In cutting off gas supplies to the Ukraine, Russia is making a geopolitical point that may cost it dearly in the long run. The brutality of its response to Ukraine because the government of Western-leaning President Viktor Yushchenko refused to countenance an immediate four-fold increase in the amount it pays for its Russian gas has hit Western Europe, which takes a quarter of its gas from Russia through a pipeline that runs through the Ukraine.
The rights and wrongs of the row between Moscow and Kiev are immaterial. In a world governed by law, not least contract law, neither companies nor governments can expect to dishonor crucial commercial agreements and not expect lawsuits. Gazprom, the government-run utility that has turned down the gas flow to the Ukraine and thus to its other customers beyond it in Western Europe, has simply stepped outside the bounds of accepted business behavior. Sure, it can sell its gas to whom it likes and for whatever price it can get, but an ugly dispute with one customer cannot be allowed to affect its contractual obligations to others.
There were signs last night that someone in the Kremlin had convinced the Putin administration that it may have gone too far. Unfortunately for Moscow, the damage has already have been done. There may or may not be lawsuits from Western European companies demanding compensation from Gazprom. There will certainly however be a subtle change in attitude by Russia’s energy customers.
Such is the cost and complexity of oil and gas distribution, especially by pipeline. Energy companies need long lead times to set up alternatives. That means that nothing is going to happen very soon to what has been a growing dependence on Russian gas in particular. However, energy professionals are used to taking the long view. It therefore seems likely that contingency plans for fresh energy supplies are already being dusted down. In the recent past, the energy industry has responded radically to far less provocation. From its first days in office, the Blair government in Britain decided it could raise extra revenue by imposing windfall taxes on North Sea oil companies. The result has been a slowdown in North Sea investment in enhanced recovery and new exploration and thus a faster than expected end to the UK’s own oil and gas reserves.
Western governments and oil companies will now be thinking that if this is how Russia can treat its customers in a row with a third party, how much more damaging will be its behavior if there is ever a direct difference between Moscow and Berlin or Paris or some other Western European government. The search for alternative gas supplies is sure to impact the Middle East where fresh investment will become available for the location, production and liquefaction of fresh gas resources. In the short term, Gazprom will not lose its markets, but, in the longer term, it will find customers reluctant to commit to supply agreements that the Kremlin has just demonstrated can be set aside so peremptorily.
