Yanukovich to, instead, join a Moscow-led economic bloc—The Eurasian Customs Union. Putin threatened trade measures against Ukraine if it signed the EU deal as planned on November 28-29 in Lithuania.
Exercising a form of energy blackmail, Russia offered cheaper gas if Ukraine would join the Eurasian Customs Union. Russian First Deputy Prime Minister Igor Shuvalov told Bloomberg: “No one other than Russia can provide Ukraine with the necessary funds so quickly and in such a quantity. A gas agreement could help relieve Ukraine of a huge problem. We can also give them a loan, but we will not help them without commitments on their part.” The Bloomberg report continues, “Joining Russia’s customs union would shrink its current account gap by cutting energy costs.” Armenia joined the Eurasian Customs Union in September and, according to Shuvalov, is now getting “a specific price for gas because they’re signing the whole package of agreements on the customs union.”
According to Forbes' Kenneth Rapoza: “Naftogaz was originally paying over $400 per thousand cubic meters for Russian gas, but once Yanukovych leaned towards Moscow instead of Brussels, the price was reduced to $268.50 and came with a $15 billion aid package as a Christmas present for the pro-Russian Ukrainian.”
Naftogaz owes Russia’s state-owned gas company, Gazprom, $2.7 billion in unpaid bills from last year. The CSM report states: “That debt plays a major role in the economic woes driving the unrest in the streets of Kiev.”
Ukraine’s new interim government is led by “Washington favorite” Arseniy Yatsenyuk. Russian Prime Minister Dmitry Medvedev, Rapoza reports, has warned: “The current political crisis in Ukraine” could mean that the nearly 45% cut on natural gas from Russia would be “reconsidered.”
Moscow sees that its natural gas supplies are a weapon it can, once again, wield against Ukraine. The CSM states: “By cutting a deal for discount gas with Russian President Vladimir Putin last November, Ukraine infuriated its pro-Europe contingent and entrusted its energy security to a fickle ally.” Former U.S. Ambassador to Poland Lee Feinstein adds: “It was at its most a short-term benefit, but in the long run served only to deepen Ukraine’s reliance on Russia.”
Because of Ukraine’s “reliance on Russia,” Moscow was able to exert diplomatic pressure that forced Yanukovych to back out of the trade agreement with the EU and accept terms that thwarted Ukraine’s independence and sparked the protests resulting in his ultimate ouster.
What will happen next is anyone’s guess. In the Washington Post’s February 23 coverage of the story, the Carnegie Moscow Center’s Lilia Shevtsova is reported as saying: “Ukraine’s fast meltdown caught the Kremlin off guard.”
Other Eastern European countries have been watching and are taking steps to reduce their dependence on Russia.
A report on energy security in the FT, states: “The Lithuanians insist that they will no longer tolerate paying some of Europe’s highest gas prices or live with the perpetual sense of vulnerability that comes from knowing that Russia could shut off pipelines at any moment in a political dispute.” Vaclav Bartuska, the Czech Republic’s national energy ambassador says: “The Russians tailor their negotiating position to each country’s weakness. …They know how independent you are and factor that in.”
For the Eastern European countries, Liquefied Natural Gas (LNG) is seen as their salvation.
Poland is due to complete a large LNG import terminal on the Baltic this year—and Poland is already supplying some of Ukraine’s natural gas needs.
If President Obama wants to help our allies, he can do so without having to fire a shot. Now that U.S. natural gas supplies are so abundant, thanks to the companion technologies of horizontal drilling and hydraulic fracturing, he can expedite the permitting of LNG export terminals on U.S. shores and encourage Congress to overturn the restrictions that prevent exporting natural gas to any country without a trade agreement. Rep. Michael Turner (R-OH) has already proposed the Expedited LNG for American Allies Act.
The FT reports: “The EU’s access to American LNG exports is one of the most critical questions in determining Europe’s energy security and industrial competiveness.”
Ukraine knows that developing its own resources is imperative to its energy security. Being dependent on Russia for its natural gas has forced Ukraine to abandon a trade agreement with the EU—lessening its independence and renewing ties with its former master.
As this current conflict highlights, he who controls the energy controls the people—and this is why America’s continued energy abundance is important for our own energy security and that of our friends.