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Ukraine crisis could push gas users towards coal

World Coal,

Gas and oil prices have risen amid fears the crisis unfolding in Ukraine could have a damaging effect on one of Europe’s main energy supply routes.

Gas futures climbed up to 10% in early trading, while the benchmark price for oil rose by more than 2%.

Traders have expressed concern about the stability of supplies from Russia, which provides a quarter of Europe’s natural gas, half of it through Ukraine.

A series of key gas pipelines criss-cross through Ukraine from Russia and into Poland, Slovakia, Hungary, Romania, Moldova and Belarus.

The majority of Ukraine’s gas fields are in the pro-Russian east, and around the Crimea. While Russian troops have effectively annexed the Crimean peninsula, there have also been pro-Russian demonstrations in east Ukraine, and the threat of a further Russian incursion into the east could turn the crisis into a serious conflict zone.

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Already, gas users are looking at alternative routes, with the Nord Stream pipeline, which goes through the Baltic Sea to Germany, or another route to Germany via Belarus and Poland, signalled out as two possible options.

Russian state gas producer, Gazprom, also plans to build another sub-sea pipeline – the South Stream – to bypass Ukraine by 2016.

Coal seen as alternative to gas

Andy Brogan, oil and gas expert at global consultancy firm EY said that in the medium and longer-term, the Ukraine crisis had pushed users to look at alternatives for gas, including coal.

“There’s an element of anticipating [the security of supply issue] by different pipes that are bypassing Ukraine, but the other thing is that it’s definitely going to make people look for other supplies,” Brogan said.

This search for alternatives could lead to “a real risk of gas on gas competition,” he suggested. “The German utilities, French Utilities and even the Polish utilities. They can still all seek to increase the LNG part of their gas consumption. Whether that means they start building more terminals or can increase the size of terminals already there.”

Brogan also sees a wider risk to the gas industry: “The other risk is that [the Ukraine crisis] moved more of the generation mix away into coal or renewables. Gas is already struggling because of the impact of shale on US coal prices.”

Threat to gas has precedent

Gazprom said that despite the movements of troops into Ukraine, gas supplies to Europe through the country were unaffected. However, a previous Russian supply cut to Ukraine caused major disruption across the continent and significantly pushed up prices.

In January 2009, Russia turned off the taps to its neighbour in a row over contract prices.

The two week shutdown resulted in severe disruption across the continent, with more than a dozen countries without their expected supplies of Russian gas. Parts of Europe had to shut down industrial plants and domestic heating systems and find alternative sources of energy.

Gazprom threatens Ukraine

Gazprom has warned Ukraine that it may increase the gas price for Kiev after Q1. “The situation with payments is worrying,” Said Andrei Kruglov, Gazprom’s chief financial officer. “Ukraine is paying but not as well as we would like it to.”

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Any rise in gas prices for the Ukrainian authorities would put more pressure on the country’s struggling coal industry, which announced significant drops in coal production over 2013. The Ukrainian coal industry is also in an estimated US$ 200 million of debt.

Oil prices expected to rise

With the threat of war becoming an increasing possibility – with warning shots reportedly fired by Russian soldiers in Crimea – analysts expect oil to also suffer from higher prices.

“Oil markets are reacting on the potential that the situation could worsen,” Said Ben Le Brun, market analyst at OptionsXpress.

“I definitely suspect that oil will move much higher if it actually comes to war.”

UK reliance on gas causes concern

UK prices for next-month delivery of gas climbed as much as 10%, according to ICE Futures Europe exchange.

With the UK Government looking to curtail its use of coal, which currently makes up over 40% of the country’s energy mix, the decision by the chancellor to target gas instead appears to be foresighted, should alternative fuel sources be required to keep the lights on.

The British Parliament’s All Party Group has already been warned that the energy policy framework that has been adopted by the government is driving premature closures of the current coal fleet. With this pressure on the industry, the country’s energy security is under threat from volatile situations, such as the Ukraine crisis, that are outside its control.

The future of gas in doubt

Brogan said that the effect of the Ukraine crisis on gas as a fuel has been to demonstrate the weaknesses that are exposed by reliance on the energy source.

“The medium term impact [of the crisis] is more around the attractiveness of gas as a fuel. And from an industry perspective, that would probably be with us longer than the short-term price volatility.”

“At its basic level, it has thrown a question mark over Russian supplies,” Brogan added. “We went through this in 2009, and 2006 before that. Even if there’s absolutely no interruption whatsoever, what it’s done is remind people of the risk of piped gas associated with Russia.

Some experts have explained that a relatively mild winter in Europe has meant gas supplies have not dwindled as much as they otherwise would have done. However, the threat posed by Russia turning off the gas nonetheless remains – future winters might not be so forgiving.

The crisis in Ukraine

Following months of pro-EU protests, previous Ukrainian President Vikto Yanukovych resigned, in what Russian authorities have claimed to be effectively a coup. On 1 March, Russia’s parliament approved the use of military force and armed soldiers blockaded Ukrainian bases in Crimea. The US and EU have both condemned Russia’s actions, and for the first time in years, world leaders have begun trading rhetoric in scenes reminiscent of the cold war years. 

For further information about the crisis, please visit the below links:

Ukrainian crisis timeline

Ukrainian crisis: Does Russia have a case? 

Written by Sam Dodson

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