David Sheppard and Nastassia Astrasheuskaya

July 1, 2021



The head of Ukraine’s state-backed pipeline company has described Russia’s refusal to ship additional gas supplies to Europe as “blackmail”, with prices for the fuel having risen to the highest on record.

Sergiy Makogon, chief executive of Gas Transmission System Operator of Ukraine, said he believed Russia’s Gazprom was purposefully holding back gas supplies from Europe by refusing to ship additional volumes via Ukraine, in a bid to force the approval of the contentious Nord Stream 2 pipeline that runs from the Baltic to Germany.

“[Europe] should not follow this blackmail of Gazprom with prices,” Makogon told the Financial Times, arguing that Russia could have tempered the doubling in gas prices this year if it pumped more. Supplies from Russia are down by almost a fifth on pre-pandemic levels so far in 2021.  “[The supply tightness in Europe] is an artificially created problem.”

Gazprom, which has a monopoly on Russian pipeline gas exports, on Tuesday declined to book additional volumes through Ukraine at a closely watched monthly auction designed for topping up its exports to Europe, triggering a further rise in prices.

Gazprom, which has fulfilled its long-term contracts in Europe, declined to comment on the allegation, but last week said “optimisation” of its gas flows as well as meeting customer requests was normal. Executives at the company have previously indicated there will be more gas available once Nord Stream 2 starts up.

On Thursday prices in Europe for delivery next month reached 36.90 per megawatt hour, surpassing the previous peak set in 2008 when oil prices were almost double the level they are today. Prices in the UK have also soared, jumping almost 30 per cent in one day to 91 pence per therm.

While lower Russian supplies are not the only reason for the gas price rally, with a long winter draining storage and stronger demand globally, executives and traders have questioned Gazprom’s reticence to increase exports.

James Huckstepp, at S&P Global Platts, said Gazprom risked hurting the company’s desire to be seen as a reliable partner, especially as other Russian pipelines are due to stop for maintenance next month.  “Gazprom neglecting to book interruptible capacity through Ukraine during the maintenance period of the northern delivery routes, could put their claim to being Europe’s most reliable supplier at risk,” Huckstepp said.

An EU official said the commission had “no indications of specific behaviour by any of our suppliers to drive up prices”.   “The current situation is a reflection of global market dynamics. All EU regions now have access to more than one source of gas, so are less vulnerable to supply squeezes coming from an individual supplier,” the official said.

Nord Stream 2 runs through the Baltic Sea to Germany and is set to be approved later this year, though German elections in September could complicate the sign-off.

The pipeline, which is nearing completion, has been targeted with sanctions by the US. It is also opposed by countries such as Poland that believe it will give Russia additional leverage over European energy supplies, while undermining Ukraine by allowing Moscow to bypass the country.

Polish foreign minister Zbigniew Rau on Wednesday hit out at Germany’s support of the pipeline, writing in the Frankfurter Allgemeine Zeitung that the “completion of Nord Steam 2 will create a great security deficit on Nato’s eastern flank and Ukraine will find itself in a security void”.

Russia has long sought alternative transit routes to Ukraine. In 2014, Moscow annexed Crimea, a peninsula in the Black Sea, and has continued to support a proxy war in Ukraine’s eastern territory.

Some analysts have said a shift to so-called interruptible contracts may have had an effect on the supply situation. These contracts in theory would allow Ukraine to push Gazprom supplies off the line in favour of other customers.  “[That] means Gazprom would have no guarantee that it could deliver gas it would be committing to buyers in Europe,” said Laurent Ruseckas, an analyst at IHS Markit.

But Makogon said that the interruptible contracts had been mutually agreed with Gazprom, and that Ukraine TSO was happy to discuss firm contracts if that was what Russia wanted. “If Gazprom would approach us officially and ask: ‘let’s make it firm’, definitely we would consider this and define how to solve this problem,” Makogon said.  Makogon said Russia was ultimately threatening a supply crunch in Europe this winter, as normally the summer is when storage facilities are refilled when heating demand is lower. “Europe can enter winter with very serious problems,” Makogon said. “If Gazprom asks to pump more in August, we’d only be happy to.”