Special Report Russia-Ukraine gas dispute

Transcription

1 January 19, 2009 Special Report Russia-Ukraine gas dispute Origins of dispute Competing supply routs Gazprom s expansion in Europe

2 Contents Introduction Energy transportation corridors a) Oil transportation corridors b) Planned gas transit routes Gazprom s strategy Conclusions Fact book: Gazprom s expansion in Europe Erste Group Special Report: Ukraine Page 2

3 Introduction In mid-december 2008, Russia entered into a major dispute with Ukraine, the second since the Orange Revolution. Both sides issued statements and accusations, which only specialists can fully understand. The Ukrainian pipeline network is such that it is impossible for Russia to selectively cut off Ukraine while allowing gas to flow further west to Europe. It is also technically impossible for Russia to stop extracting much less gas than it does. The credibility and sustainability of gas import prices and transit fee agreements depend on both sides ability to negotiate and set transparent rules of cooperation. José Manuel Barroso stated: If the transit of gas doesn't go as normal, we will have to draw the conclusion that the supply of gas from Russia through Ukraine is no longer a credible supply. European consumers do not care who is to blame and see supplies from Russia through Ukraine as wholly unreliable. Even during the worst times of the cold war, Russia (as the face of the former Soviet Union) never ignored its foreign obligations over energy supplies, but now the situation has changed. Why has Russia entered into a conflict knowing that it will damage its image? We think that Russia does not care much about how it is viewed by the international community. Russia has learned how to profit from its new strong position in the foreign arena. Let s look at the politics of the issue from Ukraine s perspective. We will show how Ukraine, jointly with other post- Soviet countries, is trying to gain influence and create competition for Russia in supplying energy resources to Europe. Energy transportation corridors Guam GUAM is an international organization comprised of Georgia, Ukraine, Azerbaijan and Moldova. Turkey and Latvia have observer status. GUAM was created in 1997 as an alternative for the further development of former Soviet nations. Ukrainian President Viktor Yushchenko stated that GUAM members don t see themselves any more as wrecks of the Soviet Union and are willing to become a locomotive of a third wave of democratic revolutions in the CIS region. GUAM is a democratic alternative of the CIS (the Commonwealth of Independent States). GUAM is heavily supported by the United States and Eastern European countries that are seeking independence from Russia s monopoly on the supply of oil and gas. Ukraine has the status of a regional leader of the GUAM project. GUAM Organization for Democracy and Economic Development Source: Wikipedia Erste Group Special Report: Ukraine Page 3

4 The GUAM organization is part of the competition to link Europe and Asia. There are two proposed transportation corridors competing to link Europe with the energy-rich Caspian region. One is proposed by Russia, with energy transportation routes bypassing Eastern European countries and with direct links to Europe s largest consumers of energy resources. This scheme also supposes that countries of the Caspian region will sell energy resources with Russia as intermediary. The US would prefer the alternative critical transportation corridor bypassing both Russia and Iran. The plan proposed to GUAM by the United States crosses both the Black Sea and the Caspian Sea. The energy transportation routes proposed by GUAM suggest direct export of energy resources by states of the Caspian region through Eastern European countries to Europe. Oil transportation corridors The Baku-Tbilisi-Ceyhan pipeline is the first part of a plan to create an alternative energy transportation corridor into Europe. The USD 3.6bn pipeline connects the Caspian Sea, Georgia and Turkey. Baku-Tbilisi-Ceyhan Pipeline Source: Azerb.com The Odessa-Brody pipeline is a second part of the corridor, connecting the port city of Odessa in the south of Ukraine and Brody near the border with Poland. The USD 2.5bn pipeline was built to conduct oil imports to Eastern European countries. Further extension is planned to Gdansk, Poland. With a maximum capacity of 280,000 barrels per day (bpd), the 674km Odessa-Brody was originally built to funnel Caspian oil westward, bypassing the congested Turkish Straits, and was seen as an alternative to Russian-controlled routes. Currently though, Odessa- Brody serves to carry Russian oil to the Black Sea, leaving energy-thirsty Europe faced with the same old set of problems. Such heavyweights on the oil import issue within the EU as France and Germany opt to deal with Russia rather than Ukraine or the new member states that champion Odessa-Brody-Gdansk. There are two regimes proposed for using the Odessa-Brody-Gdansk pipeline: Averse (from Odessa to Brody) and Reverse (from Brody to Odessa). Alternatives for Odessa-Brody pipeline overview Averse project Reverse project Internal lobby 1 Viktor Yushchenko Yulia Tymoshenko Foreign company interested Czech Refining Company, Grupa LOTOS S.A. TNK BP Countries interested Poland, Czech Republic, Azerbaijan, Georgia, Latvia, Lithuania, Estonia, Moldova Russia Source: Erste Group Research 1 Viktor Yushchenko and Yulia Tymoshenko issued legal acts enforcing described above energy projects. Erste Group Special Report: Ukraine Page 4

5 Odessa-Brody Pipeline Source: AmCham News, Issue Dec Oil- and gas-rich Black Sea shelf. It is estimated that the Black and Azov Seas have a total of 170bn cubic meters of gas and 80mn tons of oil. Under a joint coalition government of the Party of Regions and the president s Our Ukraine, in 2005, US company Vanco obtained a license to develop the oil- and gas-rich Black Sea shelf. In 2008, PM Yulia Tymoshenko entered into a conflict with the president, reversing preliminary agreements with Vanco. Instead, it was proposed that state-owned Naftogaz Ukraine and Russia s Gazprom would jointly develop the Black Sea shelf. Black Sea shelf Source: vancoenergy.com Project overview Vanco project Gazprom project Internal lobby Viktor Yushchenko Yulia Tymoshenko Foreign company interested Vanco Energy Company Gazprom Countries interested USA Russia Source: Erste Group Research Erste Group Special Report: Ukraine Page 5

6 Planned gas transit routes Nord stream is a planned natural gas pipeline from Russia to Germany, to be built by the company Nord Stream AG. The project, which is promoted by Russia and Germany, is seen as controversial, both for environmental concerns and national security risks in some countries, such as Poland and the Baltic states, which favor overland pipelines across their countries' territories. Nord Stream Pipeline Source: Wikipedia South Stream is a proposed gas pipeline to transport Russian natural gas to Italy (a sister of Nord Stream). The project would partly replace the planned extension of Blue Stream from Turkey through Bulgaria and Serbia to Hungary and Austria. South Stream is also likely to dash the hopes of Gazprom joining the Nabucco Pipeline project. South Stream has been seen as diverting some gas exported through Ukraine, instead of providing a new source of gas for Europe. Although Ukraine has limited opportunities to prevent the project, laying the pipeline on the continental shelf of Ukraine would require a large-scale environmental impact assessment study and environmental permits from Ukrainian authorities. There are speculations that Ukraine would permit the construction of South Stream in exchange for a Russian permit to build the White Stream offshore gas pipeline from Georgia to Ukraine. South Stream and Nabucco Pipeline Source: energytribune.com Erste Group Special Report: Ukraine Page 6

7 The Nabucco pipeline is a planned natural gas pipeline that will transport natural gas from Turkey to Austria, via Bulgaria, Romania and Hungary. It will run from Erzurum in Turkey to Baumgarten an der March, a major natural gas hub in Austria. This pipeline is a diversion from the current methods of importing natural gas solely from Russia. The project is backed by some of the European Union states and the United States. White Stream (also known as the Georgia-Ukraine-EU gas pipeline) is a proposed pipeline project to transport natural gas from the Caspian region to Ukraine and further to Poland. Energy transportation routes into Europe are very important political issues concerning a lot of European countries, Russia and Central Asian energy exporters. An alternative to the supplies from Russia s energy monopoly is the joint position of Eastern European and GUAM countries, which propose alternative transportation corridors into Europe. Assuming that the EU has a strong joint position in external energy policy, the possibility of maneuvering between supplies from Russian and Central Asia emerges. This is also heavily supported by the US, as they are interested in reducing the influence of Iran and Russia in the region. Due to its geopolitical position, Ukraine is absolutely vital in any energy supply schemes for Europe. This results in a tremendous foreign influence on Ukrainian politics. Currently, President Yushchenko is a strong supporter of the GUAM project. The Party of Regions (Ukraine s largest party by seats in Parliament) effectively supported deals that helped the GUAM project (when its ministers signed the contract with Vanco) during the joint coalition with the president s party Our Ukraine in However, the Party of Regions tends to have a flexible position on this issue. Yulia Tymoshenko has been de facto supporting Vladimir Putin in Russia s energy policy. Yet her current position in the recent dispute with Russia is a mystery. She seemed to have taken (at least for some period of time) the same position as the president. The statement from Putin that Ukraine is run by criminals does not seem to be aimed only at Yushchenko, as one might think in the first place. The GUAM approach (White Stream, Odessa-Brody) is more favorable for Ukraine, as this would strengthen ties with Europe. The GUAM project could also bring multi-billion dollar investments into the oil and gas fields of the Black Sea and big profits from the usage of oil pipelines and natural gas routes. The creation of new alternative routes of importing energy supplies to Europe puts Ukraine in direct political and commercial conflict with Russia. Gazprom s strategy Russia s view of itself in the future can probably be described as an energy superpower with an influence on global energy prices, the global supply of natural gas and the direct sale of natural gas to consumers. The Gas OPEC, known as the Gas Exporting Countries Forum (GECF), was established in Tehran in 2001 with Algeria, Bolivia, Brunei, Egypt, Equatorial Guinea, Indonesia, Iran, Libya, Malaysia, Nigeria, Qatar, Russia, Trinidad and Tobago, the United Arab Emirates and Venezuela as members. On October 21, 2008, Russia, Iran and Qatar officially formed the so-called Big Gas Triennial Union. On December 23, 2008, the GECF adopted its charter. Gazprom wants to penetrate Europe s national markets, which is happening in three ways. The first is by establishing long-term contracts that tie the customer with the supplier for many years. In 2006, Gazprom started to conclude contracts which grant it rights to sell gas directly on the retail market of a given country. This clause can be found in contracts with Austria, France and Italy. The second measure is controlling gas transit routes to Europe. Gazprom makes efforts to acquire existing gas pipelines and pushes its new projects like Nord Stream. Gazprom also invests in inter-system connections, such as the BBL gas pipeline from the Netherlands to the UK. Besides proposing alternative transit routes, Gazprom has actively pursued the privatization of existing transit systems. It has partly succeeded, such as in 2007, when Gazprom became the owner of 50% of Beltransgaz in the wake of an energy dispute with Belarus at the end of Gazprom now controls the gas transit route that Belarus previously owned. Erste Group Special Report: Ukraine Page 7

8 Since at least 2002, Russia has proposed the idea of a joint gas consortium with Ukraine, possibly involving Germany. This consortium was projected to have control over the gas transit system of Ukraine. Russia offered additional benefits to Ukraine, such as joint gas extraction on Russian territory. Ukraine did not want to give up control of its gas transit system and only saw the possibility of a consortium if new transit systems were created on Ukrainian territory. On October 29, 2002, a joint memorandum was signed between Russia and Ukraine about a possible gas consortium, but it remained only an idea, with different views from both sides. Russia has continued to pursue joint control of Ukraine s gas transit system and has returned to this idea during disputes with Ukraine. Thirdly, Gazprom has set up a network of subsidiary companies in Europe through which the Russian monopoly is penetrating European markets. Gazprom sets up its own companies, licensed by regulatory authorities to operate in Europe, e.g. Gazprom Marketing & Trading (GMT) in the UK, or as companies established with domestic enterprises, e.g. Wingas-Europa established together with BASF or the Central Energy Italian Holding (CEIGH), a distribution and trade company founded together with ENI. Some of Gazprom s subsidiaries conclude contracts with individual industrial customers; for example, the Czech affiliate Vemex operates under such circumstances and already controls nearly a tenth of the Czech market. Via newly-created companies, Gazprom also wants to gain access to underground gas storage facilities. However, as no rival company wants to give up their shares, Gazprom has to build new storage capacity or lease it. For instance, the Russian company has already finished the construction of a gas storage facility in Austria and plans to build new storage in Hungary, Romania, Turkey or Belgium, as well as lease storage facilities in Germany. Eventually, Gazprom will present proposals to European gas companies, such as Electricite de France (EdF), to sell gas together to third countries. Conclusions What we are seeing is a long-term battle over how to supply Europe with energy resources. This is a conflict of interests that has been going on at least since 1997, when GUAM was created. Gazprom wants to extend its influence over Ukraine s gas transportation system by creating ties with Ukrainian politicians. The intensity of the current conflict may also stem from personal relations between top Russian, Ukrainian and European politicians. Special attention in this situation should be paid to the possible personal conflict between Yulia Tymoshenko and Vladimir Putin. Ukraine has failed to create transparent agreements on technical issues over gas supplies to Europe that would protect it against accusations in gas disputes. Ukraine now has to accept partial responsibility for the dispute, which was probably not possible to avoid anyway. In our opinion, it is a good idea for new transparent monitoring of gas supplies to Europe. However, this should be followed with an agreement between Russia and Ukraine, in which responsibilities for the technical process of gas transit are determined. Without this, there will always be potential for conflict. The battle between Russia and Ukraine over control of Ukrainian gas transit routes will go on, as will the competition between the different strategies (Gazprom and GUAM) for supplying Europe with gas. One of the possible ways to avoid a Gazprom monopoly is to support GUAM and new EU member countries projects for energy transportation corridors. Georgia, Ukraine and Moldova are too weak politically and economically to withstand strong pressure from Russia. The EU currently has no common view on how to secure its gas supply. Support is split between the Russian and GUAM approaches. Analyst: Zablotskyy Mar yan Maryan.Zablotskyy@erstebank.ua Erste Group Special Report: Ukraine Page 8

9 Fact book GERMANY Gazprom supplies one third of Germany s gas under terms agreed with E.ON Ruhrgas and BASF s Wintershall. It controls a 1,830km gas pipeline network in Germany via Wingas, a joint venture between Gazprom and Wintershall, Western Europe s largest gas storage company. Germany and Russia agreed on the joint project Nord Stream, which would supply gas directly to Germany via the Baltic Sea. Former German Chancellor Gerhard Schroeder is the chairman of Nord Stream AG. ITALY Gazprom supplies one third of Italy s gas under a contract with ENI. Gazprom signed a landmark deal with Italian energy firm ENI, according to which Gazprom would sell gas directly on the Italian market from Gazprom should extend supply contracts with ENI to 2035 and the two companies should cooperate in upstream projects and in other countries. ENI and Gazprom unveiled a plan for the South Stream pipeline to take Russian gas under the Black Sea to Europe, undermining an earlier plan to extend a Turkish route, the Nabucco project. HUNGARY Under a deal announced on July 13, 2006, Gazprom gained stakes in Hungarian gas and power companies in return for giving Germany s E.ON a share in the Siberian Yuzhno-Russkoye field. Gazprom and MOL have formed a company to study the proposed extension of the Blue Stream gas pipeline, which takes Russian gas to northern Turkey. SLOVAKIA Gazprom owns 49% of gas network SPP together with Ruhrgas and Gaz de France. BELARUS In 2007, Gazprom acquired a 50% stake in the Belarusian gas pipeline operator Beltransgaz in the wake of an energy dispute. UKRAINE Since 2002, Russia has been pushing the idea of a consortium for joint control over the gas transit system of Ukraine. Gazprom is alleged to be trying to acquire a major stake in local gas distributor Oblgazes Erste Group Special Report: Ukraine Page 9

10 Head of Research Friedrich Mostböck Head +43 (0) CEE Macro/Fixed Income Juraj Kotian (Macro/FI) Co-Head +43 (0) Rainer Singer (Macro/FI) Co-Head +43 (0) CEE Equity Research Günther Artner, CFA Co-Head +43 (0) Henning Eßkuchen Co-Head +43 (0) Ukrainian Research Team Viktor Stefanyshyn Head Svitlana Bazilevich (Equity) Maryan Zablotskyy (Macro/FI) Erste Group Sales Fixed Income Domestic Sales +43 (0) Treasury Domestic Sales +43 (0) Institutional Sales +43 (0) Corporate Sales +43 (0) Ukrainian Sales Dmitriy Lazarev (FI/Equity/FX) Published by Erste Group Bank AG, Neutorgasse 17, OE 0543, 1010 Vienna, Austria. Phone +43 (0) ext. Erste Bank Homepage: On Bloomberg please type: ERBK <GO>. This research report was prepared by Erste Group Bank AG ( Erste Group ) or its affiliate named herein. The information herein has been obtained from, and any opinions herein are based upon, sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions, forecasts and estimates herein reflect our judgement on the date of this report and are subject to change without notice. The report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, Erste Group or its affiliates or the principals or employees of Erste Group or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal in transactions in any of these securities. Erste Group or its affiliates or the principals or employees of Erste Group or its affiliates may from time to time provide investment banking or consulting services to or serve as a director of a company being reported on herein. Further information on the securities referred to herein may be obtained from Erste Group upon request. Past performance is not necessarily indicative for future results and transactions in securities, options or futures can be considered risky. Not all transaction are suitable for every investor. Investors should consult their advisor, to make sure that the planned investment fits into their needs and preferences and that the involved risks are fully understood. This document may not be reproduced, distributed or published without the prior consent of Erste Group. Erste Group Bank AG confirms that it has approved any investment advertisements contained in this material. Erste Group Bank AG is regulated by the Financial Services Authority for the conduct of investment business in the UK. Please refer to for the current list of specific disclosures and the breakdown of Erste Group s investment recommendations. Erste Group Special Report: Ukraine Page 10