Russian state gas producer Gazprom had cut back on supplies to the west because it feared that Ukrainian parties were illegally tapping into pipelines carrying gas through their territory.
The move angered customers in western Europe and resulted in a rise in the cost of both gas and oil on energy markets across the globe. The reduced supply also heightened fears of gas shortages leading some of Europe’s power providers, such as E.ON UK, to implement contingency plans that involved increasing generation from oil and coal fired power plants.
However, in the face of severe political pressure, Moscow has now decided to return supply capacity back to normal levels, which has resulted in natural gas futures prices declining by 3.8%.
The decision to cut supply came in the wake of a dispute between Russian and the former Soviet state Ukraine over the cost of gas supplies. Late last year Gasprom informed Ukraine officials that it planned to increase the price of the gas it supplied to the former satellite state almost five fold in 2006 to bring it in line with worldwide norms.
However, the Ukrainian government reacted angrily to the price hike leading to the current dispute. As some of its supplies are piped to western Europe through Ukraine, Gazprom had become concerned that the dispute could lead to unofficial siphoning of gas within the Ukraine.
Meanwhile political tensions between Russia and the Ukraine continue and Gazprom’s reputation has taken something of a battering.
