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U.S. Seeks to Reduce Ukraine’s Reliance on Russia for Natural Gas U.S. Hopes Boom In Natural Gas Can Curb Putin
(about 7 hours later)
WASHINGTON — The crisis in Crimea is accelerating Obama administration efforts to reduce Ukraine’s dependence on Russia for natural gas, part of a diplomatic push that seeks to undercut President Vladimir V. Putin’s ability to use his nation’s gas supplies as a weapon. WASHINGTON — The crisis in Crimea is heralding the rise of a new era of American energy diplomacy, as the Obama administration tries to deploy the vast new supply of natural gas in the United States as a weapon to undercut the influence of the Russian president, Vladimir V. Putin, over Ukraine and Europe.
Republican leaders on Capitol Hill and major oil companies have urged the Obama administration to speed up the nation’s first exports of natural gas. Although environmentalists, some Democrats and American manufacturing companies that depend on the competitive advantage of cheap domestic natural gas oppose the effort, they have fallen to the sidelines in the rush to export the gas. The crisis has accelerated a State Department initiative to export American natural gas to Europe as a lever against Russia, which supplies 60 percent of Ukraine’s natural gas and has a history of cutting off the supply during conflicts. This week, Gazprom, Russia’s state-run natural gas company, said it would no longer provide gas at a discount rate to Ukraine, a move reminiscent of more serious Russian cutoffs of natural gas to Ukraine and elsewhere in Europe in 2006, 2008 and 2009.
At the State Department, an initiative to harness a natural gas boom in the United States as a lever against Russia, underway since 2011, intensified this week as Gazprom, Russia’s state-run natural gas company, said it would no longer provide gas at a discount rate to Ukraine. Russia supplies 60 percent of Ukraine’s natural gas, and the move was reminiscent of Russia’s previous moves, in 2006, 2008 and 2009, to shut off natural gas supplies to both Europe and Ukraine. The administration’s strategy is to act as swiftly and aggressively as possible to weaken any moves by Mr. Putin in future years. Although Russia is still the world’s biggest exporter of natural gas, the United States recently surpassed it to become the world’s largest natural gas producer, largely because of breakthroughs in hydraulic fracturing technology, known as fracking.
The administration’s strategy is to move as aggressively and swiftly as possible to undercut Russian natural gas sales and any moves by Mr. Putin in future years. Although Russia is still the world’s biggest exporter of natural gas, the United States recently inched ahead of Russia as the world’s largest natural gas producer.
“We’re engaging from a different position because we’re a much larger energy producer,” said Jason Bordoff, a former senior director for energy and climate change on the White House’s National Security Council.“We’re engaging from a different position because we’re a much larger energy producer,” said Jason Bordoff, a former senior director for energy and climate change on the White House’s National Security Council.
The United States does not yet export its natural gas. But the Energy Department has begun to issue permits to American companies to begin exporting natural gas starting in 2015. The administration’s strategy has attracted unlikely allies, including major oil and gas producers like ExxonMobil and Republican leaders on Capitol Hill, who this week have urged the administration to speed up natural gas exports. Although environmentalists, some Democrats and American manufacturing companies that depend on the competitive advantage of cheap domestic natural gas oppose the effort, they have fallen to the sidelines in the rush.
On Tuesday, Speaker John A. Boehner, Republican of Ohio, said: “One immediate step the president can and should take is to dramatically expedite the approval of U.S. exports of natural gas. The United States has abundant supplies of natural gas — an energy source that is in demand by many of our allies — and the U.S. Department of Energy’s excruciatingly slow approval process amounts to a de facto ban on American natural gas exports that Vladimir Putin has happily exploited to finance his geopolitical goals. We should not force our allies to remain dependent on Putin for their energy needs. Ending this de facto ban and expediting approval of natural gas exports is one clear step the U.S. can take to stand by our allies and stand up to Russian aggression, while creating American jobs at the same time.” For Russia, energy supplies are as important to keeping a hold on Ukraine and the other former countries of the Soviet Union as is the Russian Army itself. Ukraine would freeze without Russian gas, and its flow has been a considerable source of wealth and corruption in both countries. But Russia is also obligated by contract to provide natural gas to Western Europe, and Moscow remains highly dependent on Ukrainian pipelines to get it there.
Next to language and history, natural gas is the strongest glue that binds Russia and Ukraine, a source of strength for both but also their greatest vulnerability. Put another way, natural gas is a gun each holds to the other’s head. David Dalton, the editor of the Economist Intelligence Unit, said: “Russia has always used gas as an instrument of influence. The more you owe Gazprom, the more they think they can turn the screws.”
For Russia, energy supplies are as important a hold on Ukraine and the other former countries of the Soviet Union as the Russian Army itself. Ukraine would freeze without Russian gas, and its flow has been a considerable source of wealth and corruption in both countries. But Russia is also obligated by contract to provide natural gas to Western Europe, and Moscow remains highly dependent on Ukrainian pipelines to get it there. But this time, there is a major difference. As recently as 2007, American natural gas supplies were believed to be dwindling, and the George W. Bush administration was considering importing natural gas from Russia. Since then, fracking, which environmentalists say could contaminate America’s water supplies, has transformed the strategic landscape.
Despite the construction of the Nord Stream pipeline that circumvents Ukraine, about 63 percent of all Russian gas exports to Europe pass through Ukrainian pipelines, and the European Union still depends on Russia for about a quarter of its gas. The United States does not yet export its natural gas. But the Energy Department has begun to issue permits to American companies to export natural gas starting in 2015. American companies have submitted 21 applications to build port facilities in the United States to export liquefied natural gas by tanker. The agency has approved six of the applications.
To an extent not always recognized in the West, Russia is a petrostate, dependent on energy exports for up to half of the government’s revenue, with natural gas accounting for a third of that revenue. Ukraine itself consumes 13 percent of the exports of Gazprom, the state-run megacompany that emerged from the Soviet Ministry of Gas. However, even if the Energy Department approves all the pending permits from companies seeking to export natural gas, the fuel could not begin flowing overseas for at least a few years. Most American natural gas export terminals are in the early stages of construction. While one, in Sabine Pass, La., is tentatively scheduled to open in late 2015, most others will not start operating until 2017 or later.
Gazprom’s highly profitable European contracts are hugely important to the Kremlin. In 2012, for example, Gazprom booked revenue from European sales of about $49 billion at the exchange rate then, an amount commensurate with its reported profits of $39 billion that year. But the contracts come with a catch: Gazprom is legally and financially obligated to fulfill them and has to find alternate sources or pay for what it fails to deliver. In theory, this gives Ukraine enormous leverage, though Moscow over the years has found ways to intimidate and co-opt Ukrainian officials and avoid a serious shutdown. At the helm of the new energy diplomacy effort is Carlos Pascual, a former American ambassador to Ukraine, who leads the State Department’s Bureau of Energy Resources. The 85-person bureau was created in late 2011 by Hillary Rodham Clinton, the secretary of state at the time, for the purpose of channeling the domestic energy boom into a geopolitical tool to advance American interests around the world.
In a strong indication of the mutual dependence, Alexei Miller, the head of Gazprom, announced on Tuesday that it would cancel on April 1 a large discount on gas granted to Ukraine as part of a Russian loan deal, made in December to recompense Viktor F. Yanukovych, the president at the time, for abandoning a customs agreement with the European Union. At the same time, Mr. Miller said on Tuesday that Gazprom would support “offering Ukraine a loan worth $2 billion to $3 billion to cover its debt for last year and pay for current supplies.” In an interview, Mr. Pascual asserted that his team’s efforts had already weakened Mr. Putin’s hand, and had helped lower Ukraine’s dependence on Russia for natural gas supplies to 60 percent, down from 90 percent.
Ukraine’s national energy company, Naftogaz, paid Gazprom about $400 per thousand cubic meters in 2013, a price that was cut to $268.50 under the deal struck in December and that will now end on April 1. The $400 price is far higher than what most European utilities pay; the average price in Europe in 2012, the last year Gazprom released its annual report, was $313. Mr. Pascual said that his team had worked to help Ukraine and other European countries break away from dependence on Russian gas by finding supplies elsewhere, including Africa, and assisting the Europeans to build up their natural gas storage. The team, he said, is working with Ukraine and the European Union on completing a European energy charter, which already allows natural gas to move more quickly through Europe and permits countries to negotiate lower rates with Gazprom.
Ukraine, saddled with inefficient, Soviet-era industries, already owes Gazprom at least $1.5 billion for gas, with an additional $700 million for January and an estimated $300 million to $400 million for February, even with the discount. An earlier $2 billion loan from Gazprom has also not been paid, said Dmitri Petrov, an analyst at Nomura in London, as well as prepayments for gas storage. In addition, he said, the team is helping countries develop their own natural gas resources, including in partnership with American energy giants. Halliburton has started fracking for natural gas in Poland, while Shell last year signed a contract to explore for natural gas in Ukraine.
David Dalton, editor of the Economist Intelligence Unit, said: “Russia has always used gas as an instrument of influence. The more you owe Gazprom, the more they think they can turn the screws.” Mr. Pascual said that although the prospective American exports would not immediately solve the problems in Europe, “it sends a clear signal that the global gas market is changing, that there is the prospect of much greater supply coming from other parts of the world.”
The fight in the last few years, since a 2009 confrontation over gas debts that led Russia to shut off the flow to Ukraine and southeastern Europe for nearly two weeks, “has been the struggle for Ukraine to get away and for Russia to yank them back,” Mr. Dalton said. Ukraine has tried to diversify its sources and reduce consumption, while Russia has tried to build pipelines to circumvent Ukraine. “This is a radically changed market,” he added. “Our challenge is to look at U.S. production in the global context and understand how we can influence what happens.”
The 2009 conflict was resolved when Ukraine’s prime minister at the time, Yulia V. Tymoshenko, signed a much-criticized 10-year “take or pay” gas deal with Gazprom that left Ukraine paying a higher price for gas than do other Europeans, who have larger transport costs. The deal also forced Ukraine to take or pay for 50 billion cubic meters a year. Even in 2011, Ukraine used only 44 billion cubic meters, Mr. Petrov said, a figure that declined to 32 billion in 2012 and 28 billion last year, when Ukraine was in recession and the gas-dependent heavy industries of the east used less fuel. In the coming years, Gazprom’s influence will be further weakened as American supplies are shipped onto the global market, Mr. Pascual said.
Last January, Gazprom demanded an additional $7 billion under the contract as payment for unused gas, but Ukraine refused to pay it, and the demand is considered unlikely to be enforced in any court. This week, Republicans escalated their calls for the administration to speed those exports.
The Tymoshenko deal helped Mr. Yanukovych win power the next year, and in 2011 she was sentenced to jail for an alleged abuse of power. “While that contract was not a crime, it was a huge error,” Mr. Dalton said. Perhaps not surprisingly, Mr. Putin has always spoken highly of Ms. Tymoshenko. On Tuesday, Speaker John A. Boehner, Republican of Ohio, said: “One immediate step the president can and should take is to dramatically expedite the approval of U.S. exports of natural gas. The United States has abundant supplies of natural gas — an energy source that is in demand by many of our allies — and the U.S. Department of Energy’s excruciatingly slow approval process amounts to a de facto ban on American natural gas exports that Vladimir Putin has happily exploited to finance his geopolitical goals.
There was a similar, briefer cutoff of Russian gas to Ukraine in 2006, when Ukraine diverted some gas intended for export to domestic use. “We should not force our allies to remain dependent on Putin for their energy needs,” he said.
After 2009, Mr. Yanukovych did try to reduce Ukraine’s dependence on Russia by signing contracts for coal gasification with the Chinese and starting two shale gas projects. In September, he signed a deal with Western oil companies including ExxonMobil, Shell and OMV to develop the Skifsky offshore gas field, a longer-term venture, and Ukraine has tried to import more gas from Hungary and Poland. The efforts this week are not the first time that the State Department has used newfound energy resources to gain geopolitical advantage.
But the Russians also responded. Most important, they built the Nord Stream pipeline that circumvents Ukraine and goes directly to Germany, and took over the rest of the Belarus pipeline system. They are now building another pipeline to the south, called South Stream, scheduled to come online by the end of 2015. In 2012, in response to Iran’s nuclear program, the United States urged the Europeans to impose financial sanctions that greatly limited Iran’s ability to sell oil on the world market. Other countries feared that the move would raise prices, but officials assured other nations that a surge in American oil production would keep prices stable.
While Nord Stream is being used to near capacity, it can handle only 35 percent to 40 percent of Europe’s imports, meaning that most of the rest still flows through Ukraine. Earlier this year, the United States worked to broker a sale of Israeli natural gas to Jordan, in an effort to stabilize relations in the Middle East.
Europe, too, remains highly dependent on Russian gas — the European Union gets at least 22 percent of its gas from Russia, according to Simon Quijano-Evans of Commerzbank. Despite efforts at diversification with Norway and Algeria and with liquefied natural gas, as well as some early efforts at shale gas extraction in Ukraine and Poland, Germany still gets about 35 percent of its gas from Gazprom, while France and Italy get about 25 percent. Gazprom delivers to Europe 163 billion cubic meters of gas a year; of that amount, about 86 billion cubic meters come through Ukraine, about 63 percent, Mr. Petrov said. “In World War II, we were the arsenal of democracy,” said Robert McNally, who was the senior director for international energy issues on the National Security Council during the Bush administration. “I think we’re going to become the arsenal of energy.”
Europe’s continuing though shrinking dependence on Russian energy, combined with the influence that Russian money and investment have won Moscow in Western Europe and the London financial markets, is another reason that tough sanctions are harder for the Europeans to accept than for the distant United States.
Gazprom is a publicly traded company whose stock is held by investors around the world, but it is a chimera of state and private interests, half-owned and fully controlled by the Russian government. In past gas pricing and transit disputes, Gazprom emerged as a tool of Russian foreign policy in Ukraine and in pipeline politics throughout Europe.
In Ukraine, contract disputes eroded the credibility and finances of a pro-Western government that was in control from 2005 to 2010, and eased the election of Mr. Yanukovych.
Allegations of corruption are never far from Ukrainian gas deals. In 2005, a close aide to Ms. Tymoshenko, Oleksandr V. Turchynov — now Ukraine’s acting president, but then serving as the director of Ukraine’s domestic intelligence agency — investigated suspected ties between a gas trading company, RosUkrEnergo, which was half-owned by Gazprom and half-owned by people close to President Viktor Yushchenko. Mr. Yushchenko denied any involvement in illegal deals, but the episode, and the insidious influence of gas in Ukrainian politics, opened a schism in the pro-Western camp.
While Ms. Tymoshenko has conceded that the 2009 deal that two years later sent her to prison locked Ukraine into a costly contract with Gazprom, she has promoted its main achievement as cutting out any corrupt side deals for RosUkrEnergo, surely making many enemies along the way.
Russia’s status as a major oil producer further clouds the gas issue. It is already benefiting from the rise in oil prices owing to the Ukraine conflict. If gas flows to Europe were to halt, oil prices would most likely rise further. Oil is exported from Russia mostly by tankers and pipelines that pass through Belarus.
And then there is the uncertainty of politics, with new actors emerging in a new power structure that overthrew Mr. Yanukovych, who built a lot of his political support and personal wealth on the gas business.
Already, Ukrainian officials are saying that they do not intend to pay the higher price. David Zhvania, a member of the Ukrainian Parliament, said that in any gas pricing conflict with Russia, “we have plenty of levers to respond.”
In a month, “it will be warm, and then we will announce we need to repair the pipeline, and we will shut it down,” he said. “Then, they will have to shut off the wells. In this conflict the Russians will end up destroying what could have been a good business, the business of Gazprom.”
With loosely organized groups of street fighters now a parallel authority in the Ukrainian capital, Kiev, and many western regions of Ukraine having gas pipelines that carry the bulk of the fuel that crosses into Slovakia, sabotage poses yet another risk to Gazprom’s profits and Europe’s fuel supply.
Yarema Dukh, a spokesman for an umbrella organization representing street fighters who have not disbanded in spite of the emergence of the interim government, said that the organization would respect any decision on gas policy taken by the new political leaders, and that talk of sabotage to harm Gazprom “is nothing more than rumors.”
Sabotage, he said, “would also block gas for the European Union, and these are not our methods,” Still, Mr. Dukh added, “if Russia decides to raise prices, it doesn’t mean we will pay those prices.”
In one respect, however, Ukraine has been relatively lucky, with a fairly warm winter and up to eight billion cubic meters of gas in its storage reserves, Nomura estimates. Even if Russian gas were cut off again, Ukraine would have enough to get it through the summer, at least.