As winter looms, war-weary Ukraine shows signs of energy independence

As Russia and Europe push for a wintertime natural gas deal, will Ukraine assert its independence and forgo Russian gas? 

More than two years after an armed conflict erupted in Ukraine, the state of affairs in the country continues to evolve rapidly. Some days are filled with reports of violence, others are marked by hope that the various ceasefire agreements between Ukraine and the country’s Russian-backed separatists will carry weight. But as the winter months grow closer and the cold begins to creep in, a familiar tension rises to the forefront.

Roughly a third of Europe’s natural gas – a critical heating fuel – comes from Russia, and more than half of that supply flows through pipelines in Ukraine. As winter heating season once again approaches, the animosities between Russia and Ukraine may temporarily take a back seat to ensuring  a steady supply of natural gas from Russia.

This time, the Russia-Ukraine winter gas standoff is different, experts say. Russia’s grip on energy in Ukraine – and indeed all of Europe – is slipping as the continent curbs consumption and bolsters its own gas transit systems. It’s a promising trend toward greater energy independence, experts say, but decades of energy politicking among Brussels, Kiev, and Moscow isn’t going away overnight.

On September 25, the European Union brokered a tentative wintertime truce to an ongoing standoff between Russia and Ukraine over how much gas to supply and at what price.  Officials said the temporary agreement would supply Ukraine with the gas it needs to last the winter and ensure Russian gas continues to flow uninterrupted to Europe.

“Once implemented the winter package will lay the ground for smooth gas deliveries from Russia to Ukraine, and consequently also through Ukraine to the European Union,” European energy commissioner Maroš Šefčovič told reporters in Brussels that day. The so-called “Winter Package” would commit Ukraine to purchasing 2 billion cubic meters of Russian natural gas between October 2015 and March 2016 for around $500 million, a price comparable with the prices offered to neighboring EU countries.  

Five days after the agreement was slated to begin, there are signs that it may be unraveling before any gas arrives in Ukraine. The Ukrainian government has yet to sign the agreement and is instead seeking better deals from its western suppliers. Ukraine’s reluctance to finalize the winter gas deal, which took months of EU-facilitated negotiations to conclude, is a sign that Russia has more to lose than Ukraine if the deal goes south, experts say.

 

“Russia has a lot at stake,” says Ariel Cohen, a senior fellow at the Atlantic Council, a think tank based in Washington. “It has an abundance of gas, it’s trying to keep its market share, and the conflict in Ukraine has the potential of deeply cutting Ukrainian purchases of Russian gas.”

Ukraine’s large natural gas storage facilities and new bi-directional interconnectors, which facilitate gas imports from countries like Slovakia, are giving the country the leverage to hold out for a better deal, observers say.

Confronted with Ukraine’s hesitance over the winter gas package, Russia, meanwhile, has expressed its readiness to seal the deal immediately. On Saturday, Russian energy minister Alexander Novak told reporters that Ukraine’s formal signature on the “Winter Package” is unnecessary, as Ukraine’s gas company Naftogaz needs only to pay its bill for the agreement to come into force.

“Russia wants to remain a reliable supplier to the markets in the center of Europe,” says Brenda Shaffer, a specialist on energy and foreign policy at Georgetown University. “Until Moscow builds alternative gas supply pipelines, it will strive for the transit through Ukraine to Europe to be uninterrupted.”

In recent months, Russia again surpassed Norway as the number one supplier of natural gas to Europe, Dr. Shaffer points out. Currently, Russia supplies around one third of Europe’s gas needs, and Moscow is now jockeying to gain EU support for the expansion of the Nord Stream pipeline, which brings natural gas from Russia to Europe via the Baltic Sea, bypassing Ukraine.

Meanwhile, Moscow is also pushing for a successful out-of-court settlement to the European Commission’s antitrust case against the Russian state-owned gas company Gazprom, which alleges that Russia abused its dominant position in Poland, Hungary, and other eastern European EU-member states by overcharging for gas by up to 40 percent. A successful conclusion to the gas deal with Ukraine would be perceived as a step toward normalizing Russia’s business relationship with Europe, which has been tense during the aftermath of the Western sanctions levied against Russia as a result of the conflict in Ukraine.

Although Europe has less to lose if the “Winter Package” is left by the wayside, EU officials also wish to avoid the turmoil that could ensue if Ukraine were to block Russian gas imports to Europe, experts say. Consequently, both Russia and the EU are vying to deescalate the conflict in Ukraine by exerting pressure on Kiev to accept the status quo and go ahead with the gas deal.

“Europe just wants everything to be calm on the Eastern front; they don’t want Ukraine to freeze and they don’t want them to cut the flow of gas to Europe,” says Dr. Cohen.

“They [the Europeans] are worried about the Russian economic downturn and the loss of markets,” says Cohen. “They recognize the Russian intervention in Ukraine, but Ukraine isn’t of strategic importance … Europe can live with it being a frozen conflict,” he concludes.   

Nevertheless, if Ukraine remains convinced that it has enough gas in storage and an option to bring even more gas from the West, it could walk away from the deal with Russia entirely. The amount of gas Ukraine ultimately imports from its eastern and western neighbors will depend on how low suppliers are willing to bring down the price, and how much gas the country needs to heat homes throughout the winter, according to analysts from Platts McGraw Hill Financial.

Currently, it remains unclear exactly how much gas Ukraine will need to last the winter. Ukrainian officials estimate the country will consume an additional 5.7 billion cubic meters from October until April, while Russia has suggested that it will need up to 7 billion cubic meters to cover its energy needs.

“The severity of winter will determine how much gas it [Ukraine] needs,” says Shaffer. “In the end, nature will decide if [the Winter Package] is successful.”