Ukraine's gas dispute could mean cold winter for Central, East Europe

Tue Jul 8, 2014 9:53am EDT

* Russia cut exports to Ukraine in June

* Past winters have seen EU disruptions in Russia, Ukraine row

* So far Ukraine is still pumping gas onward to EU

* Seasonal gas spreads: link.reuters.com/wac42w

By Michael Kahn and Henning Gloystein

PRAGUE/LONDON, July 8 (Reuters) - Central and south-eastern Europe could face higher gas prices and potential shortages this winter, as a prolonged price row between Russia and Ukraine heightens regional supply fears.

The former Soviet countries, many of which receive most or all of their gas from Russia via Ukraine, have been scrambling to fill storage tanks and arrange alternate supply sources to prepare for the winter heating season.

In June, Russian natural gas exporter Gazprom cut off gas deliveries for use by Ukraine in a dispute over unpaid bills, raising concerns of a disruption of supplies to the rest of Europe.

So far, Ukraine has continued to send gas to the European Union under transit obligations it has with Russia and EU member states.

Western Europe is well prepared to deal with Russian gas flow disruptions, with access to alternative supplies such as Norway and Algeria or imports of liquefied natural gas (LNG).

But for countries in central and south-eastern Europe the dispute has rekindled memories of 2006 and 2009 when a pricing disagreement prompted Russia to cut off deliveries along the Ukraine pipeline, leaving hundreds of thousands of homes and businesses without heat in freezing temperatures.

They rely largely on Russian gas imports via Ukraine and would be hit hard by another winter gas cut-off. Problems could come if Russia shuts off all flows via Ukraine or if Ukraine takes deliveries meant for the West to meet its own demand.

Another potential threat is an attack on the pipeline stemming from the fighting in the country between the government and separatists in the east. A June blast on the pipeline caused no casualties and did not interrupt flows but Ukraine called the explosion a possible "act of terrorism."

"The 'no gas via Ukraine' scenario is the baseline scenario for this year and a few more," said Vaclav Bartuska, the Czech Republic's top official on energy security.

"There is instability which will not go away tomorrow. This is not a gas crisis but a war plain and simple."

PREPARING FOR DISRUPTION

Most of Europe's gas pipelines are designed to flow only one way, for instance from Russia's gas fields westward to Europe.

But past experience has spurred EU countries to enable reverse flows of pipelines from West to East, increase storage capacity, contract more supplies from Norway as well as building new routes for Russian gas to come to Europe, avoiding Ukraine.

The Nord Stream pipeline, which runs from Russia through the Baltic Sea directly into Germany, started operations in 2011.

Data from Gas Infrastructure Europe, an association of transmission, storage and LNG terminal operators, shows that storage tanks across the European Union's 28 nations are 71 percent full, compared with just 34 percent this time last year.

The gas currently in storage amounts to almost 60 billion cubic metres (bcm) out of a total 80 bcm capacity, enough to meet almost three months of total EU demand.

The Baltic region in particular has made progress in diversifying its supplies, with a new LNG import terminal expected to come online both in Poland and Lithuania in 2015, and another facility planned for Estonia and Finland later this decade.

But less has been done further south, leaving countries such as Bulgaria and Serbia especially vulnerable.

Anna Bulakh from the International Centre of Defense Studies in Talinn said that some progress had been made, but added more effort was needed to avoid future disruption crises.

"The most vulnerable CEE/SEE (central/southeast European) countries are in better positions compared to the 2009 crisis due to progress towards completion of the internal energy market," she said.

"But the problems are still there. Storage withdrawals cannot be regarded as the source of security of supply in the longer term and more interconnectors won't be built overnight."

Martin Boyadjiev of the Bulgarian Gas Center said that "there's a possibility for shortages or consumption limit by 30-35 percent in case of gas supply problems" during winter.

"(Bulgaria) is taking steps to prepare for a crisis situation as there are attempts for more intensive injection of gas into storage, while long-term plans include expansion of storage," he added.

HOPE FOR MILD WINTER

The weather will be crucial for these countries. Last year's mild winter kept demand low whereas frigid temperatures such as those seen in 2009 would spark a jump in gas demand.

Vojislav Vuletic, the president of the Serbian gas association assembly, said the crisis in Ukraine has prompted Serbian gas company Srbijagas to try to fill its Banatski Dvor gas depot by autumn and to prepare to switch fuels for heating if supplies are interrupted.

"Everything will depend on how harsh the winter will be," he said. "The price of that gas might be higher from what we pay for the Russian gas now."

Gas markets take a similar view.

While spot gas prices for delivery the next day have almost halved since the beginning of the year following a mild winter and spring, prices for delivery next winter have remained much stronger due to speculation about possible Russian supply cuts. (Additional reporting by Angel Krasimirov in Sofia and Maja Zuvela in Sarajevo, Editing by Veronica Brown and Anna Willard)

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