Europe May Face Energy Shortages As Ukraine Is Unable To Pay For Gas

Posted on 27. May, 2009 by Ross in Energy Shortages, Europe

Following talks between Russia’s Gazprom and Ukraine’s Naftogaz, commentators predict a new threat to European energy security as Kiev again is struggling to pay for Russian fuel. However, the Ukraine is in advanced talks to sell the right to emit around $3.5bn worth of carbon to three foreign companies in a continuing effort to balance the books and ease the nation’s cashflow problems.

Gazprom`s Chief Alexei Miller and his Ukrainian counterpart from Naftogaz Oleg Dubina met in Moscow to discuss Kiev’s payment structure for Russian gas, including those amounts Ukraine needs to keep in underground storage facilities for further transportation to Europe. In January Ukraine and Russia had a row over gas pricing and transit fees which resulted in 15 European countries left without gas, with consumers in Serbia and Bulgaria suffering most.

The information provided by Naftogaz during the talks in Moscow proved that the Ukrainian company is facing serious financial problems and is unable to pay for the Russian gas supplies. Highlighting the aggressive stance that the Russians are taking over this, Gazprom`s official spokesman Sergei Kupriyanov commented:

Unfortunately, our colleagues from Naftogaz did not tell us anything optimistic. Obviously, Ukraine will find it quite difficult to pay for the gas it has received in May. We urged our partners in Ukraine to take every effort to fill all the storage during the summer to avoid problems in winter season. We also reminded them that in accordance with the treaty we signed in January, 2009, Russia will switch to 100% prepayments if Kiev fails to observe the commitments.

The Ukraine has been toiling to avoid defaulting on its national debts since the start of the economic downturn, along with much of the rest of the surrounding region. Massive failed private investments from struggling Western banks, especially from Austria, has destabilised smaller local banks. Political corruption has plagued the country since 2004’s Orange Revolution, which was one reason why the IMF stalled over a recent $2.8 billion bail-out payment after large quantities of the previous one disappeared from accounts far quicker than anticipated by the World Bank. The economic picture in the Ukraine has become slightly more rosy recently though, with falling inflation and a trade surplus.

However, last month Ukraine’s gross domestic product (GDP) decline outlook was downgraded by the World Bank from minus four per cent to minus nine per cent for 2009. The impact of the global economic downturn has devastated Ukraine’s industrial output and consequently it’s carbon dioxide emissions, enabling the biggest ever sale in internationally-recognised carbon credits, likely to be completed later this year.

In the largest deal to date of its type, the Ukrainian government intends to sell over 250 million Assigned Amount Units (AAUs) - a measurement of carbon established under the aged Kyoto Protocol - to Japanese bank Nomura, Swiss-based Dighton Carbon and New Zealand-based Tawhaki International LP. The price for the AAU’s is likely to be $7-$14 per tonne of carbon dioxide: substantially less than the floor price for carbon in the forthcoming UK and US cap-and-trade schemes.

Laurent Segalen, managing director of commodities and environment at Nomura, told Reuters he represented a consortium of businesses looking to buy at least 100 million AAUs for between €5-10 per metric ton of CO2, and added that the deal was ‘extremely green’ - many buyers of AAU’s require vendors to earmark their profits for clean technology and efficiency projects.

The Ukrainian government issued a cabinet resolution saying it also aimed to sell 100 million to Dighton Carbon and 50 million to Tawhaki, but provided no further details.

Image by mobilestreetlife @ Flickr