Commentary: Ukraine turmoil raises uncertainty for petrochemical players

07 March 2014 10:51 Source:ICIS Chemical Business

Political tension between Russia and Ukraine raises the level of business uncertainty, as Europe is dependent on Russian gas supplies. Russia may play politics with gas

For Russia’s chemical producers, it is the collapse of the rouble that will hurt the most, particularly as its dollar-denominated debt burden grows. For companies elsewhere, dramatically increased political tension in Ukraine will raise the level of business uncertainty still higher.

Financial markets slumped on 3 March and energy prices rose sharply on the rapidly escalating standoff between Russia and Ukraine.

 Russian Prime Minister Dmitry Medvedev meets with Gazprom management committee chairman Alexey Miller on Ukraine developments

Copyright: Russian government

But the easing of tension on 4 March saw the markets calm. Oil prices fell back and gas prices in Europe, which had reacted smartly to the possibility of a squeeze on supplies by Russian gas giant Gazprom, also dropped.

Some contracts in Europe are index linked to crude so reacted largely to the oil price.

Given the focus on gas – about a third of Europe’s natural gas comes from Russia, a great deal of it through Ukraine – high energy consuming chemical producers, and those that process methane, should be most concerned.

The fertilizer markets, nevertheless, have been quiet. Ukraine’s fertilizer producers are said to be operating normally and the country’s exports through the Black Sea are continuing.

Those producers face a gas price rise in April as Gazprom rescinds a discount it agreed with ousted Ukraine president Viktor Yanukovych. If fertilizer market demand is strong enough, then it is unlikely to affect production, although margins will suffer.

Thankfully, a very mild winter across Europe means that gas in storage is more than sufficient to meet demand with the cushion being something like one and a half months of supply, according to press reports.

There was some perceived sabre rattling by Russia’s oil and gas giant Gazprom on 4 March as Russia’s premier, Dmitry Medvedev met Gazprom chief Alexei Miller outside Moscow. The two talked about gas supply to Europe, Ukraine’s debt to Gazprom for gas, and Gazprom’s aim to sell much more gas to China. The transcript of the meeting was published by the Russian government.

Europe’s heavy reliance on Russian gas has long been a cause of strategic concern for the EU and for its allies. So the EU has sought to diversify supply as well as support the construction of the Nord Stream pipeline which transports gas from Russia into Germany and the planned South Stream pipeline that will connect Russia, Bulgaria and Hungary.

Both pipelines avoid the sensitive states of Ukraine and Belarus but, as a report to the US Congress pointed out last year, bypass EU member states like Poland and Lithuania that are “critical of Russian policies”.

While the supply of gas works very much in Russia’s favour, the EU is also a major consumer of Russian oil. Most of the country’s oil exports are shipped through the Black Sea, about 1m bbl/day. According to the EU statistics agency Eurostat, 63% of the total value of EU 27 imports from Russia in 2010 were oil, and 9% gas.

Russia may, therefore, not want to curtail oil exports but might continue to play politics with gas – it shut off gas supplies to Ukraine in 2006 and 2009 in disputes over prices. Natural gas is not as easily transportable as crude oil and producers and consumers tend to rely on delivery by pipeline in regional markets.

Russia sells about 80% of its gas to the EU. But Miller emphasised that Gazprom is almost ready to sign a 30-year gas supply contract with China.

Initially the company would supply China with 38bn cubic metres of natural gas from Eastern Siberia but once that agreement was made, negotiations would start for supplies from Western Siberia, which has traditionally supplied Europe, he said. Gazprom’s Altai pipeline project is one which would supply natural gas to western China.

Meanwhile, Ukraine is falling further into debt with the Russians over gas supplies. Its gas supply payment debts for 2013 have not been paid, Miller said, and neither has the debt for January. The total debt to Gazprom is $1.53bn, according to Miller.

“Yesterday, our Ukrainian partners told us they won’t be able to fully cover February gas supplies either,” he said on 4 March.

By Nigel Davis