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Wednesday, January 21, 2009

Gas row shakes Europe's trust in Russian energy

21 Jan. 2009 - Reuters by Robin Paxton and Amie Ferris-Rotman - MOSCOW, Jan 21 (Reuters) - By cutting off gas supplies to Europe via Ukraine, Russia strengthened its case for new pipelines to bypass its ex-Soviet rival. But it may also have lost Europe's trust. European consumers, left to shiver for two weeks when Moscow shut off their gas, will now accelerate plans to develop alternative fuels and build a regional gas supply network better equipped to withstand disruptions from the East, analysts said. Moscow might also find its political influence waning in eastern Europe, the region worst affected by the crisis, as governments there look more to the European Union for support. "There is a lot of bitterness around the way that Russia behaved over much of the last two weeks in failing to reach any sort of workable compromise," Julian Lee, senior energy analyst at the Centre for Global Energy Studies in London, told Reuters. "There is a real sense Gazprom behaved in a way designed to embarrass Ukraine, rather than to get the gas flowing again." Russian gas started to reach Europe via Ukraine on Tuesday after the two sides signed a 10-year deal to end the dispute, which cut supply to about 20 European countries. Gazprom, Russia's state-controlled gas export monopoly, attributes the cuts to Ukraine's inability to offer safe transit. But the dispute has raised doubts in the West over Russia's long-term reliability as an energy supplier. "When the government should have been looking to integrate Russia and unite its strengths with those of other countries, Gazprom embarked on a large-scale confrontation," said Nikolai Petrov, political analyst at the Carnegie Moscow Center. Russia supplies a quarter of Europe's gas needs and, in the short term, customers have few alternatives. Pipelines such as Nabucco, which aims to ship up to 31 billion cubic metres a year of Caspian region gas by 2020, bypassing Russia, don't have enough gas to fill them. But European diplomats who attended meetings during the row say privately that Gazprom is worried about "anti-Russian" EU policies which envisage a reduction in Russian gas imports. Europe will accelerate plans to build new gas storage and a unified European gas grid, analysts say. Nuclear and other alternative fuels will also be pursued with more urgency.
NEW PIPELINES -- This could play into Russian hands. Prime Minister Vladimir Putin, speaking at the signing of the deal with Ukraine, said Russia should pursue the Nord Stream and South Stream pipeline projects and create the means to deliver liquefied natural gas. Russia's case for the Nord Stream pipeline, which would cut out Ukraine by pumping 55 billion cubic metres of gas under the Baltic Sea to Germany every year from 2011, has been bolstered. "The need for alternative import routes has again been forcibly demonstrated with the recent gas flow disruption. It is highly likely the process to approve and build Nord Stream will now accelerate," said Chris Weafer, strategist at UralSib bank. Ukrainian President Viktor Yushchenko, long at odds with the Russian leadership over his pro-Western stance, has cited Nord Stream -- which is still opposed in some parts of Europe -- as a possible motive for Moscow in the gas dispute. "To deprive European consumers of gas in winter in order that the Baltic countries might perhaps look more favourably on the northern pipeline route is completely disproportionate," said Carnegie's Petrov. "It's like using an atomic bomb to go fishing, rather than to end a war."
POLITICAL OPPOSITION -- South Stream, a 30 billion cubic metres per year project in which Italian energy major ENI SpA (ENI.MI) has a stake, might be a harder sell. Its proposed route cuts through Balkan countries still smarting from supply losses. "Russia has upset a lot of allies in southeastern Europe who were important for South Stream," a diplomat told Reuters on condition of anonymity. For Moscow, a loss of trust could have political ramifications, particularly as the European Union appears to be acting, at least in some cases, with a single voice on the question of energy security. "Losing 30 percent of the Bulgarian gas market, financially, is not a big loss to Gazprom. What's more important politically is the loss of status as the monopoly supplier of gas to Bulgaria," said Lee of the Centre for Global Energy Studies. Even when the Soviet Union stationed half a million soldiers in eastern Europe to protect its Cold War interests in the 1970s, gas flows West were never interrupted. The latest row has changed perceptions of Russia, said Jonathan Stern of the Oxford Institute for Energy Studies. "This is an event that will be remembered forever," he said.

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