The latest gas dispute between Russia and Ukraine flared up just as most of Europe was gripped by Arctic cold and just before the spy poisoning scandal in which the UK accused Moscow of poisoning a former double agent in England by a military-grade nerve agent of a type developed by Russia.

Russia’s gas giant Gazprom, which delivers around one-third of Europe’s gas, uses the Ukrainian gas system as a key route for its gas supplies. While European Union institutions want to reduce European dependence on Russian gas, Russia wants to cut its dependence on the Ukrainian transit route for its supplies to the EU by building pipelines to bypass Ukraine.

Yet, according to Ukraine, Russia will need the Ukrainian route to ship gas to Europe even after 2019, when the current transit agreement expires, the chief executive of Ukraine’s national company Naftogaz, Andriy Kobolyev, told Bloomberg in an interview this week.

“Gazprom will not be able to cope without the Ukrainian gas transportation system after 2019, so they will need to sign a new contract with us,” Kobolyev told Bloomberg, noting that Russia uses gas supplies to advance its political goals.

“Russia is totally unwilling to separate gas and politics -- from their perspective it’s the same and gas plays a very important instrument in achieving a wider geopolitical agenda,” Kobolyev said.

The gas companies of Russia and Ukraine have been locked in bitter disputes for more than a decade, and the relations were further strained by the 2014 Russian annexation of Crimea.

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At the end of February, the Stockholm arbitration court ruled in favor of Naftogaz in the payment dispute with Gazprom, ordering the Russian company to pay Naftogaz US$2.56 billion for failing to supply Ukraine with the agreed amount of natural gas over a period of several years and also for failing to pay the full transit fees for the gas it did pump in that direction. After the ruling, Naftogaz said that it expects payment. Gazprom, on the other hand, said the court decision was unfair and applied double standards, and said it would start a procedure to terminate the transit contract and the gas supply contract with Ukraine.

By the end of this month, Gazprom and Naftogaz will meet to discuss the differences, and the transit deal and the payment ordered by the court will be the key topics of discussion.

According to London-based consultancy Energy Aspects, Gazprom won’t be able to replace the entire Ukrainian transit volumes with other routes, even if it were to build the Nord Stream 2 offshore pipeline to Germany, so the Russian company’s plan to cancel the transit deal is possibly a negotiating tool.

“So the threat to cancel the transit contracts should be seen as gaining leverage to renegotiate a more favorable transit deal,” Energy Aspects said in a note last week, quoted by Bloomberg.

While Russia and Ukraine are locked in the transit deal dispute, Gazprom boosted its gas supplies to Europe to record levels, taking advantage of the cold snap at the end of February and early March.

The Russian giant also wants to build the Nord Stream 2 pipeline to twin the existing Nord Stream pipeline between Russia and Germany via the Baltic Sea. This project bypasses Ukraine, but the EU—especially Poland and the Baltic states—and U.S. lawmakers oppose it, as it would further increase Europe’s dependence on Russian gas.

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Last week, a group of bipartisan U.S. Senators sent a letter to Treasury Secretary Steven Mnuchin and Deputy Secretary of State John Sullivan, urging the U.S. Administration “to utilize all of the tools at its disposal to prevent its construction.”

“Nord Stream II, which follows the route of the Nord Stream I pipeline from Russia across the Baltic Sea to Germany, will make American allies and partners in Europe more susceptible to Moscow’s coercion and malign influence. The pipeline would be a step backwards in the diversification of Europe’s energy sources, suppliers and routes,” the Senators wrote.

In Europe, the Energy Committee at the European Parliament approved on Wednesday draft amendments to the EU rules to state that all gas pipelines from third countries into the EU must comply fully with EU gas market rules on EU territory, including Nord Stream 2 that was specifically mentioned in the press release. These EU gas market rules include third-party access, transparency requirements, fair tariffs, and a proper separation of the supply chain from production to distribution of gas, while Nord Stream 2 is far from complying with those.

“Far too often, gas supply has been used as a political weapon. We cannot ‘disarm’ the impure intentions of others but we can arm ourselves with full legal clarity and consistency of existing legislation,” said Jerzy Buzek, a Polish politician Member of the European Parliament and chair of the Energy Committee.

We have yet to see how the EU will handle Nord Stream 2, because Germany—the project’s key beneficiary—is not opposed to it. But the latest Russia-Ukraine gas spat, like in all their previous disputes, is not just a bilateral dispute about transit fees.

By Tsvetana Paraskova for Oilprice.com

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