Concessions and pressure: What is behind gas agreement between Ukraine and Russia?

Author : Olena Holubeva

Source : 112 Ukraine

The authorities reported on a comprehensive agreement with Gazprom, with which gas transit to Ukraine will be maintained from January 1. And also it allows concluding a new contract with guaranteed pumping volumes for 5 years. Both sides had made significant concessions. And if in the case of Ukraine the desire to compromise is understandable, then what made the Russians sharply change their position is not yet clear
22:13, 24 December 2019

112 Agency

Pessimism vs optimism

Just a day before the trilateral talks on the Russian gas transit to Ukraine, from which our country has so far received up to $ 3 billion annually, the head of Naftogaz Andriy Kobolev stated that the possibility to sign a contract with Russian Gazprom from January 1, 2020 is very low. “We can say that there is still some chance of signing a transit contract from January 1, but it’s very, very small. Every minute it tends to zero,” he said.

On the same day, in an informal conversation, one of the Naftogaz top managers said that the position of the Russian side on this issue remains rather uncertain. According to him, the Russian side did not give any documentary evidence that would testify to Gazprom’s intentions regarding the terms and volumes of the transit contract: “There are only some phrases that they spread in media statements - three to five years, various volumes." On the eve of the talks in Berlin, the official emphasized that “the ball is on the side of Gazprom. They say that the Ukrainian position is as flexible as possible and our side is ready for all kinds of options. Due to the lack of documentary evidence regarding the volumes and terms of a possible transit contract, Ukraine still could not calculate the tariff for gas transportation. Only the tariff for the “transit zero” scenario was considered. It assumed a significant increase in transportation costs, which would inevitably lead to higher prices for gas in Ukraine.

However, after two rounds of negotiations (in Berlin and Minsk), the situation changed radically: pessimism gave way to confident optimism and declarations of victory. Energy Minister Oleksiy  Orzhel at a briefing said that Ukraine and Russia agreed on a five-year gas transit contract with the possibility of extension for another 10 years. At the same time, guaranteed volumes for the first five years are fixed - 65 billion cubic meters in the first year, then four years - 40 billion cubic meters per year. Note that these volumes are lower than the current ones - since the beginning of the year, Ukraine has transported 87 billion cubic meters of gas. At the same time, initially the Ukrainian side was negotiating a contract for 10 years with a guaranteed volume of 65 billion cubic meters.

Guaranteed volumes are recorded in the protocol of the European Union, Ukraine and the Russian Federation representatives meeting, as well as companies of these countries (LLC Gas Transporting System Operator of Ukraine, NAK Naftogaz Ukraine, PJSC Gazprom), held on December 19-20 in Berlin and in Minsk. The document, in particular, describes the scheme on the basis of which a system of transit agreements will be concluded. Within its framework several contracts should be signed. PJSC Gazprom will sign an agreement with NAK Naftogaz Ukraine on the organization of gas transportation through the territory of Ukraine. In turn, Naftogaz and LLC Gas Transporting System Operator of Ukraine will conclude a transport agreement (gas transit contract). In order to technically transit from January 1, documents must be signed before December 29.

Tariffs for pumping Russian gas from January 1, and accordingly the amount of funds Ukraine will receive from the transit of Russian gas, are still unknown. At a briefing, Oleksiy Orzhel assured that they would be higher than the current ones. "Given that we have a certain decrease in guaranteed volumes, the parties understand that the tariff should increase. That is, there will be a certain increase in the transportation tariff. Based on the European methodology for determining tariffs, the regulator will determine the final ones," Orzhel said, noting that there is a clear understanding that the tariff should increase in a certain way.

At the same time, Russian media cite Deputy Prime Minister Dmitry Kozak, who said that Naftogaz would take the risk of tariffs for gas transit with Ukrainian company: “We told Naftogaz how much we would be ready to compensate it for the provision of this service, the tariff doesn’t bother us, "said Mr. Kozak, adding that if the tariff is lower than the size of the service, then these will be Naftogaz’s additional revenues. If it will be higher, then these are the commercial risks of the Ukrainian company."

The text of the protocol says that the reservation of capacity of Ukraine’s gas transportation system in the volumes indicated (65 billion cubic meters and 40 billion cubic meters) will be carried out if Ukraine will establish a competitive rate recognized by the company- organizer ("Naftogaz") and corresponding to the level of gas transportation tariffs applied in the countries of Western and Central Europe."

Mutual concessions

The achievement of an agreement on the preservation of transit was made possible thanks to the mutual concessions made by the parties. They are also recorded in the text of the protocol. At the same time, the parties will withdraw all arbitration and legal claims against each other for which no final decisions have been made. The potential benefit in the event of Ukraine’s victory in claims that are being withdrawn would be about $ 12 billion. The protocol provides for the removal of seizures of Gazprom’s property, assets and funds (imposed as security measures to recover funds by decision of the Stockholm arbitration), and also a waiver in the future of all possible claims and claims under contracts for the supply and transit of gas dated January 19, 2009. The settlement agreement will include, inter alia, the termination by Ukraine of all current and possible future requirements for PJSC Gazprom, based on the decision of the Antimonopoly Committee of Ukraine No. 18-r of January 22, 2016 and the corresponding decision of the Commercial Court of Kyiv of 05.12. 2016 (including requirements for the payment of fines and penalties).

Related: Zelensky called on gas station chains to lower fuel prices

Among other things, the Russian side abandoned the position "transit in exchange for direct gas supplies", which was voiced by the Russian delegation at the negotiations in September. The last paragraph of the protocol says that "the parties will consider the possibility of gas supplies to Ukraine, taking into account the pricing based on the price of the European hub (NCG) with the exception of a reasonable discount taking into account the volume of such deliveries." "If they (direct deliveries of Russian gas) are potentially carried out, then only on the basis of the price of the European hub. Within the package agreements that we have reached, there is no direct supply. They only describe the principle on which they can be carried out. There is no political price. There is a hub, a European hub,” emphasized Oleksiy Orzhel at a briefing.

When asked if possible deliveries will be made on the basis of a contract with Naftogaz, which also ends on January 1, or everyone can negotiate with Gazprom, Orzhel did not answer. However, according to sources, at least several Ukrainian companies already have preliminary agreements with Gazprom on gas supplies for their own needs.

It is worth noting that until recently the parties did not allow such a development of events, but now the positions have changed. Why this happened is perhaps the most important question in this story. The reasons why the Ukrainian side made concessions are easier to explain. Guaranteed annual revenues from transit authorities rated as a more attractive prospect than the potential gain in court over time. In addition, in the event of victory, one would have to fight for a payment by the decision of the Stockholm arbitration - to wage a long and exhausting struggle around the world, seeking the seizure of Gazprom’s property. In addition, the loss of transit would mean for Ukraine the loss of the status of a transit power, the need to raise tariffs or “cut” the GTS infrastructure, which would become unclaimed. A rise in prices in Europe, which could have happened if transit had been interrupted since January 1, would inevitably lead to an increase in prices for industry in Ukraine, and so for consumer goods. It is worth noting that even on the positive signals from the negotiations in Berlin-Minsk, the price of gas futures on international trading floors went down.

And why did Russia make concessions? There are several theories: from those voiced by officials to conspiracy ones. At today's briefing, Yury Vitrenko suggested that a new arbitration process worth $ 12 billion could become an “economic incentive” for Russia (Ukraine will refuse it in exchange for maintaining transit). There are suggestions that against the background of the unregulated issue with the Nord Stream, Russia, having stopped transit to the Ukrainian gas transportation system, would have lost competition with liquefied gas, which would begin to flow to Europe from the United States. According to officials, the position of Europe, which supported Ukraine, and the threat of new US sanctions helped. As you know, on Saturday night, December 21, US President Donald Trump signed law on the defense budget, which includes a clause on the imposition of sanctions against companies that provide laying services for the Nord Stream 2 and Turkish Stream pipelines. The Swiss Allseas, which vessels, until recently, in emergency mode laid the last section of Nord Stream 2 near the island of Bornholm, immediately announced the suspension of work.

“A lot of factors have played. Including the fact that the president of Ukraine is in a very active search for stronger positions for the country. And in particular, the Normandy format - the issue of gas was also raised there,” said Orzhel at a briefing. By the way, the details of the discussion of the gas issue during the Normandy format meeting are still not fully known. Is it possible to exclude that the settlement of the gas issue covers a wider range of concessions in other areas sensitive to Ukraine and the Russian Federation? Which ones, one can only guess.

It is alarming, for example, that the sensitive issue of the return of Naftogaz assets in Crimea by Russia, did not arise during negotiations on gas transit, according to Vitrenko. The Executive Director of the Naftogaz noted that “the party to the process is the state of the Russian Federation, which is responsible for the relevant claims of Naftogaz. Therefore, they say, this is not mentioned in the protocol. The protocol was signed by Russian Deputy Prime Minister Dmitry Kozak and Minister of Energy of the Russian Federation Alexander Novak, who are not the representatives of Gazprom. In addition, we heard no assurances of Ukrainian officials that in any case these processes will continue until victory.

Related: Protocol of gas transit negotiations between Russia, EU and Ukraine unveiled

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