Gazprom Natural Gas Crisis

BRIEFING PAPER / JUNE 2009

The Gazprom – Naftogaz Ukrainy Natural Gas Crisis

UK & EUROPEAN RAMIFICATIONS Analyst: Ken Chan 09853999 | Wordcount: 1700

Executive Summary

The impacts of the 2006 and 2009 Gazprom–Naftogaz Ukrainy crisis drew attention to important energy security issues that Europe cannot continue to ignore. These issues affect the UK indirectly for now, but as the consolation of our energy independence comes to an end, UK too will be directly vulnerable. These issues are: • • • Source Dependency: “What alternatives do we have to Russian natural gas” Transit Dependency: “What is our fallback position during gas transit failure” Political Exposure: “Do we have a realistic defence against, Russian geopolitical conflict”

It is recommended that these risks be managed in the following manner: • • • • • Manage Consumption downwards – increase efficiency, penalise wastage Energy Diversity – Push hard for pipelines connecting Caspian Sea gas reserves to Europe Store and Share – With LNG terminals in place, invest in the storage capacity across Europe (but particularly in the UK) to receive large cargoes in preparation for non-delivery Regional Solidarity – Agree on cross border strategies (volume cuts, reverse flow) in the case of supply disruption Rigorous sustainable relations – before imports of Russian gas commence, put in place strict accountability mechanisms for supply

Table of Contents

EXECUTIVE SUMMARY THE GAZPROM – NAFTOGAZ UKRAINY GAS CRISIS HISTORY & BACKGROUND 2009 GAZPROM-NAFTOHAZ UKRAINY CRISIS IMMEDIATE IMPACT OF CRISIS ON EUROPE & UK RESOLUTION GEOPOLITICS PRICING IMPACTS NETBACK PRICING OF NATURAL GAS CRISIS IMPACT ON HEREN NBP INDEX COUPLING EFFECT BETWEEN HEREN NBP AND JAPANESE CRUDE COCKTAIL (JCC) MEDIUM TO LONG TERM RAMIFICATIONS TO UK & EUROPE SOURCE DEPENDENCE ON RUSSIAN GAS TRANSIT DEPENDENCE INTEGRITY OF SUPPLY SUPPLY SHOCK RISKS: STORAGE POLITICAL RISKS CONCLUSIONS AND RECOMMENDATIONS DEVELOP RIGOROUS AND SUSTAINABLE...