Without unbundling and partner: Ukraine before another negotiations with Gazprom

Author : Olena Holubeva

Source : 112 Ukraine

The involvement of European companies in the ownership structure or in the management process of the Ukrainian GTS is necessary for Ukraine, in order to strengthen its position in the negotiation process with Gazprom, to negotiate with the Russian monopolist on the basis of European rules and European requirements for gas transportation. Experts say that if a European operator is involved in the management of the Ukrainian GTS, a new gas transit contract can be concluded on more favorable terms
12:59, 11 April 2019

gas supplies
Open source

Naftogaz announced that it had signed an agreement with five large foreign gas pipeline operators. Within the framework of the working group they will provide consulting services in the process of creating an independent GTS (gas transportation system) operator. Earlier, the signatory companies were considered as full-fledged partners of the Ukrainian GTS, who could get it under management and, as an option, partly into ownership. This was necessary in order for European companies and European buyers of Russian gas to negotiate new working conditions with Gazprom after the expiration of the transit contract in 2019. Now the opportunity to implement this option is postponed at least until January 2020. Thus, the positions of Ukraine in the negotiation process with Gazprom on the extension of gas transit could become stronger, but remain as they were, experts say. The success of the negotiations, they said, will largely depend on how far Russia can advance in the construction of Nord Stream 2, as well as on the political situation in Ukraine following the two electoral processes.

The press service of NJSC Naftogaz Ukraine reported that last week JSC Ukrtransgaz (the company operating the gas transport system as part of the oil company) and the “Magistralnye Gazoprovody” (the company that was supposed to receive the GTS as a result of unbundling, but did not get it) signed an agreement on the creation of a joint working group with leading European operators "interested in the unbundling process and the further management of the Ukrainian GTS". “The purpose of cooperation is to help the Ukrainian side to create an independent GTS operator, in accordance with European legislation, after which the European partners will be able to join the management of the GTS,” the press service on the Naftogaz website said.

The press release notes that at this stage, the relevant experts of European operators will assist with the creation of an independent Ukrainian GTS operator and with the application for certification, will also participate in the development of a plan for the modernization of the GTS to ensure its technical reliability and efficiency. European operators will provide consulting support during joint meetings of the board and the unbundling committee of the Naftogaz Supervisory Board.

It is important to note that previously four of the five companies that signed the working group agreement were considered full-fledged partners who, after completing the unbundling (separating the assets of Naftogaz by transferring the gas transportation function to an independent operator), can take part in the management of the Ukrainian GTS. In early December 2017, a memorandum was signed with the French GRTgas and the Dutch Gasunie. In April, a similar memorandum was concluded with the Slovak Eustream and Italian Snam. The most likely partners of the Ukrainian GTS experts called Eustream and Snam, which operate gas pipelines that are a continuation of the Ukrainian GTS outside Ukraine.

In October 2017, the head of Naftogaz Ukraine, Andriy Kobolev, said that a foreign company, or perhaps a consortium that would be involved in the management of the Ukrainian GTS, would have a management package and monitor all the work of the gas transmission system. "We are considering an option when the consortium will control all the work of the GTA and will in fact have a controlling package. This is an important moment and an important condition that we heard from all participants. Whether it will be a concession or a leasing is in the process of discussion. I can definitely say that we are not talking about any sale of gas pipelines, "Kobolev said at the Oil & Gas conference in Kyiv.

The involvement of European companies in the ownership structure or in the management process of the Ukrainian GTS is necessary for Ukraine, in order to strengthen its position in the negotiation process with Gazprom, to negotiate with the Russian monopolist on the basis of European rules and European requirements for gas transportation. Experts say that if a European operator is involved in the management of the Ukrainian GTS, a new gas transit contract can be concluded on more favorable terms. According to them, Gazprom would have to renew the contract and look for conditions that would suit the European partner.

Related: EU, Ukraine, Russia could talk gas transit after presidential election in Ukraine

Now (after signing the agreement on the establishment of a working group) it is clear that while the question of granting the status of a GTS partner to European companies is being postponed, we are talking only about consulting services. "Speaking of the consortium (of foreign companies, - Ed.), we are talking about providing us with a map of actions that can help in creating a new operator who can perform new modern functions. For example, this is the planning of the network development according to Ukrainian standards, according to tradition, based on technological needs. The market has not been studied, no analysis has been made of investment attractiveness. No analysis has been made of future supply and demand. " stated the Naftogaz.

Obviously, the attempt of Ukraine (rather, of Naftogaz Ukraine) to attract the European partner to Ukrainian gas transport system before the expiration of the transit contract with Gazprom has failed, ExPro Consulting director Gennady Kobal said. At the same time, according to him, the fact that foreign companies signed an agreement on a working group is a positive signal, which indicates that they  companies did not stop the dialogue with Naftogaz and did not lose interest in the Ukrainian GTS.

The current agreement on the creation of a working group with Naftogaz, Ukrtransgaz and Magistralnye Gazoprovody was signed by GRTgaz S.A. (France), N.V. Nederlandse Gasunie (Netherlands), Snam S.p.A. (Italy), Eustream a.s. (Slovakia) and Fluxys S.A. (Belgium). “Initially, 10 companies participated in the partnership negotiations. But then those who were really interested in participating in the management of the GTS (not in investing) united into a consortium. Therefore, the need for a tender to select a partner has essentially disappeared,” explained Leonid Unigovsky.

All operators of European GTS have considerable experience and authority on the European natural gas market. For example, Fluxys. "This is a Belgian operator that manages more than 4,100 km of gas pipelines, gas storage and regasification terminal are at its disposal. It’s shareholders - Publigas - 77.7%, CDPQ - La Caisse de Depotek Placement du Quebec - 20%, Belgian Federal Holding and Investment Company (SFPI - FPIM) - 2%, and 0.3% is owned by Fluxys staff. The company operates in 10 countries ", said Leonid Unigovsky. He also added that Fluxys has 16.5% in the share capital of Eugal, which will be a continuation of the Russian gas pipeline bypassing Ukraine Nord Stream-2.

No way without unbundling

Even if foreign companies were ready for more serious than the existing forms of cooperation, none of them could become a partner of the GTS until the completion of the unbundling - the separation of the pipe from the structure of Naftogaz. Ukraine has been trying to carry out unbundling since 2014. Decree No. 496 "On the separation of activities for the transportation, storage (injection and selection) of natural gas” was adopted by the Cabinet on January 1, 2016. The plan approved the relevant actions and also selected the OU unbinding model (full separation).

The strongest argument of Naftogaz in preserving the GTS in its structure was that after the decision of the Stockholm arbitration in 2018, lawyers concluded that until the completion of the transit contract with Gazprom, no gas transportation assets could be removed from Naftogaz. This also applies to support functions (finance, IT, accounting, procurement). In April 2018, it became known that the head of Naftogaz of Ukraine, Andriy Kobolev, appealed to Groysman with a request to postpone the separation of gas transportation and storage functions from the company until the expiry of the gas transit contract with Gazprom on this basis.

As it became known, recently Naftogaz has prepared a number of changes in the resolution №496, which it plans to submit to the government in the near future. The most important of them is the change of the OU (Ownership unbundling) model to ISO (Independent System Operator), which allows Naftogaz to retain assets in the company’s structure, but transfer control and management to an independent operator. Changes in Resolution No. 496 will imply an ISO with subsequent conversion into an OU. Conversion will occur after the completion of arbitration with Gazprom in Stockholm on a new lawsuit filed by Naftogaz in 2018 (regarding the revision of the transit tariff for 2018-2019).

It is known that holding unbundling in this form is supported by the Naftogaz Supervisory Board, in particular, its head Clare Spottiswoode. In addition, the current leadership of Naftogaz has enlisted support of the World Bank in this matter and is now trying to get it from representatives of the European Commission.

In an interview with RBC-Ukraine, Kobolev said that he supported the GTS unbundling by transferring it to economic management, and not to ownership, because the Verkhovna Rada is not ready to make changes to legislation that would allow the privatization of GTS. "Since we talked about ownership unbundling (OU), our parliament has not adopted a single legislative act that allows us to separate the GTS operator according to this model," he said, noting that in order to implement the OU model, Parliament must pass a law authorizing the privatization of the GTA. At the same time, with the current political scenario in the Verkhovna Rada, this cannot be done. “I talked on this issue with a large number of deputies. And even the most pro-reformatory of them told me: “Kobolev, forget it altogether! ”Said the head of Naftogaz in an interview with the agency.

Related: Will gas price for population decrease after decision of Ukraine's Cabinet?

The amendment table for the second reading of the draft law will be reviewed by the Economic Policy Committee on April 24. According to the head of this committee, Andriy Ivanchuk, the document itself can be voted until June 2019. If the timing is respected, and the Cabinet of Ministers approves the amendments of Naftogaz to the decree №496, the unbundling according to the ISO model will be held in January 2020. After that, the Ukrainian GTS may finally have a foreign partner.

Negotiating with Gazprom without European partner

Thus, Ukraine is approaching the moment when the transit contract with Gazprom ends and it will be necessary to negotiate new conditions without a strong European partner who is really interested in maintaining the GTS. “The positions of Ukraine remained the same as in 2014. If the plan with unbundling and engaging a foreign partner in managing the GTS was implemented, the country could strengthen its position, but it was already obvious that it could not be done. Accordingly, the chances of reaching an agreement with "Gazprom" on the terms of European legislation in our country are small," said Gennady Kobal.

The result of the negotiations is, as you know, a matter of great importance. By pumping Russian gas to Europe, our country earns more than $ 2 billion annually, which is about 3% of GDP. In addition, Gazprom provides about 75% of the load for the Ukrainian GTS.

In the current situation, the main trump card of Ukraine in the talks on the extension of transit with Gazprom is only the degree of implementation of projects for the construction of alternative gas pipelines and their willingness to accept Russian gas volumes from the Ukrainian gas transport system, experts say. In recent years, Russia has been making titanic efforts to push gas into Europe, bypassing Ukraine. The Turkish Stream gas pipeline was under construction (from the Anapa area along the Black Sea to the Turkish coast), and the Russian Federation actively lobbied for the Nord Stream-2 gas pipeline (through the Baltic Sea to the German coast). The planned capacity of the Turkish Stream is 32 billion cubic meters, and of Nord Stream-2 is 55 billion cubic meters. The head of Naftogaz, Andriy Kobolev, at a round table held in the Verkhovna Rada, said that the implementation of these projects threatens to reduce the volume of transit of Russian gas on the territory of Ukraine to zero.

Unigovsky said earlier that according to the calculations, even under the most pessimistic scenario after completing the construction of Nord Stream-2 and its continuation, as well as the Turkish Stream, at least 30 billion cubic meters will be pumped through the Ukrainian GTS after 2019 per year. According to him, this figure was confirmed by the calculations of the German Institute EWI, which modeled the projected gas flows through European pipelines (and the Ukrainian transit) for 2030. "But, of course, we will lose a lot in comparison with these volumes, which we are now transiting," he noted.

For comparison, as of March of this year, the volume of gas transportation through Ukraine from Russia to European countries and Moldova has already reached 21.2 billion cubic meters, which is 4% more than in 2018.

So far all the efforts of Ukraine cannot put an end to the projects of the Russian monopolist, but the situation can finally become clear only towards the end of the year, experts say. The further fate of the gas transit and the Ukrainian gas transport system will depend on this.

Related: Ukraine to use aid of EU experts to build up independent gas transport system operator

Unbundling – a split (of a company or conglomerate) into its constituent businesses, sometimes  prior to selling them off

Related: Ukraine selects Russian gas, poses it as European with markup of Dusseldorf+ formula, - Medvedchuk


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