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Analysis: Central Asia and Gazprom

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by John C.K. Daly
Washington (UPI) Mar 14, 2008
Kazakhstan, Turkmenistan and Uzbekistan have long chafed under Gazprom's pricing arrangements for their natural gas exports, as the energy giant has long adhered to the policy of buy cheap, sell dear.

In a development fraught with ominous implications for Gazprom's Central European consumers, the leaders of the three nations recently indulged in some tough negotiations with Gazprom, which has provisionally agreed to pay global prices for their energy exports beginning next year. On March 11, Gazprom reported the new arrangement following a meeting in Moscow between top gas officials from the three Central Asian countries and Gazprom Chief Executive Officer Alexei Miller. The Central Asian negotiating team included KazMunaiGas President Uzakbai Karabalin, Uzbekneftegaz CEO Nurmuhamad Akhmedov and TurkmenGaz Chairman Yagshigeldy Kakayev. A Gazprom statement noted the Central Asian triumvirate said, "Based on the interests of the national economies and taking into account international obligations to ensure reliable and uninterrupted energy supplies, beginning with 2009 the sale of natural gas will be made at European prices."

Of all Gazprom's consumers, it is Ukraine that will be hardest hit by the arrangement, as it will see prices approximately double over the next 12 months. Ukraine primarily imports low-priced Central Asian gas for $179.50 per 1,000 cubic meters, only resorting to European price Gazprom Russian gas at $315 per 1,000 cubic meters to top up.

Even worse for Western energy companies eager to enter the Central Asian energy market, the agreement appears to cement Gazprom's stranglehold over Central Asian gas exports, effectively killing off such optimistic Western proposals as the Nabucco pipeline and the undersea Trans-Caspian line to transit Central Asian energy to Azerbaijan and thence to Western markets.

While Gazprom executives in Moscow are doubtless unhappy with Central Asian negotiators giving them a taste of their own longstanding hardball pipeline politics, Gazprom will still be able to charge extortionate transit rates for the privilege of using Russian pipelines. While Gazprom charges $1.70 for 1,000 cubic meters to travel 100 kilometers, with transportation of gas from Central Asia to Ukraine costing about $10 per 1,000 cubic meters, Gazprom may well double the transit fee, too. While Kiev will be left scrambling to come up with the extra revenue or freeze, as Michael Corleone said, "Its just business."

Ironically, the intense U.S. and EU diplomatic lobbying for alternative gas export routes to Europe, bypassing both Russia and Iran, has contributed to the formation of an informal Central Asian gas cartel, as the fiscal incentive to bypass Moscow's control in return for higher revenues is now effectively ended by the new arrangement.

Not that Gazprom's Western European consumers will escape sticker shock; last November Gazprom was projecting gas prices in Europe to rise to $354 per 1,000 cubic meters by mid-2008. A source told Interfax, "The forecast average price for Gazprom gas to Europe in 2008 is $378 per 1,000 cubic meters with the potential to rise to roughly $400 by year-end."

Ukraine's dependence on Russia for energy imports is part of a larger subset of strained relations that have existed since the 1991 collapse of communism. Pipeline politics have given the Kremlin a convenient pressure point on Kiev over policies it doesn't like, most notably the oft-expressed intention of President Vladimir Yushchenko's government to seek NATO membership. Upping the ante, Yushchenko's office announced March 13 that, "U.S. President George Bush ... will visit Ukraine between March 31 and April 1. U.S. Secretary of State Condoleezza Rice will be part of the delegation" on its way to NATO's summit in Bucharest April 2-4. A measure of Moscow's displeasure is that in January, Russian President Vladimir Putin warned that Russia might be forced to aim missiles at Ukraine if it hosted Western military facilities -- remarks Rice labeled as "reprehensible."

Rhetoric aside, the reality remains that the Ukrainian economy depends on imports, primarily from Russia, to meet about 75 percent of its annual oil and natural gas requirements. In what has become an almost annual rite of brinkmanship, a dispute with Russia over pricing in late-2005 and early-2006 led to a temporary gas cutoff; Ukraine concluded a deal with Russia in January 2006 that almost doubled the price Ukraine pays for Russian gas. Earlier this month Gazprom cut shipments to Ukraine by 50 percent over a pricing dispute, with the dispute only being resolved on March 13.

While Moscow has grudgingly accepted NATO membership of the Baltics and most of its former Warsaw Pact allies, the Kremlin has consistently maintained that Ukrainian membership in NATO is a line drawn in the sand that, if crossed, will have consequences. If the United States persists in pursuing NATO membership for Ukraine, then it should at the very least ensure that any alliance troops deployed there pack thermal underwear, sweaters and mittens, as they are likely to face a long, cold winter on the steppes.

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