Shifting energy trends blunt Russia's clout

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While Russia flexes its military might at its Black Sea naval base in Crimea, Moscow has another weapon that it has wielded against Ukraine in the past: natural gas supplies.

Russia provides more than half of Ukraine's natural-gas needs and since 2006 has twice curtailed supplies in disputes over politics, price and late payments. Those supply cuts rattled nations across Europe that depend on the Russian pipelines that run through Ukraine.

But changes in the global trade in natural gas have blunted Moscow's weapon, forcing the Russian pipeline monopoly Gazprom to cut prices worldwide and giving Ukraine slightly more bargaining power.

The boom in U.S. shale gas has left gas-exporting nations shopping for other customers. Europe, as it adds terminals to handle liquefied natural gas, will be able to offset its own declining production with supplies from countries such as Qatar. And in 2012, Norway's Statoil sold more gas to other European nations than Russia's Gazprom.

"Since the Russian supply cuts in 2006 and 2009, the tables have totally turned," said Anders Aslund, a fellow at the Peterson Institute of International Economics who has advised Russia, Ukraine and Kyrgyzstan. Mr. Aslund said Ukraine once rivaled Germany as Gazprom's biggest customer. Now, he said, "Gazprom's challenge is to stay in the Ukrainian market."

In December, Gazprom said it would discount the price paid by Ukraine, cutting it from about $11.50 per thousand cubic feet to $8.10. But that only brought Ukraine's prices roughly in line with those being paid in other parts of Europe. Gazprom said it would review the price every quarter, meaning a new reset is possible at the end of March.

As clunky Soviet-era factories and mines have become more efficient or gone out of business, Ukraine's domestic gas consumption has dropped nearly 40 percent over the past five years, cutting its imports from Russia in half, according to a report by Sberbank Investment Research.

Domestic consumption might drop further if Ukraine trims the generous subsidies it gives households using natural gas, although so few households are paying their bills that it might not matter. "People will go from not paying the lower price to not paying the higher price," said Thane Gustafson, senior director of Russian energy for the consulting firm IHS CERA.

The gas subsidies and delinquent payments lie at the center of Ukraine's economic problems and tension with Moscow. Even if residential customers paid up, the Ukrainian state energy company, Naftogaz, would lose money on those sales. That contributes to its failure to keep up payments to Gazprom, which on Feb. 3 said Naftogaz owed $3.3 billion for deliveries over the previous 13 months. Naftogaz's losses will grow as it sells in the battered local currency and buys gas priced in dollars, Sberbank noted.

"An inefficient and opaque energy sector continues to weigh heavily on public finances and the economy," the International Monetary Fund said, noting that energy subsidies reached 7.5 percent of Ukraine's GDP in 2012. "The very low tariffs for residential gas and district heating cover only a fraction of economic costs and encourage one of the highest energy consumption levels in Europe," the IMF said in December.


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