European Gas Threatened by Ukraine Sanctions

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Written by Martin Lynch, European News Editor for Industrial Info (Galway, Ireland)--Ukraine has threatened to impose sanctions on Russia which could disrupt the flows of oil and gas into Europe.

The sanctions, proposed by Ukraine Prime Minister Arseny Yatseniuk last week, could include bans on Russian energy companies and banks. Parliament backed the first reading of the bill this week, leading many to believe that Europe could be facing severe gas shortages as the conflict between Ukraine and Russia escalates. Russia supplies around one third of Europe's gas demand and half of that comes through Ukraine.

The proposed sanctions target 65 Russian companies, including state-owned gas giant OAO Gazprom (PINK:OGZPY) (Moscow, Russia), and 172 citizens of Russia and other countries. Prime Minister Yatseniuk accused them of "financing terrorism." Germany has called on Ukraine not to implement sanctions that would harm oil and gas imports.

Ukraine's action comes a month after sanctions were imposed by the U.S and E.U. on Russian energy companies. Industrial Info reported on financial restrictions imposed on energy and defense companies, including state-owned oil company OAO Rosneft (NYSE:ROSN) (Moscow, Russia), independent gas-producing firm OAO Novatek (MCX:NVTK), and Russian Gazprombank, a third of which is owned by the world's biggest natural gas producer, Gazprom. For additional information, see July 22, 2014, article - EU, U.S. Tighten Grip with Sanctions on Russian Energy Firms.

In June, Gazprom announced that it had cut gas supplies to Ukraine over non-payment of billions of euros in debt. That decision did not affect gas being transported through Ukraine pipelines to Europe. For additional information, see June 20, 2014, article - Russia Halts Ukraine Gas Supplies.

The impending gas crisis can be avoided, Ukraine said, if European energy companies and their Russian counterparts agree to renegotiate contracts with Ukrainian state-owned gas company Naftogaz. The company has since set out to reassure Europe that even with sanctions, there will be ways to secure gas supplies.

"The draft law of Ukraine 'On Sanctions'..... does not envision automatic introduction of economic and restrictive measures. The law creates legal grounds for introduction of restrictions related to certain types of economic activity, including transportation of energy resources. Imposition of sanctions on transit of resources can limit or terminate gas transport services by certain counteragents of Naftogaz of Ukraine and Ukrtransgas. In this respect, transportation of natural gas via the territory of Ukraine to the EU [European Union], Turkey and Moldova can be passed to counteragents not subject to sanctions. To do this, any prospective counteragent would have to sign direct agreements with Ukrtransgas, the operator of the Ukrainian gas transport system."

Chairman of Naftogaz, Andriy Kobolyev, said: "Naftogaz of Ukraine confirms its readiness to continue reliable natural gas transit to European consumers".

The EU admitted that gas contracts may have to be renegotiated if sanctions are brought in.

"We have raised the issue of the draft law again this morning in a phone call with our Ukraine partners," European Commission Vice-President Guenther Oettinger said. "We are confident that Ukraine remains a reliable transit partner. Naftogaz's idea that European gas companies could buy Russian gas at the Russian-Ukrainian border instead of getting it delivered through Ukraine requires a renegotiation of the transit contracts. "This cannot be done in the short term - it is a question that would need to be discussed in a trilateral meeting between the European Commission, the Russian Federation and Ukraine."

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