Natural gas standoff between Russia and Ukraine leaves Europe on edge

With billions of dollars on the line and Russia's presidential election around the corner, two bitter enemies locked horns last week over heat-producing natural gas during a brutal cold spell in Europe.

But the tense standoff between Ukraine and Russia also left Europeans on the edge of their seats, asking what's next when it comes to their future supply of the highly lucrative resource.

Ukraine and Russia rely on each other to delivergas to Europe. The Russians pump natural gas through pipelines in Ukraine and deliver it to Europe, but the deep-seated distrust that has turned into hatred between the two countries is causing chaos, and it isn't the first time.

In 2009, a dispute between the two countries cut offnatural gas suppliesto Europefor 13 days in the dead of winter. While last week's episode wasn't as precarious, it could have important long-term consequences for all of Europe.

The immediate losers in the latest battle were regular civilians, as the gas they use to heat their homes suddenly became a scarce commodity on March 1, a day when temperatures fell as low as 22 C.

• Ukraine stops buying Russian gas, but Gazprom says it cut off service

• On again, off again? Gas dispute continues between Russia, Ukraine

• EU demands speedy end to Russia-Ukraine gas spat

In the freeze, the Ukrainian government asked businesses and citizens to turn down the heat to conserve gas, while recommending the closure of all kindergartens, schools, colleges and universities.

Schools like Kyiv's Taras Shevchenko University went on hiatus, caught in the fallout from a four-year legal battle between Ukrainian state-owned energy company Naftogaz and Russian energy giant Gazprom that culminated with a $4.6-billion US ruling in Ukraine's favour, handed down by the Stockholm Arbitral Tribunal on Feb. 28.

The decision was to be the end of a grinding court battle over natural gas contracts that began in 2014, the same year Russia annexed Ukraine's Crimean peninsula and war broke out in Ukraine's eastern regions.

More drama

Instead, however, the decision ramped up the drama and served as a warning sign for the European Union, said Agata Loskot-Strachota, a senior fellow of energy policy at the Centre for Eastern Studies in Poland.

"It is a great reminder to the EU and Gazprom's European partners how some of the gas-related decisions are made in Russia."

Loskot-Stachota echoed the sentiment of many other analysts who believe the Russian government uses the state-owned Gazprom as a foreign policy tool instead of allowing it to operate as a standalone company.

• Gazprom accused of being an unfair monopoly by EU\
• Gazprom puts pressure on Ukraine to pay its $2.2B gas bill

Russia used to supply most of Ukraine's gas before 2014, and although Ukraine has largely weaned itself off Russian gas, the Russians still needs Ukraine's pipelines to deliver their lucrative gas to Europe.

The EU is now mired in a battle over increasing its reliance on that Russian gas via the controversial Nord Stream 2 pipeline, a massive project fully owned by Gazprom. Scheduled to come online in late 2019, it will bring cheap Russian gas across the Baltic Sea to Germany.

The drama began on Feb. 26 when Gazprom invoiced Naftogaz for supplies that were to be delivered to Ukraine in March.

That same day, Naftogaz made a prepayment of $127 million US for that invoice.

That deal was necessary to fulfil a December ruling from the Stockholm tribunal that ordered Naftogaz to buy around $2 billion worth of gas from the Russian producer.

However, after Ukraine won a net total of $2.56 billion in damages, a clear loss for Gazprom in the midst of Russian President Vladimir Putin's re-election campaign, Gazprom unexpectedly cancelled its March supply contract with Ukraine.

On March 1, the day after the landmark judgment and with just minutes to go before March's gas delivery began, the Russians refunded the $127 million payment, no longer willing to fulfil the deal.

Going to the reserves

Authorities in Ukraine sprang into action, quickly working to reduce consumption across the country while reserves and outside supply were sourced.

Social media-savvy leaders initiated a hashtag campaign asking all citizens to turn down the heat at home, which helped cut consumption 14 per cent in one day.

A day later, Gazprom CEO Alexei Miller announced the company intended to withdrawal from all contracts with Naftogaz, including the all-important transit contracts supplying gas through Ukraine to Europe.

Gazprom's actions set off alarm bells for analysts like Thierry Bros, a senior research Fellow at the Oxford Institute for Energy Studieswho told CBC News that although the move was brutal, it was not totally surprising.

"When you deal with those two countries, you have to remember there is a war, there is an annexation, so it's never just commercial."

The problem for Europe now is that with the intended cancellation of transit from Ukraine, it has been pushed into a reality it wasn't anticipating until 2020, when the Russian-Ukrainian transit contracts were set to expire.

"We do not have the capacity to bring Russian gas to Europe in the quantities that we need without Ukraine," said Bros, "and the other effect of this crisis is what is Europe going to do vis-a-vis Nord Stream 2."

Although Nord Stream 2 would lessen European reliance on Ukraine for transit gas, it won't be ready until late 2019 at the earliest.

Lack of trust

More importantly, other European countries, especially the Baltics, are wary of increasing their ties to Russia. Some Europeans simply don't trust the Russian government as a partner in something as critical as gas.

Now they're pointing to the latest drama with Ukraine as further evidence of their position.

Anders Fogh Rasmussen, the former secretary general of NATO who now works as a consultant for Ukraine, told CBC News that, "after years of trying to present itself as a reliable supplier to Europe, the mask slipped and its true face of Gazprom as a platform for Kremlin influence was exposed."

Others are enthusiastic about Nord Stream 2, like newly elected Austrian leader Sebastian Kurz, who has indicated he'd like to strengthen ties with Russia.

Germany, the largest player in Europe and coincidentally the endpoint of the Nord Stream 2 pipeline, is steadfast in its commitment to the multibillion-dollar project. The issue has created another in a series of seemingly endless rifts in the EU.

Recently, in a meeting with his Lithuanian counterpart, Polish President Andrej Duda said: "We have our experiences with Russia, we have also been observing the experiences of Ukraine, against which the reduction of gas supplies has been used as a weapon."

• Battered eastern Ukraine seems headed into protracted on-and-off war

Bros said time is running out for Europe after Gazprom has shown its willingness to end the transit contract with Ukraine.

"If this contract was terminated, it means that technically Europe is short of 50 billion cubic metres of Russian gas overnight. We can't afford to terminate the contract but if it happens, from where do you replace that supply?"

Looking for diversity

Baltic states want Europe to diversify to liquefied natural gas (LNG) from suppliers like Qatar and the United States. Lithuania and Poland have been quickly developing infrastructure to diversify to LNG.

Adding to the confusion is the possibility of the European Commission slapping sanctions on the Russian pipeline, but only time will tell.

Bros said the European Parliament will hold an important vote on the pipeline in late March and that '"what Russia did on March 1st could have a significant impact on the way the parliament votes."

With the weather warming, Ukraine has avoided any sort of energy crisis by signing a new gas supply contract with Poland.

For Ukrainian students who'd hoped for an extended surprise vacation, unfortunately school is back on.