Why Europe needs Russian gas?

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  Russian state monopoly Gazprom’s decision to cut off the gas flow to one of its neighbours, Ukraine,

  has again raised questions about the security of Europe’s energy supply.

  What sparked the latest crisis?

Russia cut gas supplies to Ukraine on New Year’s Day, saying it would pump only enough for customers further down the pipeline.

Ukraine and Russia face negotiations over the renewal of gas supply contracts every year, but by midnight on 31 December 2008 …..they had failed to agree on the price Kiev should pay for gas in 2009.

After initially offering to supply Ukraine at a price of $418 (£288; 299 euros) per 1,000 cubic metres of gas, Gazprom eventually dropped the offer to $250.

Russian Prime Minister Vladimir Putin said that price, less than half of what most countries in Europe pay, was very generous.

But Ukraine rejected this offer and Moscow accused Kiev of blackmail by threatening supplies.

Ukraine later offered $235 – but Gazprom has reverted to its previous demand, of $418.

Meanwhile, Gazprom demanded payment of about $2bn by the Ukrainian state energy firm Naftogaz; $1.6bn in backdated bills and a further in $450m fines for late payments.

Naftogaz claims it has fulfilled its obligations by paying $1.5bn to RosUkrEnergo – a Switzerland-registered gas trading company – to cover its debts, but it disputes the fines.

Is this politics or economics?

Gazprom used to be a Russian ministry before becoming a private company, and it remains very closely connected to the state – Russian President Dmitry Medvedev is a former chairman of the company.

Critics say that Russia is using its energy resources as a political weapon to pressure European and former Soviet countries to adopt favourable stances towards Moscow.

But threats to disrupt exports, and the fact that it has carried out such threats in the past, have damaged Russia’s reputation as a reliable gas supplier.

Meanwhile, Gazprom has suggested that “political forces” in the pro-Western Ukrainian administration are seeking to provoke a wider confrontiation with Russia.

Mr Putin has been highly critical of Ukraine’s leaders, blaming the dispute on a “clan war” between Prime Minister Yulia Tymoshenko and President Viktor Yushchenko.

Has Europe’s gas supply been affected?

Both Russia and Ukraine insisted that the flow of gas through Ukraine to the rest of Europe would be unaffected by the dispute.

Several countries reported minor disruptions after the New Year’s Day cut. But, after Russia accused Ukraine of siphoning off gas and restricted supplies further, a number of countries were hit much harder.

Turkey said all its gas from Ukraine had been cut. Romania reported a 75% reduction, and Slovakia 70%. Bulgaria, Greece and Macedonia have also been affected.

The European Union called the supply cut “completely unacceptable”, demanded immediate restoration and called for an urgent resolution between Kiev and Moscow.

Gazprom controls about a third of the world’s gas reserves and it is responsible for a quarter of Europe’s supplies.

Most of Europe’s gas is piped via Ukraine, and when Gazprom shut down the pipeline in 2006, the flow to the rest of Europe fell, in some areas, by 40%. Customers as far away as France were affected.

Since 2006, Ukraine has built up reserves that will cover its needs for several months, and most other EU countries have done the same.

Gazprom had already embarked on plans for pipelines that bypass Ukraine and Belarus, former Soviet states which are currently essential for transit.

Gazprom has two major projects, Nord Stream and South Stream. Nord Stream will run for 1200km along the bed of the Baltic Sea, and South Stream under the Black Sea. Gazprom has signed up big European partners: Italy’s ENI for South Stream, and German companies E.ON Ruhrgas and Wintershall – along with Dutch provider Gasunie – for Nord Stream.

Is the EU happy about relying on Russian gas?

The EU has major concerns about security of supply and is moving ahead with a pipeline plan of its own. Nabucco will bring gas from Central Asia and the Caspian across Turkey into the European Union. But it will have only enough capacity to provide a small proportion, perhaps 5%, of Europe’s needs.

So Europe needs Gazprom, and that is why European companies and their governments have actively embraced the two projects. Austria is likely to serve as a hub for both. EU officials say that even during the Cold War the Russian gas supply was stable, so it is better to rely on Gazprom than potentially unstable sources such as Turkmenistan and Uzbekistan.