Friday, January 20, 2012

South Stream Becoming a Reality

On December 29, 2011, Turkey and Russia signed an agreement to allow the South Stream natural gas pipeline to transit the Black Sea waters in Turkey's economic zone.  This was an important development, in that South Stream now has the necessary permissions to bring the Russian pipeline system to Europe via the Southern corridor.  Russian Prime Minister Vladimir Putin was so excited by the development that he ordered Gazprom to move up the date to begin construction from 2013 to 2012.
There has been much speculation that the pipeline is a bluff--designed to either stop Nabucco construction or to force Ukraine to bend to Moscow's will.  The truth may be more obscure.  US Special Envoy for Eurasian Energy Richard Morningstar commented in a recent speech, "The Russians have...taken to building the South Stream Pipeline, although they are the only ones who know why."
The fact is that, regardless of what the original thoughts may have been concerning the pipeline, Russia has made so many commitments concerning this pipeline that it would be almost impossible for them to back out.  There are three Western European private companies who are partners in this project.  It is extremely doubtful that Germany's Wintershall (a division of BASF), Italy's ENI, and France's EDF would incur start-up expenses in support of a Russian political ruse.  Gazprom still controls 50% of the consortium and could unilaterally kill the project, but it would incur the wrath of its other partners.
The same goes for the various governments that have signed on.  Bulgaria has hired a company for a feasibility study, Slovenia has created a JV to build and operate their share of the pipeline, Serbia looks forward to being a key transit center, Greece (now to be on a spur instead of the main line) has identified the pipeline as a national priority, etc.
Much has been made that South Stream has not identified where it will get the 63 bcm annually it needs to fill the pipeline.  In fact, South Stream never planned to identify new sources of gas, but to use the gas that is presently transiting the Ukrainian pipeline system, according to South Stream CEO Marcel Kramer.  European Energy Review published an interview with Kramer on this subject.  "The basic and overriding target of Russia is to ensure the technical, managerial and economic reliability of its gas supply.  That is where South Stream comes in.  Don't forget that the pipeline system in Ukraine is in a poor state.  It's being said that it is old, dilapidated, without an integrated management system.  To upgrade the entire route through Ukraine would also cost a lot of money.  Then you get into questions of ownership, operatorship, who puts up the money, the chances of political interference.  The bottom line is, is this an arrangement that the buyers of gas in Europe can rely on?  If you put all this together, the answer is clear," he said.
Ukraine, of course, is opposed to the new pipeline.  Energy Minister Yuri Boiko called South Stream a threat to Ukrainian national interests.  "We will always be against it," he said according to UPI.
Another question has been whether there is sufficient demand for Russian natural gas to justify the building of the pipeline.  Andrea Bonzanni, former consultant to the UN and the World Bank, wrote in World Politics Review that the mid- to long-term outlook for gas demand does not seem to justify the construction of both Nabucco and South Stream.
The Russians believe Europe has a long-term need for additional gas, justifying the construction.  After a meeting between Gazprom Chairman Alexi Miller and Bulgargaz executive director Dimitar Gogov, UPI reported the participants issued a statement that both sides "share the opinion that given the inevitable gas demand growth in Europe, timely implementation of South Stream would meet the interests of millions of European consumers."  Miller has said, "It is clear that there will be need for additional pipeline capacities" that would help mitigate risks that could have a serious impact on the European market, according to Platts.  Alexander Medvedev, deputy chair of the Gazprom Management Committee, wrote in Today's Zaman, "The fact that South Stream is primarily an investment in energy security, not in boosting the market share of Russian gas, also means that it does not compete with other pipeline projects that intend to import fresh supply volumes from other possible gas sources.  South Stream does not oppose these projects." RIA Novosti quoted Gazprom's Medvedev, "Even if we take into account the Nord Stream, the South Stream, the Nabucco and liquefied natural gas, all the same, the shortage of gas supplies to Europe will be some 530-700 billion cubic feet."
Some within the European Union appear to agree with this analysis.  European Energy Commission Gunther Oettinger said "we don't want to block South Stream," and arranged for South Stream executives to make their case to the commission in May. At that meeting, the Russians took the opportunity to make the case that South Stream is a continuation of Russian trans-border pipelines, and third parties should not have access to it.  Ths would guarantee a Gazprom monopoly on the project flow. CEO Kramer said requiring the pipeline to open to competitors would affect the project's rate of return, and could make the project more "difficult" to carry out, according to the New York Times.  Oettinger, however, remained adamant:  "If South access to gas independents active in Russia, then South Stream would deliver on two essential criteria:  namely diversification of routes and counterparties.  That means a stronger contribution to European diversification efforts," he said in a speech reported by the Wall Street Journal.
Whether the doubters or the believers are correct, however, it appears that the construction of the pipeline will begin within the next twelve months.

Tuesday, January 17, 2012

Nabucco Down but Not Out

It's been a tough six months for Nabucco, the European Union-preferred route that is supposed to bring Caspian natural gas to Austria via Turkey, Bulgaria, Romania and Hungary.  Azerbaijan has received bids for its Shah Deniz II oil from several competing consortiums, and several of them are more attractive economically.  On top of that, Nabucco still is unable to find enough feedstock for its pipeline.  Despite these setbacks, some analysts believe the route remains the most viable route:  because it guarantees independence from Russian natural gas, and because it can carry more product than any of the competition (except for South Stream).
On June 8, the Nabucco Gas Pipeline International GmbH signed project support agreements with the transit countries, but Azerbaijan did not sign the agreement as this would have signaled their choice of a route.  Elshad Nasirov, vice present of the State Oil Company of Azerbaijan (SOCAR), said that Azerbaijan was not prepared to commit all its gas to one buyer.  "We prefer diversity among the buyers, so we sell gas to the EU and Iran, as well as Russia," Hurriyet reported him as saying.  Nasirov cast doubt on Turkish support of Nabucco, citing Turkish failure to provide Azerbaijan with a signed copy of the project support agreement, and failure to sign a bilateral transit agreement.  "If we have not yet signed the transit agreement, should we understand that Nabucco has still not been sanctioned byTurkey?"  he asked.  In a foreshadowing of Azeri support for the Trans-Anatolian pipeline proposal, he told the Wall Street Journal that he preferred a smaller pipeline that could be expanded later to meet additional capacity.  He also said that SOCAR would consider becoming a shareholder in this smaller pipeline, in order to influence transit tariffs and other decisions.
Contradicting Nasirov was Azerbaijan's Minister of Industry and Energy Natiq Aliyev.  UPI reported him as saying his country supported the Nabucco project.  "As part of this project, Azerbaijan can serve as a transit country, as well as a gas supplier, as the project is seen as a priority in light of the diversification of gas supplies," he said.  UPI reported the German energy company RWE, whose support had been questioned after they signed a purchase agreement with Gazprom, remained committed to Nabucco, according to RWE Chief Executive Officer Joergen Grossman. In addition, Bayerngas announced its desire to join the Nabucco consortium, according to the Dow Jones newswire.
Nabucco submitted its formal proposal to SOCAR at the end of September, along with all its rivals.  SOCAR spokesmen announced at various times that a final decision would be made as early as October 2011or as late as 2014.
Nabucco's inability to find gas supplies has forced it to delay by 3 years its scheduled date to begin operations.  Orignally scheduled to be completed in 2015, completion date is now scheduled for 2018--although construction is still supposed to begin in 2013, according to the CEO of OMV Gerhard Roiss the Sofia News Agency.  To solve this problem, Austria's President Heinz Fischer asked Turkmenistan to become a Nabucco supplier, according to Associated Press.  According to Dr. Friedemann Muller of the German Institute for International and Security Affairs, the Turkmenistan gas is crucial for Nabucco to be successful. (The issue of bringing Turkmenistan gas to Azerbaijan via the Trans Caspian Pipeline is addressed in numerous other entries on this blog.)
The cost of Nabucco has also become an issue.  Hungarian National Development Minister Tamas Fellegi complained, "No one can predict the final cost of Nabucco, but according to optimistic estimates, its cost may reach 24-26 billion euro," a far cry from the original projection of $8 billion.  The European Commission believes the price will be closer to $10 billion, and Nabucco chief Reinhard Mitschek does not believe financing will be an issue.  "I am confident that once we will have the gas supply and transportation contracts and...with political support we expect financing will be settled and will not create a bottleneck," quoted Reuters.
U.S. Special Envoy Richard Morningstar has never been a Nabucco supporter, and he has continued to denigrate its possibilities.  At a news conference in Baku, he said that Nabucco retained U.S. political backing but that economic concerns should take precedence.  "It's important if Shah Deniz producers and SOCAR choose a smaller pipeline as the first pipeline," he said according to Reuters.
Nabucco's primacy was challenged in December 2011, when SOCAR and the Turkish Pipeline Company (BOTAS) announced their plan to build their own pipeline, the Trans Anatolian pipeline.  According to SOCAR president Sabit Bagirov, however, this development actually helps Nabucco's prospects:  "With the implementation of the Trans Anadolu Dogalgaz Pipeline, the necessity to construct the Turkish section of Nabucco will disappear, and the builder will only need the gas pipeline section from Turkey through Bulgaria to the distribution point in Baumgarten in Austria.  In other words, with the implementation of the Trans Anadolu Dogalgaz Pipeline, only that section of the Nabucco route falling on European teritory will need to be built," quoted the Moscow Times.
As 2012 begins, Nabucco appears no closer to completion than it did at the beginning of 2011.  Construction is scheduled to begin on time, but completion will not be until 2018.  The consortium relies on Shah Deniz II gas, which SOCAR wants to pump through the Trans Anatolian Pipeline.  On the other hand, Nabucco could join this new project.  The price continues to rise, and no alternative feedstock sources have been found.  Nabucco is not dead, but it might be considered to be on life support.

Wednesday, January 11, 2012

China Russia Energy Cooperation Moving Slowly

You would think that the most natural thing in the world would be for a large energy producer to partner with a large energy consumer, but in the case of China and Russia logic does not always prevail. The Washington Post quotes a Western energy executive who said, "They look like the perfect partners, but this is a marriage made in hell." He added the two sides were so afraid of being outdone by the other that negotiations tend toward all-or-nothing combat. The issue, whether discussing gas or crude oil, is the relationship between price and transportation distance.

In the case of oil, in October 2008 Russia and China signed an agreement in which the China Development Bank lent Transneft the funds to build an extension of the East Siberia-Pacific Ocean (ESPO) so that Russian crude could be delivered to the Chinese city of Daqing. The loan was to be repaid by supplying China with 300,000 barrels per day of crude for twenty years. Everything appeared on track, and on December 31, 2010, the first Russian oil crossed the Chinese border.

In April, Transneft reported that it was losing $20 million a month in the oil deliveries, because China had unilaterally decided that they were paying too much and reduced payments. Russia threatened to take the Chinese National Petroleum Corporation (CNPC) to the London Arbitration Court. China wanted a discount, because the oil they were purchasing traveled less than oil destined for Japan. according to Transneft spokesman Igor Dyomin, "There is no price difference for oil companies as to where they enter ESPO and where they exit...Russia is long out of socialism--we want fair market pricing."

Chinese Foreign Ministry spokesman Hong Lei was sanguine about the dispute. Reuters reported his comments that, "As for some concrete problems encountered during cooperation, we believe both sides can fully resolve this in a positive way via friendly negotiations and on a mutually beneficial, win-win basis."

Some progress was made in late May 2011, when China paid about three-fourths of the money the Russians claimed they were owed. Shortly thereafter, China resumed discounting its payments. After talks in early June, a Russian Energy Ministry spokesman said that the pricing formula would remain unchanged. "The price formula will be kept unchanged, we have agreed on that and China is ready to make payments according to it," quoted RIA Novosti. The Russians were overly optimistic, however. "They actually went back to the level of negotations which we had prior to the signing of the contract," Pravda quoted Transneft officials.

A Russian source stated anonymously that if the Chinese did not pay for the oil in full, that the dispute would go to the arbitration court, and that Transneft was prepared to repay its 20 year loan ahead of schedule, according to With the loan repaid, Transneft could cease oil deliveries. China then moved the dispute from the state-owned company level, to the governmental level.

Russia's Deputy Prime Minister, Igor Sechin, tried to calm the situation. He said he did not see any problems that could not be solved, and that not all opportunities had been exhausted, according to RIA Novosti. Finally, in October, Premiers Wen Jia Bao and Vladimir Putin jointly announced a breakthrough. "The two countries agreed on crude oil prices and decided to actively push forward cooperation on oil and gas," China Daily quoted Wen. No details of the agreement were released but anonymous sources told that Russia, who had claimed China was underpaying by $3 per barrel, had agreed to a $1.50 discount.

At least a compromise had been reached. Natural gas is a different story. Currently, China consumes about 150 billion cubic meters (bcm) of natural gas per annum, approximately 4% of its energy mix. This amount is expected to double by 2020, according to a report in the People's Daily. Russia and China signed an agreement in 2006 to build two natural gas pipelines. Russia would then send 70 billion cubic meters annually to China. In 2011, despite numerous positive remarks by both Chinese and Russian officials, there is no pipeline construction.

Denis Borisov, an oil analyst at the Bank of Moscow, believes that Russia badly needs a gas deal with China, to diversity its exports away from saturated European gas markets. "Talks may last long but the gas deal won't be sacrificed..I think gas cooperation is a top priority for Russia," he told Reuters. This optimism was echoed by a Chinese source close to the Chinese-Russian talks,. "Our positions have gotten closer," he said about the possibility of a Chinese loan to build the pipeline.

In April, Chinese President Hu Jintao met with Dmitry Medvedev in the Chinese resort town of Sanya. The leaders announced they would pursue cooperation on major energy projects, such as the west natural gas pipeline from West Siberia to China, according to the Xinhua news agency. Despite the positive pronouncements, Interfax China reported that Gazprom and CNPC were involved in tough negotiations over price that did not appear to be progressing.

Everything looked better in May. Russian Deputy Prime Minister Igor Sechin reported that, after many years of fruitless negotiations, Russia and China had coordinated the key terms of a long-term gas contract. "We are considering two gas supply routes for the next 30 years. The western route will provide China with 30 bcm of gas, the eastern one with 38 billion,' he said. He also said there would be no problem with financing, according to the Voice of Russia. Sechin cautioned, however, that the two sides had not reached a final agreement on price--leaving that detail to Gazprom and CNPC, according to Chinese Assistant Foreign Minister Cheng Guoping was pleased: "Personally, I'm confident that if progress is smooth, then it's quite likely that in the near future..both sides will achieve a major breakthrough in cooperating over natural gas," he told a news conference. Xing Guangcheng, an expert on Russian studies at the Chinese Academy of Social Sciences, commented, "The deal is not an ordinary project between just two companies. It is a project of bilateral strategic importance, and it needs the determination of the leadership from both sides," according to China Daily.

It was not to be. President Medvedev announced that documents were being finalized, and Premier Hu Juntao said both sides ere willing to push forward, but price remained a stumbling block. "We are not going to sign anything this time," Medvedev concluded the negotiations, according to New Europe. Russian Energy Minister Sergei Shmatko commented, "This is not some simple bazaar deal; we can't hurry on this."

The disagreement was outlined in China Daily. Andrew Neff, an analyst who specializes in Russia and the Commonwealth of Independent States at IHS Global Insight, explained the Russian position: "Gazprom is focused on achieving a price agreement in line with that of its long-term, oil-indexed contracts for pipeline supplies to its European customers." But China disagreed. Pang Changwei, Director of the Institute for International Oil Politics at China University of Petroleum said it was unrealistic to base the price on the European market because the distance between China and Russia was much less than that between Russia and Western Europe. He reasoned that because transportation costs should be lower, so should the price. It was the same Chinese argument that disrupted oil deliveries through ESPO.

Some analysts believe that Russia has no intention to actually build a gas line, and that the lengthy negotiations are a ruse. RusEnergy partner Mikhail Krutikhin opined that clearly no gas agreement would be reached. "Russia is trying to scare Europe with threats of redirecting its gas to China, but China is not ready to pay $220-$230 per 1,000 cubic meters," he said according to Nezavisimaya Gazeta. Robert Cutler cited a Chinese press leak that the two sides were as much as $100 per thousand cubic meters apart on price.

In the end, price differences could be negotiated, but the heart of the matter is a lack of trust between the two sides. "China looks very seductive, but" said former Russian deputy energy minister Vladimir Milov. "there is a deep lack of trust behind the facade," quoted the Washington Post. This lack of trust could be generated by geopolitical rivalry between the two sides, according to analyst Alexandros Petersen. The Chinese officially reject such an analysis as an "inaccurate Western perspective," but Petersen quotes a Sinopec analyst saying, "Our interests and the interests of our government are to see stable governments in the region...The result is soft geopolitical competition between China and Russia. And it is spreading."

All that's left is to see what is more important: access to energy, price or geopolitics.

Tuesday, January 10, 2012

Russia Offers Possible Compromise on Third Energy Package

The European Union's Third Energy Package, demanding the "unbundling" of energy production from energy distribution, had been headed for an impasse between Russia and the EU. As of December, however, it appeared that a Russian compromise may be finding traction.

The low point came in early October, when the European offices of Gazprom were subjected to anti-trust raids. The EU seized files to determine if Gazprom was engaged in anti-competitive practices. While the Russians may have been angered, they recognized they were in a confrontation from which there could be no winners. Russian President Dmitry Medvedev told Gazprom and the Russian Ministry of Energy to submit proposals on how to operate under European laws.

The results were a disaster: the Russian Energy Ministry proposed an intergovernmental agreement establishing a special legal regime for major international infrastructure projects. The EU rejected the proposal. Energy Minister Sergei Shmatko told the press, "Talks with the European Comission on the third energy package...have hit a dead end," according to Reuters. The Russians threatened to legally challenge the Third Energy Package in court, and to shift their energy business to the Far East.

In the end, however, despite the diplomatic setback, Russia continued to look for a compromise. "What does this mean? Nothing terrible," Shmatko continued. "All the obligations that the Russian Federation and Russian companies have taken on with regard to supplies of energy under long-term contracts will without doubt be fulfilled." He also said Russia is committed to being a stable and reliable supplier of energy to the EU, and maintenance and increase of supply natural gas transport capacity is a top Kremlin priority, according to Deutsche Presse-Agentur. In early December, Shmatko offered hope. "I would not rule out resolving a fair number of regulatory conflicts at the level of national regulators," he said according to Reuters. At the same time, top EU energy officials said the dispute between Russia and the EU could be worked out under existing law.

The nature of the possible compromise was finally revealed by Russian Ambassador to the EU Vladimir Chizhov. As reported by ITAR-Tass, the Ambassador suggested that the ownership of Gazprom-controlled projects such as Nord Stream and South Stream be reinterpreted, so that ownership and transportation of the gas had already been "unbundled." "South Stream does not fall under the Third Energy Package, because its owner will be not Gazprom, but an international consortium. That is, it will be under an independent operator," he said. "The same applies to Nord Stream, because its operator--Nord Stream AG--is a consortum registered in the Canton of Zug of the Swiss Confederation."

While the Third Energy Package problem may be solved, EU energy commissioner Gunther Oettinger is creating more problems with the Russians. Gazprom has been highly successful in negotiating bilateral agreements that have hurt other countries in their ability to negotiate with the Russians. Thus, the bilateral Russian-German agreement to build Nord Stream has left Poland vulnerable to energy cutoffs; the bilateral Russian-Turkish agreement to allow South Stream to use Turkish waters in the Black Sea could leave Ukraine vulnerable to the same pressure. To solve this problem, the European Commission approved in September an Oettinger proposal requiring national governments to notify the European commission of international energy negotiations. "The ...mechanism is set to strengthen the negotiating position of member states vis-a-vis third countries, while ensuring security of supply, proper functioning of the internal market and creating legal certainty for investment," said the commission.

Monday, January 9, 2012

Azerbaijan to Have its Own Gas Pipeline

Tired of Nabucco planning without implementation, Azerbaijan's Minister of Industry and Energy Natik Aliev and Turkish Energy Minister Taner Yildiz signed a memorandum in late December to build their own natural gas pipeline. The new project, entitled the Trans Anadolu pipeline, will upgrade existing Turkish pipelines to carry 16 billion cubic meters (bcm) of natural gas a year: 10 bcm throughput for the European market, and 6 bcm for domestic, Turkish consumption.
The pipeline will be 80 % owned by the State Oil Company of the Azerbaijani Republic (SOCAR). The remaining 20% will be divided between the two Turkish state-owned companies that control the pipelines: Petroleum Pipeline Corporation (BOTAS) and the Turkish Petroleum Corporation (TPAO.)
The question becomes, what will happen to Nabucco? Trans Anadolu will only deliver to Europe one third the capacity of the planned Nabucco pipeline, but it would deprive Nabucco of the Shah Deniz output that was essential to getting the project started. Gulmira Rzayeva, a research fellow at the Center for Strategic Studies, told Bloomberg, "Nabucco is impossible in the medium term because it is a costly project and needs more suppliers than Shah Deniz to be economically viable." RWE's Stefan Judisch said the new route "raises questions about access and financing."
The Turkish government says that this project is not necessarily an alternative to Nabucco, but could be a first step toward its ultimate completion. Given that Trans Anadolu can be built at a fraction ($9.2 billion) of Nabucco's cost (possibly as high as $20 billion), it remains to be seen if investors will be interested in spending the funds to complete the project(assuming additional feedstock can be found).

Wednesday, January 4, 2012

Russia on Top in Ukranian Energy Dispute

In 2011, Ukraine was faced with a combination challenges: former Prime Minister Yulia Tymoshenko had saddled the country with a long term contract committing the country to paying $400 per thousand cubic meters on a "take or pay" basis; the government was in a dispute over its share of revenues for gas passing through the country to Europe; it was threatened by the creation of alternate pipelines that would remove its importance to the European energy grid; its sovereign control over its energy assets were threatened. As 2012 arrives, it appears that Ukraine is losing on all counts.

Until three months ago, 80% of all Russian natural gas exported to Europe flowed through the Ukrainian pipeline system. This vital energy artery was initially constructed by the Soviet Union. Through age, use and lack of proper maintenance, the pipeline faces obsolescence. Ukraine has long wanted to renovate the pipeline, but has lacked the funds. In June, Ukrainian President Viktor Yanukovych invited Russia and the European Union to finance the renovations, in return for price concessions. Naftogaz officials estimated the cost of renovations would be $3.5 billion, a bargain compared to the $11 billion Nord Stream project or $21.5 billion South Stream project. Faced with a lack of Russian interest, in July Ukrainian Prime Miniter Mykola Azarov announced it was beginning to upgrade its pipeline system itself. The European Bank for Reconstruction and Development (EBRD and the European Investment Bank (EIB) signed memorandums commiting 300 million Euros to Naftogaz for the upgrade.

Meanwhile, Prime Minister Azarov demanded that Russia release it from the 2009 gas contract. When Tymoshenko signed the contract, she was hailed as a hero because it promised that Russia could not cut the gas supply to Ukraine as it had only months before. In 2011, however, as the cost of natural gas plummeted around the globe, the contract was perceived as a criminal conspiracy to defraud the Ukraine and Tymoshenko was jailed.

Russia hinted that the contract could be renegotiated, but only if Ukraine joined in a customs union with Russia and Belarus. Alternatively, Gazprom's leader Alexei Miller offered to lower prices if Naftogaz merged with the larger Gazprom. Azarov feared either option would destroy the country's soveriegnty and refused.

To cancel the contract, Azarov announced he would disband Naftogaz. "Naftogaz as a company will cease to exist. There will be a liquidation period. Some time later, after all necessary formalities are taken care of, entirely new companies will begin to operate on the market. As a result, all existing agreements will be revised," Ria Novosti quoted Azarov as saying.

Yanukovich also threatened to take Russia to the Stockholm Arbitration Panel to get the contract voided. This action appeared to be an empty threat, however, as within a week Ukranian Foreign Minister Kotyantyn Gryschchenko was stating he wanted to find a solution without going to the court. "There is one group of people which is always interested in court action--lawyers," he said. "We should probably do everything possible to make their life easier and find a natural decision in the bilateral format."

In September, Russia turned up the heat by formally opening the Nord Stream pipeline. This route goes under the Baltic Sea directly to Germany, and avoids transiting Ukraine or other countries. Ukraine's transit revenues are expected to decline. Vitaliy Lukyanenko, spokesman for Prime Minister Azarov, demanded that Russia and Europe make its plans known. "Since Russia is building pipelines bypassing Ukraine, Ukraine wants to get a clear answer, whether Russia intends further to use the Ukrainian gas transport system...And from Europe, Ukraine wants to know its plans regarding the Ukrainian gas transportation route," quoted the Kyiv Post.

The Ukranian government took a deep breath, and analyzed what was going on. Why would Russia refuse to cooperate to repair an inexpensive route for their gas shipments, and insisting to pay tens of billions more for alternative routes (one of which has yet to be built)? Given the fact that the Russians had offered deals in return for the Custom Union or other connections to Russia, they concluded that they were not involved in an economic contest, but a political one.

According to Voice of America, in August President Yanukovych announced Ukraine would join the European Union in ten years. This goal is suppoted by 70% of Ukrainians, according to Viktor Chumak, director of the Ukrainian Public Policy Institute. Oleg Voloshyn of the Foreign Ministry said that Ukraine aspired to be a member of the European Union, and Russia was attempting to force Kyiv into the customs union, instead. Gazprom leader Miller also hinted that Russian plans to build the South Stream pipeline might be a pressure tactic against the Ukrainians. "South Stream has always been linked to Ukraine," he said.

Faced with a looming shutoff of gas from Russia, Yanukovych turned to Turkmenistan. Russia had stopped buying Turkmen gas in April 2009, so there was a mutuality of interests in the connection. Turkmen gas would not free Ukraine from Russian dependency, however, as the pipelines between Turkmenistan and Ukraine passed through Russian territory. In October, Prime Minister Azarov relented, and agreed to join the CIS Free Trade Zone. Azarov said that once the agreement goes into effect, Turkmen gas would be able to transit Russia within six months.

The Ukrainians then renewed its proposal for a pipeline consortium consisting of Naftogaz, Gazprom and the EU to repair the pipeline network. According to Reuters, Gazprom chief Alexi Miller met in December with Ukrainian Energy Minister Yuriy Boiko and removed the EU from the equation. New estimates, however, place the cost of repair at $20 billion. Combined with the domestic price reductions that Ukraine is demanding ($9 billion annually), the negotiations have bogged down again. Russia has returned to its previous position that it might finance pipeline upgrades, but only if the Naftogaz pipeline system becomes part of Gazprom.

Negotiations between the two sides begin again on January 15. Ukraine has been seriously weakened in its strategy. It has acquiesced to a Free Trade Zone, thereby threatening its chance at a European orientation; it has been unable to obtain a break in the price of gas it will use domestically despite its legal threats; it has moved toward creating an energy consortium that will allow Gazprom to eventually take over control of the pipeline system; Nord Stream is completed and South Stream continues to progress in its planning. Russia continues to get top dollar for its gas, and is slowly pressuring Ukraine to accept all its demands to keep that country within Russia's shadow.