We need to cut gas transportation system: New contract with Russia only temporarily delayed its inevitable demise

Author : Olena Holubeva
Source : 112 Ukraine

Ukraine agreed with Russia on preservation of transit of Russian gas for another five years, although in smaller volumes than before. This affected the amount of cash receipts. Russia has managed to implement bypass gas pipeline projects through which its gas could reach Europe despite the weak efforts and resistance of Ukrainian officials. The current five-year contract with Gazprom looks like a temporary compromise: the prospects for continuing the transit for another 10-15 years, which officials insist on, are vague. No one doubts that Ukraine will have to partially cut its gas transportation system
22:37, 15 January 2020

112 Agency

Better than nothing

It is difficult to overestimate the importance of transit of Russian gas. It accounts for 80% of the revenue structure of the Ukrainian GTS. The total revenue of the system during the validity of the new transit contract with Gazprom for 2020-2024 will amount to 225 billion UAH (9,2 billion USD), of which 185 billion UAH (7,5 billion USD) is the income from transit (in accordance with current transportation tariffs), and only 40 billion UAH (1,6 billion USD) is the  income from gas transportation within the country. If the transit of Russian gas after the expiration of the ten-year contract was stopped, almost 94% of the GTS tariff income would be on Ukrainian consumers’ (enterprises, population, and mining companies) shoulders. As reported, the tariff for the “zero transit” scenario presented by the GTS Operator at the end of last year implied a significant increase in transportation costs, which would inevitably lead to an increase in gas prices in Ukraine. The presence of transit allowed reducing transportation costs by 2-4 times.

In general, during the period of the new contract (65 billion cubic meters of gas this year, as well as 40 billion cubic meters in subsequent years), Ukraine can receive $ 7.2 billion over five years. This is significantly less than about $ 3 billion a year earlier when Ukraine pumped 80-90 billion cubic meters for Gazprom. It is worth noting that $ 7.2 billion over 5 years is the figure mentioned in Naftogaz. It has to be taken for granted since the present parameters of the scheme used in accordance with the current agreements and, accordingly, the calculations are classified.

Related: TurkStream launch causes reduction of gas transit through Ukraine by 15 billion cubic meters

All that is publicly known is that the new transit contract is structured in such a way that Naftogaz is a party to the contract with Gazprom, which in turn concluded a standard contract (regulated by Ukrainian law) with an independent operator ("GTS Operator "). Thus, the Naftogaz receives money for transit services from Gazprom, which, "like a travel agency," leaves itself with a "small amount for transit services."

“The issue of Naftogaz’s participation as a transit organizer raises certain questions. In any form, its participation in the scheme is to some extent influence on the GTS Operator,” said Leonid Unigovsky. According to him, the inclusion of Naftogaz into the transit organization scheme was forced: “I have information, including after talking with foreign partners, that a number of companies, including Austrian, which were offered to take this role, refused. Gazprom insisted that someone was needed to guarantee a constant tariff, regardless of changes in Ukraine. The provision of these guarantees, in fact, was undertaken by Naftogaz. In this light, of course, one cannot help but recall the idea of ​​attracting foreign partners to the management of the gas transportation system: if this had been done, there would have been no need to attract Naftogaz, but the Verkhovna Rada did not support it. "

But even if the configuration is forced, this does not mean that it is disadvantageous to Naftogaz. "Participation of Naftogaz in the transit organization scheme allowed it to maintain significant leverage over the situation, to" stay in the game, "said Gennady Kobal, director of ExPro Consulting.

Related: Over 630 illegal gas stations closed in Ukraine

However, whether it will be possible to talk about $ 7.2 billion in net revenues also depends on whether it will be possible to resolve the long-standing problem of the so-called unauthorized gas withdrawals. “I personally will be very offended if the additional funds that we receive for transit and which we could pay in the form of dividends to our owner (represented by the Cabinet of Ministers - revenues to the state budget) flow into the pockets of regional gas companies,” General Director of GTS Operator Serhiy Makogon said. While the operators of the distribution system and representatives of the gas transmission system are fighting in the courts, the debt for previous periods reached 40 billion UAH.

The only way to resolve the problem is to increase regional gas tariffs, which would enable companies to fully cover their technological losses. It is worth noting that at the end of last year, Ukraine for the first time in 5 years raised tariffs for gas distribution network operators. However, the Regional Gas Company stated that this decision would only "slow down the growth of technological gas debts to the newly created GTS Operator, but would not solve the problem of providing the gas distribution company with sufficient financial resources to buy technological gas in the competitive market." Also, according to the RGC, increasing the tariff will not help in resolving the issue of paying off debts accumulated in previous periods.

Related: Ukrainian gas handling system smoothly switched to euthanasia mode

“The concluded package of agreements, which allowed preserving the transit of Russian gas through the Ukrainian gas transportation system, in principle, cannot be called either loss or victory - this is a compromise. But this is an important compromise, and I do not agree with those who say that we could achieve more. Many of these commentators do not understand what would mean the absence of transit for Ukraine: I would have to significantly change the regional gas supply scheme, which needed at least 1 billion dollars,"- said Unigovsky.

Even with a large number of unknown points in the case of the new transit contract, the main thing is clear: Ukraine does not need as much capacity of hydraulic structures as there are now. "It is clear that the issue of optimizing the GTS infrastructure is on the agenda - it is designed for the transit of 200 billion cubic meters, and so big volumes will not be needed for a long time," Kobal said.

Taking into account the roundabout routes that Russia, in spite of all the opposition from the Ukrainian officials, managed to implement, it is not worth to count on a transit volume of more than 40 billion cubic meters after the expiration of the current contract.

The Turkish Stream gas pipeline, consisting of two strands with a capacity of 15.75 billion cubic meters each and intended for the supply of Russian gas to Turkish consumers (one of the strands) and for supplying the countries of South and South-Eastern Europe (the other strand), was solemnly launched on January 8. At a briefing held in Kyiv the next day, Makogon said that as a result of the launch of the gas pipeline, Ukraine would not receive 450 million in revenues for gas that could be pumped through the Ukrainian pipe. “As for the Turkish Stream, I can confirm that deliveries through Ukraine to Bulgaria and Turkey are not carried out. Now all the applications that we receive are applications for Romania and Moldova,” he said.

Related: No talks or deals on gas purchase between Ukraine, Russia, - Naftogaz-Ukraine CEO

An even more dangerous competitor to the Ukrainian gas transportation system, the Nord Stream gas pipeline, which construction was temporarily suspended due to the threat of US sanctions also seems to be completed. At a recent meeting with Russian President Vladimir Putin in Moscow, German Chancellor Angela Merkel said this was a project that “needs to be completed.” She noted that Germany and other European countries would benefit from Nord Stream 2, and reiterated that it did not support US extraterritorial sanctions aimed at companies involved in the construction of the pipeline. Putin, in turn, assured that Russia will be able to complete the construction of Nord Stream 2 - however, its opening will be delayed by the end of this year.

The intention to continue the transit of Russian gas to the Ukrainian gas transportation system for another 10 years after the expiration of the current contract is fixed only in the protocol of negotiations between the parties: only documents regulating transit until 2024 have legal force.

"I believe that Ukraine still has the prospect of extending the transit contract with Gazprom for another 5-7 years after the expiration of the current contract. However, taking into account the bypass gas pipelines - Nord Stream and two lines of the Turkish Stream, as well as no forecasts that in the long-run natural gas consumption in Europe will be reduced, - in my opinion, it is not necessary to count on pumping more than 40 billion cubic meters per year, "Unigovsky said. “After 5 years, it’s good that 40 billion cubic meters remain for pumping from the Russians, but it cannot be ruled out that there will be 20 billion cubic meters or even zero,” Kobal estimates the situation more pessimistically.

In this case, it will be quite difficult for Ukraine to find an alternative to the transit of Russian gas. “An increase in the number of suppliers from Russia that could transport gas via the Ukrainian gas transportation system to Europe is possible only if Russia cancels Gazprom’s monopoly on gas exports by pipeline. There are no legislative barriers in Ukraine for gas to be bought by European traders on our eastern border,” says Unigovsky. At the same time, there were still no people wishing to buy gas from Gazprom on the eastern border, and, according to Kobal, despite the fact that initially, a number of companies are interested in such an opportunity, no statements, wishes have yet been received.

Related: Signing a package of gas transit agreements is compromise, - chairman of Naftogaz board

Thus, Ukraine will have to begin to reduce the capacity of the gas transportation system or, as oil and gas officials beautifully call it, "optimization." By the way, at the last briefing, Makogon admitted that "bypass pipelines already exist, they exist as a fact." “These five years are a unique opportunity for us to prepare both our systems and the gas market for new challenges. We know that Gazprom has reserved 65 billion, then 40, and I don’t think that in the future they will grow significantly. First of all, we must make our system optimal, we must bring it in line with market needs, we don’t need to maintain such a powerful system, and we should carry out this reform - as optimization of hydraulic structures, and optimization of business processes," said the general director of "GTS Operator".

The biggest question is: how much will Ukraine need to reduce its gas transportation infrastructure? This will depend on how the issue of alternative loading of the transportation system can be resolved. “The extent to which we need to“ cut ”the gas transportation system will, however, depend on production volumes: so far Ukraine has not managed to achieve a significant breakthrough in this direction, but it cannot be ruled out that it will increase from the current 20 to 30 billion cubic meters per year,” considers Kobal. According to Unigovsky, the “state program for adapting the GTS to the new conditions” could save the situation: “In particular, it should involve the use of gas pipelines for other activities, except, in fact, pumping natural gas: reorienting to transport biogas, mixtures of natural gas and hydrogen, the use of free capacities for pneumatic transport (for example, for transporting grain). However, in order for this to happen in 5 years, this needs to be started now. After all, it is absolutely obvious that in such a volume as is available today, the capacities of the Ukrainian GTS will not be needed. "

It seems that in the near future the question of finding an alternative for loading the gas system will be the main one on which officials of the Ukrainian oil and gas complex will have to focus: after all, simply cutting it will be even more expensive and will require, according to market participants, billions of dollars in investments.

Related: Zelensky, Merkel discuss arrangements on gas transit through Ukraine to Europe


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