As the revolution in Ukraine proceeded apace in city streets, natural gas continued to flow through the pipelines connecting Russian supplies with European customers. The political chaos has not affected the flow of gas in the least. Bloomberg reports that an anonymous spokesperson from Gazprom remarked, “Ukraine is shipping the full volume of gas sold by Russia to European customers.” But while the gas may be continuing to move unimpeded from West Siberia to European markets via Ukraine, the Kremlin must be thinking about what the political developments mean for its long-term gas production plans. After all, oil and gas revenues accounted for 52% of Russia’s federal budget revenues and over 70% of total exports in 2012 (US EIA). The Russian economy is thus precariously dependent on hydrocarbons – and also, at the moment, on European customers.
Much has been said about Putin’s “gas grip.” News articles also often ominously reference the Russia-Ukraine gas disputes in 2006 and 2009, which almost froze Ukraine to a literal standstill, as a reminder of Russia’s leverage. But it’s important to remember that the gas market is a two-way street. Russia relies completely on Europe to buy its gas at the moment, but it can’t count on this forever. First, all of Russia’s natural gas is exported to Europe: 57% to Western Europe, 24% to Eastern Europe, and 19% to Turkey. (By contrast, liquefied natural gas, which constitutes a mere 7% of Russia’s gas exports, all comes out of Sakhalin and mostly goes to East Asian markets). Meanwhile, Europe has been seeking to reduce its own dependence on Russia, and last summer, Norway, outstripped Russia as Europe’s chief gas supplier. Second, Europe has had a relatively warm winter, and demand reached its lowest point since 1999. While climate change might be rendering Arctic gas development more feasible for Russia, it is simultaneously serving to lower demand among potential customers.
Though Russia hasn’t been able to yet reduce its dependence on Europe as its chief gas importer, it has tried to reduce the problems of geopolitical chokepoints along pipelines such as those in Ukraine or the North Caucasus pipeline, which is often subject to terrorist attacks. Russia has constructed additional pipelines to Europe, which imports some 40% of its gas from the country. In 2011, the Nord Stream pipeline began operating, allowing gas deliveries to bypass Ukraine. Before terminating in Germany, the Nord Stream pipeline transits the EEZs of Finland, Sweden, and Denmark while bypassing the Baltic states and Poland, with which Russia has more tense relations.
Since, therefore, pipeline politics are essentially a form of geopolitics, could the unrest in Ukraine presage anything for Russia’s gas development plans in the Arctic?
Unrest in the West
Gas from the Yamal Peninsula, should it come online, would be piped via the planned Bovanenkovo-Ukhta pipeline, which would link up with the existing Yamal-Europe pipeline and Northern Lights pipeline. Both of these currently connect fields in western Siberia to Europe via Belarus and Poland. Gas from the Yamal Peninsula would not go through the Ukrainian pipelines to reach western Europe, but it would have to in order to reach markets in central and southern Europe such as Hungary and Italy (Figure 1). Russia hopes to avoid this potential issue by building Yamal I-II, a pipeline that would go through Poland and avoid Ukraine – but this might not actually go forward given Polish reservations. Debate over Yamal I-II exemplifies how events in and relations with countries far from the Arctic still manage to affect the development and export of the region’s resources.
The wider ramifications of Ukraine for Russia’s Arctic gas development are likely that Moscow will try even more to win Asian customers in order to reduce its dependence on the west. While Europe’s demand for gas is declining, countries like South Korea are increasing their imports. China seeks more LNG in order to replace dirty coal and reduce air pollution. Putin will visit China in May, when Gazprom will likely sign a contract with China National Petroleum Corporation (CNPC) to supply the country with gas from around Lake Irkutsk, in the country’s subarctic, via the planned Power of Siberia gas transmission system (more information on Gazprom’s site, here). Once realized, the deal will send up to 68 billion cubic meters of gas (2.4 Tcf) to China annually for the next 30 years. For comparison, the pipelines through Ukraine carry about 700 Bcf-1 Tcf of gas annually to Europe, while the Nord Stream pipeline transports about 1.9 Tcf (EIA).
In the end, the events in Ukraine don’t mean that Russia will be less likely to develop its Arctic and subarctic gas fields. Instead, Russia will just be even more likely to look east for importers of its gas from western Siberia, Sakhalin, and eventually, places like the Yamal Peninsula. CNPC already purchased a 20 percent stake in the Yamal LNG project, confirming Chinese interest in Russian Arctic and subarctic gas. And that’s not all. As the Wall Street Journal observes,
“If Russia locks in a deal [with China] soon, it could spark the development of eastern Siberia as a hub to sell gas to Japan and South Korea. This would put competitive pressure on Asian LNG prices generally—something Middle Eastern and Australian suppliers would have to contend with.”
Developments on Russia’s western front are making the eastern front look all the more appealing – and urgent.