Peter Jackson column

Jan 5 2006 By Peter Jackson, The Journal

A chill wind from Russia sent a shiver down our spines over the holiday period.

I don't refer to the cold snap between Christmas and New Year, but rather to Russia's decision to cut off gas supplies to Ukraine.

Russia's state-run Gazprom had upped the price it charged Ukraine by an eye-watering 400%, claiming this brought it into line with market rates.

Not unnaturally, Ukraine objected to this, counter-claiming it has a contract with Gazprom at the current price until 2009.

Then, according to the Russian's, Ukraine started to tap into the pipes carrying Russian gas across its territory intended for European customers and so Russia turned the tap off.

Following a storm of complaint, Russia has resumed supplies and has reached a new agreement with Ukraine.

But with gas prices already shooting up and with previous fears of disruption to gas supplies this winter, the world's energy markets are reacting nervously.

Experts say darkly that Russia knows exactly what it is doing, issuing a sharp reminder that a world increasingly dependent on natural gas is increasingly dependent on Russia's goodwill.

The background to all this is the view that world oil production has peaked.

That does not mean we are about to run out, but that supplies will gradually decline, leaving an energy hungry world having to look elsewhere for sources of power.

And this is where natural gas comes in. Renewables cannot supply our needs, hydrogen takes energy to produce, nuclear is unpopular and coal has been a major source of air pollution, so that leaves natural gas as the alternative to oil.

Our own North Sea supplies might be running out, but, elsewhere in the world, the natural gas market is still in its infancy.

But the world is anxious to make up for lost time and it is estimated that some US$50bn has been committed to new LNG (liquefied natural gas) infrastructure projects in Russia, Qatar and Australia alone.

Worryingly for those who always distrust the motives of our transatlantic neighbour, the USA is afraid it will face its own LNG crisis and have to enter the global markets.

However, the world's largest reserves are in Qatar, Iran, Russia, Angola, Yemen and Algeria - not natural US allies.

One thing you can be sure of - gas will be an increasingly important topic in 2006 and beyond.