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Armed with unbundling: What to expect from today’s gas talks

Author : Olena Holubeva

The third round of gas talks, which will no doubt draw the attention of the international community, will take place today, on September 19
17:40, 19 September 2019

gas talks
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The third round of gas talks, which will no doubt draw attention of the international community, will take place today, on September 19. The results of the agreements on conditions of continuation of gas transit through Ukraine, which could be reached with intermediation of European Commission between Ukraine and Russia, will influence the economy of the EU, Ukraine and position of Gazprom in Europe at least in the coming years. This round will not be final, as experts note. At the same time, it will give a notion on the moods and position of Russia and Gazprom and will show if and how much Ukraine’s position strengthens after the unbundling. The government made the decision on unbundling at the very last moment.

Vice-President of the European Commission Maroš Šefčovič will participate in the third round of negotiations on concluding a long-term contract on gas transit through Ukrainian gas transport system. Ukrainian delegation is headed by the Minister of Energy and Environmental Protection Oleksiy Orzhel and Russian – by the Energy Minister Alexander Novak. The head of Naftogaz-Ukraine Andriy Kobolev and the head of Gazprom Alexey Miller will also take part in the talks, as European Commission announced.

The talks will touch the issues of gas flow volume and the possibility to decrease/increase it, tariffs, term of duration of the future contract and correspondence to the rules of the European Union.

There is unbundling

An important moment is that Ukrainian delegation came to the talks with a decision on unbundling, which is segregation of gas transport system from the Naftogaz structure according to the requirements of the third energy package. The decision on unbundling was adopted the day before the talks, on September 18. The newly appointed minister Oleksiy Orzhel did not forget to add this to the list of achievements of the new government. “Three past years, previous governments could not reach compromises; new government found the solution within 3 months accepted by all the sides of the process and supported by the European partners. It is very important that we could drive the situation from the dead-lock before the trilateral talks of Ukraine, EU and Russia,” Oleksiy Orzhel wrote on Facebook.

The minister has somewhat simplified the situation. The decision was facing some serious headwinds, which lasted almost three years, as experts say. According to them, the situation moved from the dead-lock because the Cabinet of Ministers reached an agreement with the head of Naftogaz-Ukraine Andriy Kobolev. “Judging from the model of unbundling, approved by the Cabinet, we can say that Kobolev has won,” the director of ExPro Consulting Hennadiy Kobal said to 112.ua.

As we know, the predecessors of the current Cabinet, members of the Groysman government and Groysman himself insisted on transferring Ukrainian gas transport system to the company ‘Main Gas Pipeline of Ukraine’ (MGU), which was under control of the Ministry of Energy and Coal Mining. Judging from the that time power configuration, Kobolev (who was in conflict with Groysman and the minister Ihor Nasalyk) was losing his influence on the pipeline and his weight in the negotiations on transit.

The model of unbundling approved by the Cabinet provides that transmission system operator (TSO) received the right to manage the pipeline on the conditions of economic management for the term of 15 years. TSO will be certified by the National Commission for State Regulation of Energy and Public Utilities and then the  certification will be approved by the European Energy Community. In fact, the TSO already manages the pipe: it manages IT- process and Uktransgaz workers, dealing with gas transport system functioning were transferred here. Because of this, the National Commission for State Regulation of Energy and Public Utilities unofficially decalred that they did not certify the TSO as an independent entity.

The unbundling model provides for instalment selling (for 15 years) of the TSO to the MGU Company. This is the grounds to present the structure as independent from Naftogaz. It’s important that such model allows Naftogaz “keep economic interest from the transit” and be a side of process in the Arbitration Institute of the Stockholm Chamber of Commerce in case against Gazprom SCC Arbitration V 2018/050 on reviewing the transit tariff even after unbundling. Experts note that this will have a big significance in worst case scenario: transit suspension and a lawsuit against Gazprom in Stockholm for accelerated depreciation of the TSO.

According to the model of unbundling approved recently, the Cabinet also subordinated MGU to the Ministry of Finance, headed by Oksana Markarova (who was once the First Deputy Secretary of the National Security and Defense Council under Oleksandr Danylyuk, when he was Finance Minister). In 2016, she was also a member of the Supervisory Board of PrivatBank. However, it is not about the minister, but about the model, which allows to keep current configuration and the pipe in the wrong hands, experts say. “If there are no personnel changes in the top management of the TSO after the current government decisions, it is another signal in favor of Kobolev’s win. In this case, MGU can no longer be considered as an independent unit that could influence something - it will play a supporting role in the current scheme,” Kobal said.

The expert's words confirm the fact that soon the government may consider a draft decree on “authorizing the Ministry of Finance as body which manages the state-property of TSO” (used in the process of transportation of natural gas through main gas pipelines). In addition, one of Naftogaz's main arguments for not giving the pipe to MGU was the lack of its financial resources and experience in managing the pipe. Recently, MGU funding has been quite bad recently. Due to reorganization of the Ministry of Energy, the company was cut off from budget funding. As an alternative, the option of transferring the TSO with the right to manage the pipe to the affluent state-owned company Ukrenergo was considered. However, at the end of last week, sources close to the Cabinet of Ministers said that this is unlikely to happen. Oleksiy Orzhel strongly opposed to it.  

It is worth noting that the European partners did not understand all these “squabbles” around the Ukrainian GTS, well, or they pretended very well. Sources close to the negotiation process say that the European Commission was indifferent to which operator the pipeline would be subordinated, the main condition for it to be isolated from Naftogaz and be independent. Otherwise, it would be the “shame” of Ukraine - as, according to sources 112.ua, the EC representatives called the delay in decision on unbundling. They say that during the sidelines meetings they did not hide the irritation. Against this background, the Ukrainian government had heated discussions. There were drafts of resolutions in the Cabinet on transfer of TSO directly to MGU, on liquidation of MGU, on transfer of TSO to Ukrenergo. At the same time, everyone understood that the final decision should be made by September 18, before negotiations with Gazprom.

Undoubtedly, the fact that the Ukrainian delegation has come to the negotiations, armed with the decision on unbundling and a clear understanding of how it will proceed, is of great importance, experts say. “Gazprom constantly emphasizes that it does not know who to negotiate with because there is no new operator,” Unigovsky said. He said it was very important to “deprive” Gazprom of this possibility until at least October (before the new round of negotiations).

European courts provided little help to Ukraine

Another peculiarity of current negotiations: the European partners commercially interested in the keeping of the transit through the Ukrainian gas transporting system and in the result, having the possibility to influence the negotiations did not appear. The consortium of SNAM, Eustream, GRTgaz, Gasunie, Fluxys companies (earlier considered as the partners allowed to govern the gas transporting system, - 112.international) is cautiously interested in the cooperation with the operator of the Ukrainian pipe as Unigovskiy said: “The investments to the Ukrainian gas transporting system are not interesting for them yet”. The expert’s opinion coincides with the information of 112.ua sources, which state that the European companies withdrew from the negotiations on the possible investment partnership with the gas transporting system and the negotiations take place with the American companies.

The current model: the ownership of the pipe on the basis of the contract on the administrative management makes the Ukrainian system even less attractive for the potential investors. They could be interested in such forms as concession or long term rental.

However, without the foreign partners, from the point of view of the presence of the capacities, which could be used by Gazprom to transit gas bypassing Ukraine, the Ukrainian delegation has quite strong positions at these talks as the experts note.

“Our calculations show, considering the decision of the European Court on OPAL gas pipeline (on Eugal), that it is possible to be realistic about the long term contract on 50-60 billion cubic meters per year. Due to the court’s decision, Gazprom will not be able to use 40% of the capacity of OPAL, the continuation of Nord Stream 1; it is about 12 billion cubic meters per year. The same will take place with Eugal, the continuation of Nord Stream 2, which is under construction. Totally, we have 24-25 billion cubic meters, which may be transported only through the Ukrainian transporting system. Besides, it seems to be that Nord Stream 2 will not be constructed in 2019. We have a strong position in the talks,” Leonid Unigovskiy said to 112.ua.

According to Unigovskiy, as of September 1, the Russian gas monopolist has accumulated about 12 billion cubic meters of gas in the European underground gas storages.

Gazprom, among other things, may use the supplies of the liquefied gas from Yamal Liquefied Natural Gas or contract it from other producers, but in our opinion, this step will provide a possibility to work not more than three months. The most difficult situation will be in Moldova and south of Odesa region (gas is supplied through Moldova there and unauthorized samplings of gas are possible,’ Unigovskiy said to 112.ua.

The gas suppliers from the U.S., Turkey, Qatar may use the situation when Gazprom will not be able to fulfill its commitments before the European partners in full extent (in case of absence of gas transit through Ukraine) and replace the Russian gas monopolist. It is also the argument, which makes Ukraine’s position at the talks stronger.

Unigovskiy does not exclude the situation “when the gas will be transported in the Ukrainian gas transporting system without a contract. Like, “we will figure it out later”.

In any case, it is already known that current negotiations with Gazprom on gas transit after 2019 are not the last. “Their importance lies in the fact that at least we will be able to see the position and tactics of Gazprom. And whether it is ready to sign anything,” Hennadiy Kobal said. According to him, it is obvious that Gazprom will try to delay the process to keep the pressure on the European gas market”.

The uncertainty is into their hands, however, for LNG suppliers too as ExPro Consulting director noted: “At current low prices in Europe, 11 euro for MWt, for October the futures are planned for 14.75 and for 18.4 euro for December. Converted to hryvnia, it means that in case of the absence of the agreement on the transit, the prices will increase up to 8-9.000 hryvnia ($325-366) for 1.000 cubic meters object to current 5.000 ($203)”. Analysts say about at least $300 for 1.000 object to current $160. The benefit of Gazprom at the expense of highly competitive from the side of companies, which are ready to take the lost contracts with the European counterparties of the Russian monopolist, will be short-term.

For Ukraine, the finalization of long term contract with Gazprom is a highly important issue. If for Europeans it is tied only with the risk of the growth of the prices during the current heating season then for our country it will mean the loss of about $3 billion per year. According to Unigovskiy, “the presence of transit gives us a particular mean to influence the formation of the European policy, which makes the full-scale war with Russia less possible.

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