Streetwise Professor

It seems to me that two stories reported largely separately last week are related: the Turkmenistan gas pipeline explosion, and Gazprom’s threat to fine Ukraine for not taking contracted quantities of gas.  Here’s the scenario that makes sense.  Ukraine fails to perform on its take or pay obligations to Gazprom–or to whomever is the real counterparty to the most recent gas deal.  Much of the gas supplied under these contracts purportedly originates in Turkmenistan.  Importantly, though, Turkmenistan doesn’t sell directly to Ukraine.  Instead, Gazprom and/or intermediaries take title to the gas in transit, and likely under take-or-pay type contracts with Turkmenistan at prices that are now well above what the gas can be sold for in Europe.  So, when Ukraine reneges, Gazprom and/or intermediaries are on the hook to pay Turkmenistan for the (high priced) gas but aren’t getting money from Ukraine.  So, they cut off gas shipments from Turkmenistan, causing the explosion.

Today, a Bloomberg article suggests a connection, but does not make it explicitly:

 OAO Gazprom  may seek as much as $530 million in fines from Ukraine for failing to import contracted volumes of natural gas in March,Kommersant-Ukraine  reported, citing an unidentified Gazprom official.

Russia’s gas export monopoly notified NAK Naftogaz Ukrainy that it intended to levy fines at the end of last week, Kommersant said. In March, Naftogaz bought 0.95 billion cubic meters of the fuel compared with 2 billion cubic meters envisaged by a January contract, according to Kommersant.

Gazprom has “insured itself” in the event that Turkmenistan manages to restore full gas flows via Russia after a pipeline explosion, the newspaper said. State-run Gazprom had cut supplies from the Central Asian country by as much as 90 percent before the blast, Kommersant said.

Turkmenistan plans to complete repairs to the pipeline today, though Gazprom hasn’t said when it intends to end limitations on pumping gas from the country, Kommersant said. Ukraine is the main consumer of Turkmen gas, according to Kommersant.

The report also casts doubt on Russian Foreign Minister Lavrov’s–claims that the explosion was not the result of a slashing of gas imports:  “This accident is purely technical,” Lavrov said late Friday, according to Russian news agency RIA-Novosti. “I am counting on the fact that this will all be quickly settled.”  (Although with Lavrov, the meaning of the phrase “purely technical” could encompass almost anything.)  Gazprom has studiously avoided making any comment, so the Kommersant statement that Gazprom had not said when it intended to restore gas shipments could be one of those “when did you stop beating your wife?” type of statements, i.e., it presumes what has not been admitted.  But, Gazprom’s silence is quite damning.  And just how Gazprom “insured itself” is rather hard to figure out from the Bloomberg story.  

Now, if Ukraine did indeed renege on take-or-pay obligations, its counterparty should be able to enforce those obligations.   But, any Ukrainian malfeasance does not provide Gazprom with a legitimate basis to renege on its contractual obligation to Turkmenistan.  Gazprom and/or any intermediary that bought Turkmen gas for sale to Ukraine assumes Ukrainian performance risk.  It cannot just pass that risk on to Turkmenistan.  And doing so through a unilateral, arbitrary action that inflicts substantial damage on the transportation network, not to mention potentially threatens lives, is clearly unacceptable.  

It is a delicious irony, though, that Gazprom was so anxious to lock up Turkmen gas that it now can’t sell.  That is, Gazprom is hoist on its own petard.  It–and the Russian government–has adamantly stood in the way of any direct dealing between Turkmenistan and the consumers of its gas.  To prevent such deals, it inserted itself as the intermediary in all Turkmen gas transiting Russian territory.  In so doing, it accepted both price and performance risks, both of which are now hitting it very hard.  

In other words: Be careful what you ask for, you might get it.

Gazprom is evidently desperate to get out from under this unforeseen, and now onerous, obligation, that it is willing to use any means fair or foul to do so.  Expect mainly foul.