Gas transit contracts between Gazprom and Naftogaz will expire on December 31, 2019. It means that Russia won’t have legal grounds to supply gas to Europe via the Ukrainian gas system. In order to continue supplies, Europe has to make an important decision about the transit routes. Further use of the Ukrainian pipelines and construction of alternative bypassing ones are the options considered in the public discussion. The debate has both commercial, legal and security implications.
In 2017, Russia’s energy monopoly Gazprom delivered to 21 countries of the European continent (including Turkey) 192.2 bcm of natural gas, with 93 bcm of these volumes being shipped through Ukraine. Taking more than half of transit volumes, this route is important for Russian gas supply to countries of Central and South-Eastern Europe. However, political interests still dominate common sense in Russian market positioning. In light of the critical exacerbation of relations between Russia and Ukraine, Gazprom refused to abide by awards in two commercial arbitration cases with Naftogaz (under the Stockholm arbitration decisions Gazprom is obliged to pay $2.56 billion following decisions on transit and supply contracts), and its CEO Alexey Miller announced the intention to terminate both contracts with Ukraine, once again in arbitration.
While refusing to play by the commercial rules, Russia actively lobbies construction of additional gas pipelines bypassing Ukraine. The most common ways for promotion are media campaigns for the new infrastructure facilities and influence on business and political elites in Europe. TurkStream and Nord Stream 2, with planned capacity 31.5 and 55 bcm respectively, would substitute almost all gas transported via Ukraine. For European consumers, these projects would not yield any supply diversification and require additional cost of $7 and €9.5 billion respectively to construct onshore infrastructure and additional interconnection capacity. This fact significantly reduces the economic feasibility of the Russian-backed projects.
On the other hand, the Ukrainian gas transmission system seems to be a much better choice from commercial, legal and security reasons. It confirmed its technical reliability in early March 2018 by managing the situation when Gazprom lowered the pressure at entry points by 20% below the contract requirements, and ensuring firm transit to all consumers in the EU. The current Ukrainian TSO, Ukrtransgaz, strictly follows the rules of the EU Third Energy Paсkage and entered into interconnection agreements with neighboring TSOs. It operates transparently using real-time data platform and regular reporting to the European network of operators. Ukrainian government is going to do more for improving system reliability by means of unbundling, certification of a new TSO and entering into agreement with a Western partner for managing the system under new business design. Moreover, gas storage capacities of 31 bcm are an attractive balancing opportunity in case of demand peaks.
To solve the case successfully, it is important for Ukraine and the EU to find a common ground on the preventive response to the Russian ignorance of the Stockholm arbitration’s requirements. In particular, a decision to change key gas delivery points to the Russia-Ukraine border, with clearly defined areas of responsibility, will help to create more liquid gas market in Europe, improve transparency, and protect customers from manipulations and abuse applied by Gazprom.
The European political elites have a choice to make: either to support Russian-backed political projects and thus still coercive policy of Gazprom, or to help reform the Ukrainian gas pipeline system and thus make it more reliable and fully compliant with the EU market rules. The choice of not the transit routes, but of the security of supply.
Author: Anastasiia Synytsia, Fellow, DiXi Group (Kyiv, Ukraine)Author : Ukrainian Liaison Office in Brussels