Ukraine Gas Update: Don’t Hold Your Frozen Breath

Latest from the bleak eastern front is that Gazprom has yanked out the rug from under a new gas agreement, on the pretext that those cheeky Ukrainians slipped in some provocative wording:

“Ukraine has always been and remains a reliable transit country and has not interrupted transit of gas to the EU member states”; and “Ukraine has not made any non-contractual gas take-offs in 2009″

Yup, that’s pretty silly. Clearly no-one in any great rush to settle, then, which gives us time to discuss another aspect of this long-running saga, namely that within the bounds of ‘commercial’ actions, Russia cannot win this one. The reason is simple. Ukraine was established as the hub of the Soviet-era gas delivery system to the West, with huge supporting infrastructure including, critically, vast amounts of the storage that is vital to optimise and modulate a lengthy gas supply route. For basic economic reasons storage must be at the customers’ end of such a system, and Gazprom is stuck with the fact that it’s in the Ukraine. This ain’t gonna change any decade soon, so there they are.

Of course, they have been making costly efforts to develop new outflanking routes, (though the one through Belarus runs into all the same problems), but these are relatively modest in capacity and way behind schedule in any case. And, as noted before, their ability to make such investments is going to take a big knock as gas prices fall significantly this year.

The need for resumption of hard currency flows will kick in soon, and unless Russia can inveigle the EU to pay the danegeld on its behalf (unlikely-ish …), ‘normal service’ will have to resume in due course.

Meanwhile, expect the UK gas industry to start pressing for subsidies to build new gas storage facilities (despite the fact that the existing ones are making a fortune). Why do an honest day’s work when you can go lobbying instead?

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