Battle for Russian gas: Why does Kyiv seek foreign partners?

Author : Olena Holubeva

Source :

In 2019, Ukraine may lose the transit of Russian gas to Europe due to the completion of the contract with Gazprom. Russia is making every effort to sell their gas bypassing Ukrainian territory. If it succeeds, the Ukrainian economy will suffer a blow.
22:23, 26 December 2017

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Our country earns almost $ 2 billion annually by pumping Russian gas into Europe which is approximately 2% of GDP. In addition, Gazprom provides up to 80% of the load of the Ukrainian GTS. According to experts, the only way to save a significant amount of transit through Ukrainian territory, as well as to renew the contract on favorable terms, is to transfer the GTS to the management of a consortium that will be able to negotiate with the Russian monopolist. Now negotiations are conducted with two consortiums of European companies: Slovak Eustream - Italian Snam, as well as French GRTgas - Dutch Gasunie.

Expensive and intractable Gazprom

Today, the Ukrainian gas transportation system (GTS) faces a serious threat: in 2019 a contract for the transit of Russian gas to Europe will be terminated, Yuri Vitrenko, the chief commercial director of the Naftogaz group, told this on a press conference on December 20th. With regard to the extension of the contract, as well as the conditions under which the Russian gas monopolist will agree to renew it, there is still a complete confusion. Accordingly, there is no understanding of a volume of transit in the Ukrainian GTS after 2019.

Complete clarity is only in the understanding that Russia is now making every effort to sell gas to Europe bypassing Ukraine. The Turkish Stream gas pipeline is currently being actively built, and the Russian Federation is actively lobbying the Nord Stream-2 gas pipeline project (along the bottom of the Baltic Sea to the coast of Germany). The planned capacity of the Turkish Stream is 32 billion, Nord Stream-2 is 55 billion cubic meters. The head of Naftogaz, Andriy Kobolev, said at a roundtable in the Verkhovna Rada that the implementation of these projects threatens to reduce the volume of transit of Russian gas through the territory of Ukraine to zero.

It should be noted that the volume of transit of Russian gas to the GTS, according to the financial plan of Naftogaz for 2017, was planned at 74 billion cubic meters. Due to the repair work on the Nord Stream gas pipeline (through the Baltic Sea area from the Portovaya Bay (Vyborg district) to the German coast (Greifswald area), its volume increased by 10% compared to the previous year, to 94 billion cubic meters. At the same time, Gazprom is the only gas transiter in the Ukrainian GTS, and its transit revenues account for at least 2-3% of Ukraine's GDP annually. "According to the director of ExPro Consulting, Gennady Kobal, Ukrtransgaz earns about 2 billion on Russian gas transit.

"We see that there is a very clear geopolitical direction of the Russian Federation to bypass Ukraine, they do not want the country to receive the significant funds that it receives now (transit revenues, Ed.)," Vitrenko stressed. He said that Russian authorities perfectly understand: under certain conditions, especially if the provisions of the European legislation on the protection of competition in Ukraine are applied and the settlement point is transferred from the western to the eastern border, the price for Russian gas in Ukraine will be formed at the level of the export, and not import parity. "The Russian gas will be much cheaper than now, and even cheaper than in Europe, of course, this will mean that the Ukrainian industry will have certain advantages. The development of our industry and economy is obviously not included in the plans of the Russian Federation,"  said the chief commercial director of the Naftogaz group.

After the commissioning of the Turkish Stream, Ukraine will lose the southern direction of transit, said to Gennady Kobal. Turkish Stream can take 20-25% of transit. "According to the director of ExPro Consulting," Nord Stream -2 "is a more serious threat in terms of loss of transit:" At the same time, it is unlikely to be completed quickly. The implementation of the "Nord Stream-2" does not fit into the Third energy package. In order to complete it, Russia must get very serious concessions from the EU countries in the form of exceptions to the legislative norms. However, now we see enough opponents of this project. We see that both Denmark and the US are very actively involved in the campaign against this gas pipeline."

The idea that Nord Stream 2 will start its operation before 2019 is unlikely to succeed, said the general director of Naftogazbudinformatyka Leonid Unigovsky: "It seems to me that Russians will not have time to build the Nord Stream- 2" until 2020. Therefore, in any case, there will be a period of 2-3 years after 2020, when the Ukrainian gas transport corridor will be as relevant as it is today. As for the Turkish stream, then, indeed, the first line of this gas pipeline will be built, and it will take from our transit somewhere 10-12 billion cubic meters a year."

Unigovsky noted that according to Naftogazbudinformatyka calculations, even at the most pessimistic scenario, no less than 30 billion cubic meters of Russian gas will be pumped through the Ukrainian GTS after 2019 per year. "My point of view is divergent to Naftogaz: they believe that there would be zero, and this was recently said at the round table by Andriy Kobolev. We believe that there will be a minimum of about 30 billion cubic meters. This figure, by the way, is confirmed by the calculations of the German institute EWI, which modeled the projected gas flows through the European gas pipelines (and Ukrainian transit) for 2030. But, of course, we will lose a lot in comparison with these volumes that we are now transiting," he said to

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According to experts, an important condition for maintaining a significant volume of transit of Russian gas is to attract a partner to manage the Ukrainian GTS, which could speak with Gazprom from a position of strength. "Now our relations with the Russian Gazprom for a variety of reasons, including political ones, cannot develop normally, we now do not have instruments to influence Russian gas monopoly, for a reason it would be advisable to have a certain consortium (foreign companies, - Ed.) so that could be negotiated with Gazprom on transit, "said Unigovsky. If a European operator is involved in the management of the Ukrainian gas transportation system, a new contract for gas transit can be concluded on more favorable terms, Gennady Kobal said: "Gazprom will be forced to renew the contract and seek conditions that would suit the European partner. Ukraine will be more acceptable than the current ones."

Ukraine wants to preserve Russian transit

Yuri Vitrenko notes: to achieve its goal, Russia is looking for points of contact with European partners, offers them beneficial terms. "We see that Russia is building relations with European consumers, so that Ukraine does not have a place in them. Russian propaganda has done a lot to form not the best image of the Ukrainian GTS in the eyes of European partners. As of today, there is some distrust," said the chief commercial director of the Naftogaz group.

European gas operators are large companies that have certain levers of influence, as well as access to officials in their governments, in the European Commission, notes Unigovsky. If Kyiv manages to get their interest, Ukraine will have more chances to defend its interests and prevent the implementation of the Kremlin's plans. "But in order for them to lobby Ukrainian interests, they must come to Ukraine as partners, now no one will do that, as they may not become chosen for management operators," said general director of Naftogazbudinformatyka.

It should be noted that now the Naftogaz Group was negotiating with two consortiums of investors. In early December, a memorandum was signed with the French GRTgas and the Dutch Gasunie. "With these operators, we signed a memorandum of cooperation on a wide range of issues, together with them we are trying to understand what forms of cooperation or partnership are optimal," Yury Vitrenko said, noting that among the topics discussed, there were GTS management issues, as well as its joint modernization. As you know, a similar memorandum was previously signed with a consortium of companies Slovak Eustream and Italian Snam.

"Eustream is a long-standing partner of Naftogaz and Gazprom, which receives Russian gas on the Slovakian border, together with the Italian Snam, this consortium is very impressive, these two companies understand what Ukrainian GTS is, and are interested in preserving the transit. In this case, it becomes clear why these companies need management of the Ukrainian gas transportation system. Gazprom, Ukrtransgaz and Eustream are one pipe and one system that was simply divided between these three owners ", said to Gennady Kobal.

This point of view is shared by Unigovsky. "I do not see any real foreign partners for the management of the Ukrainian GTS, except for Eustream and Snam." All the others may most likely participate in consulting, provide assistance, support, but only these two operators are really interested in entering as partners in the management of the Ukrainian GTS.

At the same time, according to Kobal, the Ukrainian gas transportation system may be interesting to Gasunie and GRTgas for the same reason as to other operators, namely, because of the opportunity to conduct large-scale business. "This year, the volume of transit of Russian gas reached 94 billion cubic meters." Ukrtransgaz "earns about $ 2 billion on transit annually, and this is big money, and all companies are interested in expanding their business, for them these are huge and attractive volumes. The Ukrainian gas transportation system is an interesting project for any company," the expert explained.

"Anyway, our GTS is interesting for foreign investors only if there is a transit, if it does not exist, then 80% of the GTS loading will simply not exist, and then there will be a question what to do with these pipes, because to dig out and dispose them - is also very expensive, and there is only one way to preserve the transit - to unite our efforts and the efforts of partners that we can attract," he said.

“Naftogaz" expressed their confidence that tender for the selection of a foreign investor for Ukrainian GTS management will be held already in 2018. The process will be organized by the Rothschild investment bank. At the same time, its terms and conditions should be developed and approved by the Cabinet of Ministers. The head of Naftogaz, Andriy Kobolev, at a recent round table in the Verkhovna Rada suggested that the deputies will approve the criteria for attracting a partner to the GTS management. "The decision to involve a partner will be approved by the Verkhovna Rada, so it is logical to agree on the terms of the contest before it is announced and held," he said.

Benefits of attracting a partner

In addition to already mentioned benefits, attracting a foreign partner to the management of Ukrainian GTS will give an investment on its modernization. Now the system invests less money than necessary. Leonid Unigovsky said: "The Ukrainian gas transportation system is old."

Also, the general director of Naftogazbudinformatyka LLC said that attracting a partner could help Ukraine to integrate into the EU market. "European partners could help us to integrate institutionally (technically we have long been integrated) into the European regional gas markets. I just want to say that we have highly qualified specialists in Ukrtransgaz. And one cannot say that someone will come and teach how to manage the Ukrainian GTS. At the same time, there are certain European regulations, directives that have to be introduced in Ukraine, if we are talking about integration with European gas markets. And only European partners can help us in this," said Unigovsky.

The presence of a foreign partner will also ensure a real separation of the gas transportation function and its independence from groups of influence, said Yury Vitrenko: "Having a strong partner will ensure a real separation of the GTS Operator not only from Naftogaz, but also in general from the influence of one person or a group of people. It will increase the trust of European partners to the Ukrainian GTS."

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