Russian-Ukrainian Gas Dispute May Affect Germany

On the surface, the atmosphere at E.ON Ruhrgas, Germany's largest gas importer, is relaxed. The gas giant's top management is, as is the case in most companies at this time of year, on holiday and even the press office is thinly-staffed.

But beyond the calm façade, E.ON Ruhrgas must have its sights firmly on a turbulent dispute unfolding in Moscow and Kiev. For months, the two sides have been wrangling about new pricing for gas supplies and transit rights.

Russia wants Ukraine to immediately begin paying world market rates for gas it receives from Russia, instead of the highly subsidized price charged at present under a barter system left over from Soviet practices.

Kiev says it is prepared to pay market rates -- and to charge Russia market rates for use of the gas pipeline network on Ukrainian territory that Gazprom relies heavily on to ship gas to customers in Europe -- but wants the shift to take place gradually over several years.

Old contracts governing Russian state-run giant Gazprom's gas supplies to and via Ukraine to customers in Europe run out on Dec. 31. If Russia and Ukraine fail to reach a compromise by then, things could turn distinctly frosty -- not just between Moscow and Kiev, but also in Germany which relies on Russia for 35 percent of its gas supplies.

No reason for panic, as yet

Energy experts in Germany aren't hitting the panic button as yet.

"Germany can be supplied for more than two month from gas storage tanks," Martin Weyand, head of the Federal Association of German Gas and Water Economy (BGW) pointed out this week.

It's estimated that the largest gas storage tank belonging to Kassel-based energy company Wingas could supply two million households for a year with gas.

Even E.ON Ruhrgas has made adequate arrangements to avoid any supply bottlenecks, according to E.ON Ruhrgas boss Burckhard Bergmann.

Long-drawn out crisis could hit supplies

At the same time, experts warn that things could turn dire if supplies are cut off too long.

"If the crisis continues for too long and the winter is tough, then we have our limits too," Bergmann said.

Daily Rheinische Post reported that Essen-based E.ON Ruhrgas was feverishly working on tackling possible crisis scenarios and that it was considering importing more supplies in the short-term from Norway and the Netherlands.

Others are also cautioning that in future Germany would also have to look at alternative transport routes.

Rainer Seele, head of Wingas told the Rheinische Post that the gas dispute underlined the importance of an additional route such as the planned North European Gas Pipeline that will link the massive Russian gas fields with Germany under the Baltic Sea.

With it, Germany and Europe would achieve "independence from political instability," Seele said.

Conflict could drag on

So far, the row between Russia and Moscow shows no signs of abating.

Moscow has threatened Ukraine that it will completely turn off the gas taps, while Ukraine has countered that it will stop its territory from being used as a gas transit.

At the heart of the conflict is Gazprom's demand that Ukraine start paying $220-230 (185-193 euros) per 1,000 cubic meters of gas it receives from Russia -- roughly the price the Russian gas monopoly charges to customers in Western Europe but more than quadruple the $50 Ukraine pays at present.

In Kiev, the government says the Russian demand is tantamount to economic pressure and a political disciplinary measure for its Orange Revolution last year and Ukraine's increasing pro-Western stance.

As proof, Ukraine points to the fact that pro-Moscow nations such as Belarus will also in future be charged significantly less for Russian gas.

The chances for solving the tangle appear bleak. According to Ukrainian sources, the dispute will likely drag on until March when parliamentary elections are scheduled to take place in Kiev.

Talks failure may not be so bad after all

From a western point of view, this would be the worst option since an interruption of gas supplies will be unavoidable. In addition to Germany, several other Western European countries would be affected.

So far, Germany's close relations to Russia when it comes to gas and oil have always been viewed as secure. But the row between Moscow and Kiev makes it clear how fragile this supply line is and particularly, how dangerous the increasing fixation on big suppliers -- in this case Russia -- is for Germany and Europe.

Considering all this, a failure of Russian-Ukrainian gas negotiations may not be such a bad thing -- it might work as a shock and a trigger for a restructuring of German and European energy policy.