Ukraine crisis: Is it Kiev's turn to close the spigot?

Ukraine's parliament is set to vote Tuesday on a package of sanctions against Russia that could include limiting the flow of Russian gas through Ukraine and to Europe. The move is a measure of desperation amid a Ukraine crisis that shows little sign of easing.  

Ukraine appears poised to take its energy future – and that of Europe and Russia – into its own hands.

As Russia and the West trade incremental sanctions back and forth, Kiev is caught in the middle, quietly contemplating an even more drastic measure: cutting off flows of oil and natural gas from Russia to Europe.

The threat is a sign of desperation for a country that has endured months of violence as world superpowers exchange diplomatic barbs from either side. Moscow has already shut off natural gas to Ukraine – a result of the former Soviet republic's mounting gas debt – but it has continued pumping gas through Ukraine into Europe. Now Kiev appears ready to fight fire with fire, leveraging its role as a major gas transit country in a last-ditch effort to capture the attention of Moscow, Brussels, and Washington all at once.

Ultimately, the threat may be just that – a verbal warning intended to stave off any plans Russia might have for a full-fledged occupation of the rebel-occupied eastern Ukraine. Actually blocking Russian gas from reaching Europe would do little to win support from Brussels, and would certainly draw more ire from Moscow. 

"I think Ukraine's statement is a warning," Mikhail Korchemkin, head of Malvern, Pa.-based East European Gas Analysis, writes in an e-mail. "The transit will not be interrupted without a serious reason, such as Russia's invasion of Eastern Ukraine."

Ukraine's parliament is expected to vote on a package of sanctions against Russia Tuesday. That may include a "complete or partial ban on transit of all kinds of resources," according to a declaration last week from Ukraine Prime Minister Arseniy Yatsenyuk. The European Union gets about a third of its natural gas imports from Russia, nearly half of which is transmitted through Ukraine.

Winter gas futures in the United Kingdom jumped as much as 2.6 percent to $10.42 per million British thermal units Friday, according to Bloomberg. Dutch gas for September rose as much as 2.8 percent to $24.91 a megawatt-hour on the Title Transfer Facility hub.

 

Ukraine's state-owned gas company Naftogaz sought to assuage concerns Monday of a disruption to European gas supply. The sanctions to be voted on Tuesday would not directly or automatically restrict flows of Russian gas across Ukraine, according to Naftogaz. Instead they would create certain legal obstacles that could be circumvented by selling Russian gas to European companies at Ukraine's eastern border. 

"During the current crisis, [Naftogaz] has continued to provide quality gas transport services despite extremely strained relations between Ukraine and Russia," the company said in a statement Monday. "Naftogaz has remained fully reliable despite Russia’s termination of gas supplies to Ukrainian consumers in mid-June and the creation of artificial barriers to using existing gas transport facilities flowing from the EU to Ukraine."    

Moving Russia-Europe gas sales to the Russian-Ukrainian border might also give Kiev a way to work around the current blockade of Russian gas to Ukraine, according to Mr. Korchemkin.

"If the point of gas sales is moved to the Russian-Ukrainian border, the Kremlin will not be able to cut off gas supplies to Ukraine," Korchemkin writes via e-mail. "Any European company would be able to resell Russian gas right after the flow hits the Ukrainian territory."

That would provide a much-needed boost for Ukraine, which has struggled to fill its natural gas storage capacity without Russian supplies. Ukrainian gas stores were 46.4 percent full as of last week, according to Gas Infrastructure Europe (GIE), a natural gas industry association. Energy Aspects, a London-based consultancy, calculates that at current injection rates they will be half full by October, the beginning of the winter heating season. Typically, Ukraine's stores are about 75 percent full by October, Richard Mallinson, an analyst at Energy Aspects, told Monitor Global Outlook last week.

Largely thanks to mild weather last winter, Europe has more of a cushion if the Russia-Ukraine gas dispute isn't resolved by October. Total gas storage capacity across the European Union was 81.6 percent full as of Aug. 6, according to GIE.