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South East Europe at biggest risk of Ukraine-Russia gas row

Henning Gloystein and Michael Kahn
Tuesday, 12 Nov 2013 | 9:57 AM ET

* Italy could also struggle if row clashes with Libyan disruptions

* Russian re-exports via Germany could meet some demand

* Situation not as bad as in 2009 - analysts

LONDON/PRAGUE, Nov 12 (Reuters) - Central and south eastern Europe will bear the brunt of any halts of Russian gas supplies through Ukraine this winter but the region will not be caught as unprepared as in 2009 when thousands went without heat in freezing temperatures.

A contract dispute between Kiev and Moscow spurred Russia to shut a pipeline serving central and south eastern Europe in 2009, leaving hundreds of thousands of people without heating in freezing temperatures and forcing businesses to shutter.

Governments in the region now fear that a renewed row between Ukraine and Russia at the beginning of this winter could disrupt supplies again. Ukraine halted Russian imports last Friday in a dispute over pricing, and flows may not resume this year.

Ukraine usually imports most its gas from Russia and it is also its main transit route to the European Union (EU), which depends on Russia for about a quarter of all its gas.

Although Ukraine says that it has enough gas in storage to meet demand this winter, western European customers worry that supplies meant for them will stay in Ukraine if a cold winter pushes up demand, triggering a new supply crisis.

Analysts say that increasingly cold weather had already led to gas storage withdrawals in Central Europe, Germany and Italy.

"Europe as whole saw withdrawals this week, with Austria (Baumgarten), Germany and Italy withdrawing some 157 million cubic metres (mcm) of gas over the past week... a worry given the possible curtailing of Russian gas flows to the Ukraine, which is still a threat," research consultancy Energy Aspects said on Tuesday in a research report.

"We are potentially in a bind approaching the winter," Jonathan Stern, chairman of the natural gas research programme at the Oxford Institute for Energy Studies said in Brussels. He added, however, that Europe was better prepared for potential disruptions this year than it had been in the past.

"There is not a crisis yet (and) it is not such a big problem as in 2009. We are in a much better situation."

The main improvement since 2009 has been the opening of a new pipeline in 2011. Russia's Gazprom has been sending gas through the 1,200 kilometre (750 mile) Nord Stream pipeline from western Russia through the Baltic Sea into Germany, avoiding transit through Ukraine.

Additionally, affected countries across Europe have improved gas links with their neighbours and developed a mechanism to reverse gas flows allowing, for instance, a re-export of Russian gas from Germany to Poland or the Czech Republic and from there into Slovakia and Hungary.

The main problem of reversing gas flows is that they simply spread existing gas but do not deliver new gas, which could be needed if demand rises in the case of a cold snap.

"If Germany suddenly needs most of its imported gas itself, or Britain starts importing from Germany because there are production outages in Europe, then there may not be enough spare gas to be sent to central or southern Europe," one German gas trader said.

Although Britain usually does not use much Russian gas and would only get it through re-exports from continental Europe, its dwindling North Sea reserves mean that it increasingly relies on overseas imports from for instance Norway, through shipped liquefied natural gas (LNG), but also from continental Europe.

"We monitor the security of our gas supplies. We've got our own supplies, supplies from Norway, supplies from the continent," Britain's energy secretary Ed Davey told Reuters on the sidelines of a conference in London on Tuesday.

ITALY & SOUTH EAST EUROPE

Potentially worst hit by a renewed gas crisis would be the far southeast of Europe, where there are no major gas links with neighbours.

"If the gas stops flowing, there is a very dark scenario for Bosnia, which has no reserves and nearly all gas comes from Russia. On top of that, BH Gas has no funds to buy gas on the spot market," said Almir Becarevic, an advisor to Bosnia's indebted main gas distributor BH Gas.

In a drive to dampen the effect of future rows between Russia and Ukraine in central and southern Europe, Gazprom and its partners, Italy's Eni, France's EDF and Germany's Wintershall has begun building the South Stream pipeline, which plans to start exporting Russian gas via the Black Sea into southern and eastern Europe from 2015, again avoiding transit through Ukraine.

But until then, the region remains vulnerable to such disputes and Italy, one of Europe's biggest economies and gas users, could also be hit.

Italy receives almost 40 percent of its gas from North Africa, but supply disruptions in Libya and general concern over North African stability have sparked efforts to shift towards more Russian imports, which currently meet 35 percent of needs.

Should Russia's flows to Italy halt, it could find itself looking to meet almost 40 percent of its needs from alternative sources in the midst of the year's peak heating season.

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