Why Europe Should Support Reform of the Ukrainian Gas Market – or Risk a Cut-Off

Europe faces another catastrophic gas shortage if a gas price dispute between Russia and Ukraine is not resolved, according to this energy report. The EU is attempting to broker an agreement between Russia and Ukraine to avoid a repeat of the 2009 gas crisis which cut Russian gas supplies to Europe via Ukraine. In June 2014 Russia again cut off gas supplies to Ukrainian consumers in a dispute over payment. ECFR energy expert Chi Kong Chyong warns that if the current dispute is not settled soon, Ukraine could be forced to tap into gas supplies destined for Europe to prevent its own citizens from freezing as winter approaches. He says whether Europe suffers another gas crisis will depend on:

• Ukraine’s ability to import gas from central Europe
• How much gas Ukraine has accumulated in storage
• Additional gas supplies from Russia as part of a possible interim deal mediated by the EU
• Russia’s alternative pipelines to Europe bypassing Ukraine

The impending crisis illustrates Europe’s dependence on Russian gas and the near-monopoly Ukraine has on the transit of gas to Europe. This means when Russia limits or cuts off Ukrainian gas, it becomes a European problem because Ukraine then siphons off Russian gas destined for European customers.

Chi Kong Chyong suggests that Europe should press Ukraine to reform its gas market in order to eliminate the danger of energy cut-offs to EU member states in the longer term. His ECFR Policy Brief, “Why Europe should support reform of the Ukrainian gas market – or risk a cut-off”, argues that the current political crisis as an opportunity to improve Ukraine and Europe’s energy security. Integrating Ukraine into the EU’s single gas market would reduce the importance of gas transit for the Ukrainian economy and therefore depoliticise both Ukraine’s and Europe’s gas relationship with Russia.

Chi Kong Chyong points out that Ukraine has now missed four months of storage injection and may need to tap into EU transit pipelines by mid-January. Moscow may then stop all gas to Europe as it did in 2009. Some European countries are taking steps to export gas to Ukraine to avert an energy crisis if Russia cuts off European supplies.

In the long term, Ukraine could reduce its dependence on Russian gas by developing its own gas resources and importing gas from Europe. But in the short term, it urgently needs to reform its inefficient gas pricing policy, which would reduce consumption by industry, households and heat producers. Introducing a competitive energy market in Ukraine would also:

• Reduce the economic pressure which Russia could exert on Ukraine through its gas export policy.
• Help overcome EU member state divisions over EU policy on Russia and Ukraine.
• Depoliticise and normalise energy trade between Europe and Russia without the need to invest in bypass pipelines.
• Help the EU meet ambitious climate change targets by ensuring Russian gas remains part of Europe’s energy mix.  

This publication by Chi Kong Chyong can be downloaded in full here: http://www.ecfr.eu/publications/summary/why_europe_should_support_reform_of_the_ukrainian_gas_market_or_risk_a_c320