Gazprom loses influence in the EU: How could Ukraine take advantage of this?

Author : Olena Holubeva

Source : 112 Ukraine

Gazprom’s position in Europe continues to weaken. On May 18, the 25-year contract of the monopolist on Yamal-Europe gas pipeline ended: in order to continue to use the Polish section of the pipes for gas supplies to Germany, Russian company was forced to agree to the conditions of the Polish side. It reserves the capacity of the pipeline, buying them at auctions.
22:00, 27 May 2020

Open source

At the same time, Gazprom pays at higher tariffs than it paid under a multi-year contract. For Ukraine, this is a positive signal: if our country correctly takes advantage of the situation, it will gain new opportunities to earn by selling the services of the Ukrainian gas transmission system to European partners. In addition, with the weakening of Gazprom’s influence in the EU, Ukraine’s position in further negotiations with the Russian monopolist may strengthen.

At the beginning of last week, May 18, the transit contract concluded in the 90s expired. According to it Gazprom used the Polish section of the Yamal-Europe pipeline, which passes through the territory of Russia, Belarus, Poland and Germany (Polish section is 683 km) for gas supplies to Europe.

The Yamal-Europe gas pipeline is one of the competitors of the Ukrainian gas transmission system. In 2006, it was launched at a design capacity of pumping 32-33 billion cubic meters of gas per year. As a result, according to the calculations of the Slovak gas operator Eustream, utilization of the Ukrainian gas transmission system decreased by about 15 billion cubic meters per year. The construction of another Yamal-Europe 2 line was also considered, but the project was abandoned at the initiative of the Polish side. The position of the Poles was very indicative - they refused, citing the fact that they don’t want to implement a project that could lead to a decrease in the load of the Ukrainian gas transmission system,” said Leonid Unigovsky, head of the Expert Council on the development of the gas industry and the natural gas market.

He noted that Poland, on its own initiative, did not renew the permanent contract with Gazprom for the transit of Russian gas to Germany and switched to the auction system, which is required by European rules. “One of the reasons for this was the fact that the Poles were dissatisfied with the level of the tariff that was stipulated by the contract valid until May 18. If we talk about booking for a month (in June), Gazprom will pay 7.3 dollars for 1, 000 cubic meters, and with a quarterly reservation in July-September - $ 6.8 per 1,000 cubic meters. In any case, this is more than what Gazprom paid under a permanent contract that ended May 18," said Unigovsky .

The low tariffs that Gazprom pays to buy the capacities of the Yamal-Europe gas pipeline in Poland at the auction are explained by the lack of competition in this direction now. In the same way, they cannot have any competitors in the Nord Stream 2 pipe: these routes are exclusively Russian,” explained Andriy Mizovets, president of the Gas Traders of Ukraine Association.

The reason why it is not possible to reach high prices when selling the capacities of the Polish Yamal-Europe section is partly the lack of competition, agrees Leonid Unigovsky. Following a recent auction, Gazprom bought nearly 94% of the Yamal-Europe gas pipeline back in June. From July to September Russian company booked almost 80%. In May, they bought up to 60% of capacity at daily auctions. According to recent statements by both the Polish and Russian sides, transit through the gas pipeline will continue in the near future, but in accordance with European rules. The next very significant  auction for the sale of Yamal-Europe capacities is due to take place in October - capacities there will be sold for a year in advance. This auction will be indicative, since by that time the situation with Nord Stream-2 (the competitor of Yamal-Europe) will be clear as well as the volume of the EU’s gas demand.

Gazprom was forced to agree to Poland’s demands to proceed with the reservation of capacities through auctions. Yamal-Europe is a profitable direction for the Russian monopolist, given that they 100% own the section of the Yamal-Europe gas pipeline in Belarus. "Nord Stream - 2" could serve as an alternative to it. If the Russians managed to put it into operation, the loading in the Yamal-Europe pipe would have fallen significantly. “Now the implementation of NS-2 is restrained only by US sanctions - the German regulator’s decision to extend the European directive to it has been adopted, but there are no guarantees that it can be canceled or Gazprom would have found ways to get around it. In other circumstances until the end of this year, this project would be completed and put into operation, "said Unigovsky. He added that recently, Gazprom spokesman Sergei Kupriyanov said that his company would continue to supply 28-29 billion cubic meters to the EU via Poland per year.

Related: Germany considers partial switching to hydrogen instead of Russian gas by 2030

It is noteworthy that Poland not only refused to transit Russian gas on stable contract terms, but also announced its desire to refuse Gazprom’s gas supply services to meet the needs of the country's domestic market. As you know, Ukraine has not bought Gazprom gas for the needs of the domestic market since 2015.

“In 2022, the contract for Gazprom’s gas supplies to Poland (concluded with PGNiG) using the take-or-pay principle ends. The Polish side has already made an official announcement that after that, since 2023 they will not conclude a new contract with Gazprom on gas supplies for the domestic market," Unigovsky said. According to him, in 2019, 60% of imports to Poland accounted for Russian gas. At the same time, deliveries of LNG gas to the country from the USA and Qatar are growing annually (Poland has regasification capacities). Moreover, Poland is completing the construction of the Baltic Pipe gas pipeline, through which about 10 billion cubic meters will be supplied to the country. According to Unigovsky, of this volume - about 2.5 billion cubic meters is got in PGNiG concession projects in the North Seas.

Among other things, under a contract for the supply of gas to Poland in 2016, a lawsuit was launched in the Stockholm arbitration. It resulted in the decision that the cost of Russian gas for Poland was overstated. The arbitration decision introduced a new pricing formula for Russian gas. In March, PGNiG announced that it had won a case against Gazprom in Stockholm, in connection with which the Polish company allegedly owed six billion zlotys (about 1.3 billion euros).

Gazprom loses influence on Europe

Gazprom is really losing influence in Europe. Recent events in Poland are a vivid confirmation of this, notes Andriy Mizovets: “In order to counter Gazprom’s policies, to reduce its growing influence, the European Union has changed the rules of the game in recent years. In the field of gas transmission capacities, one person cannot be both the owner of the pipe and the owner of the resource that is pumped in. The practice of selling GTS capacities at auctions was also introduced. Europeans prefer to sell the capacity to the one who will offer the best price for it. This is a situation that maintains maximum competition, and it’s good that Poland as a member of the European Community has also come to this. "

The fact that Gazprom’s position in Europe is weakening is also confirmed by Leonid Unigovsky: “If in general in 2019 the Russian monopolist received about $ 40 billion for pumping 199 billion cubic meters of gas to Europe, then this year the volume will fall to 166.6 billion, and revenue will drop to $ 22 billion." The head of the expert council on the development of the gas industry and the natural gas market added that this year the situation was complicated by the warm winter, large reserves in underground gas storages and a decrease in consumption due to coronavirus: “But at the same time, Gazprom admits that the position has worsened due to increased competition, including from LNG.”

End consumers only benefit from what is happening, experts say. “10 years ago, thanks to the efforts of Gazprom, the price of gas in European markets was also formed not so much under the influence of market factors as under the influence of political factors. Most of the contracts were concluded at fixed prices or formulas were tied to benchmarks for other fuels (in particular oil), gas prices were kept at a higher level and were less volatile than in recent years. As a result of the changes that occurred after the transition to short-term contracts and the development of exchange trading in gas, prices for consumers began to change very dynamically, decreased significantly, which we are now observing,” Andriy Mizovets told

Gazprom used its influence and was part of the ownership structure of gas pipelines. “The influence allowed the Russian company to pursue a rather aggressive policy, in particular, to enter into the ownership structure of strategically important gas pipelines, as in the case of the Polish section of the Yamal-Europe gas pipeline. Gazprom completely absorbed the Belarusian gas transmission system (Gazprom owns and carries out operational management the Yamal-Europe section located in Belarus). It has been striving for many years to gain control over either part or the entire Ukrainian GTS. To implement this plan, a draft consortium was even being prepared at the time of President Viktor Yanukovych, in which Gazprom should be a key player with the ability to control the Ukrainian pipe," says Mizovets.

Since 2010, Gazprom has owned 50% of EuRoPol Gaz, the owner of Yamal-Europe. The remaining 50% is owned by PGNiG. The operator of the Polish pipe section is Gaz System.

How is the situation beneficial to Ukraine?

If we take advantage of the situation correctly, our country can significantly increase gas trading volumes by providing “virtual reverse” services to European partners.

Director General of Ukraine’s Gas Transportation System Operator (UGTSU) Serhiy Makogon said that in September 2020, joint virtual points with Poland and Slovakia could be launched. In addition, the UGTSU began to provide European traders with a completely new short-haul service. Since the beginning of the year, a service that allows transit over short distances has begun to be provided at the western borders.

"Short-haul is a completely new tool that has long been popular in Europe, but has not been used in Ukraine until this year. The service is relevant in situations of large fluctuations on gas markets in countries, provided that it is economically feasible to transport through Ukraine. It allows transferring gas between countries for a short time, saving traders ’money and allowing them to earn money on UGTSU operations. In Europe the tariffs for pumping in gas pipelines depend on the principle that the highest tariffs are paid by operators who bought long-term capacity for a quarter or per year. The faster the trader needs to get power (from day to day or from hour to hour), the more expensive the tariffs. And then short-haul comes to the rescue - a service that is sold at a special tariff," Mizovets explained

UGTSU claim that tariffs for short-haul in Ukraine are two times cheaper than that of operators of European gas transmission systems.

Related: Autogas prices continue to grow in Ukraine

Before the expiration of the contract with Gazprom on the Yamal-Europe gas pipeline section, test gas deliveries from Slovakia to Poland through the Ukrainian gas transportation system in short-haul mode, as well as deliveries from Ukrainian underground gas storage facilities to Poland, were carried out. These deliveries confirmed the ability to fully provide Poland with the necessary resource in case of termination / reduction of deliveries from the Russian Federation, Serhiy Makogon reported on his Facebook page.

"Such a service as short-haul in the context of the situation is a potential opportunity for the UGTSU to earn additional money by transferring additional volumes of gas. Synergy with the available underground gas storage facilities in Ukraine provides a wide field for the use of this service," said Mizovets, noting that we are not yet observing the practical implementation and widespread use of short-haul in Ukraine.

In May, 10 traders working with UGTSU, out of 300, used the service.

At the same time, it cannot be ruled out that over time it will start and will be widely in demand among European traders. The good reason is the start of the "customs warehouse" service, the volume of which last year exceeded expectations several times, the president of the Gas Traders of Ukraine Association noted. He added that whether short-haul will be in demand and to what extent will largely depend on the configuration of the gas pumping infrastructure, including projects involving the UGTSU itself. One such project is a gas interconnector between Poland and Ukraine. The possibility of its construction has been discussed for about five years. But there is still no understanding whether this infrastructure will be in demand and how much. Moreover, from the point of view of necessary investments, the project is expensive.

At the same time, the potential for short-haul operations through the Ukrainian gas transmission system may decrease after the completion of the construction of the interconnector between the gas transmission systems of Poland and Slovakia.

The pluses of the situation with the weakening of Gazprom’s position in Europe include the fact that our country is strengthening its position in further negotiations: losing its leverage, the Russian gas monopolist is becoming more accommodating, experts say. In addition to the continuation and conditions of the current transit contract in the future, a sensitive point on which there may be discussions is Gazprom’s position regarding the free sale of gas to traders on the eastern border. For many years, the Russian gas monopolist has been blocking such an opportunity.

In an interview Serhiy Makogon noted that Russia should open its own GTS for third-party access, which will allow both local and Central Asian companies to transit gas through Russia and Ukraine to Europe. “Russia is not covered by the EU’s Third Energy Package, and not only other Russian gas producers and Central Asia, but also the Ukrainian GTS Operator suffer from Gazprom’s existing monopoly on gas exports through pipelines, since we cannot offer our infrastructure to others users for transit, "said the general director of UGTSU.

It should be noted that, oddly enough, the situation of Gazprom in Europe has also disadvantages for Ukraine. "A decrease in Russian gas consumption in Europe is just a bad signal. After all, Ukraine and Gazprom are in the same boat, and the more it can sell gas on the European market, the more the Ukrainian gas transmission system can earn (provided that Nord Stream - 2 will not be put into operation)," said Leonid Unigovsky.

As you know, Ukraine signed a five-year transit contract with Gazprom, according to which in 2020, 65 billion cubic meters should be pumped as well as 40 billion cubic meters annually since 2021 on the principle of "download or pay". The UGTSU informs that according to the results of 4 months of this year, the volume of transit compared to the previous year fell by 47% to 15.5 billion cubic meters. In addition to lower demand in Europe, the reason for the reduction in transit was the commissioning of the Turkish Stream pipeline in January 2020, which took over Russian exports to Turkey, Bulgaria and Greece. Makogon predicts that, provided that Nord Stream 2 is still not commissioned, Ukraine will pump 50-55 billion cubic meters of Russian gas to Europe this year, with the physical capacity of the GTS to transport 110 billion cubic meters of gas.

Related: Germany's decision not to exempt Nord Stream 2 from EU gas directive is blow to Russia, - ambassador

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