September 19, Ukraine, Russia, and the EU sit at the negotiating table in Brussels. The parties are to discuss the conditions for the supply and transit of Russian gas to the EU through Ukraine’s territory from 2020, that is, after the completion of the current contract between Ukraine’s Naftogaz and Russian Gazprom. It is still difficult to predict the success or failure of the meeting since all the participants in the negotiations have prepared their trump cards. One thing is certain for sure - each side will persistently defend its position.
Agenda: Duration, payment, and legal compliance
On the eve of the negotiations, Maroš Šefčovič, the Vice President of the European Commission, sent letters to the Ukrainian and Russian parties "with a very clear agenda." According to him, Brussels should discuss the compliance of the future contract with European legislation, the long-term transit and the European style of payment formation. Šefčovič notes that finding a solution is "very important for both countries."
It is known that from Ukraine’s side, Chief Executive Officer of Ukrainian state energy company Naftogaz Andriy Kobolev, executive director of the company Yuriy Vitrenko, General Manager at Gas TSO of Ukraine Serhiy Makogon, and vice president of Ukrtransgaz Pavlo Stanchak will take part in the negotiations. Earlier, Ukraine was represented at the gas talks by ex-Foreign Minister Pavlo Klimkin, but the Russian Federation has repeatedly insisted that the relevant Minister of Energy should negotiate. The presence at the meeting of Oleksiy Orzhel, who was previously appointed to the corresponding position in the Cabinet of Ministers, is still questionable. However, it is known that the Ukrainian delegation will not fly to Brussels without "trump cards."
Ukraine’s mood: It would be difficult, but we are ready
Kyiv is aware that Europe has its own interests in the gas issue. According to Prime Minister Oleksiy Honcharuk, Ukraine should have no illusions concerning Europe’s support in this matter and concentrate on protecting its interest. Thus, the delegation in Brussels intends to insist on and achieve a long-term contract for the transit of Russian gas through the Ukrainian gas transportation system. The Ukrainian side is satisfied with the transportation of 60 billion cubic meters of gas annually (for 10 years).
At the moment of conducting the negotiations, Kyiv has gathered a record amount of gas reserves in eight years, which would allow it to be less vulnerable to Moscow’s pressure. “In order to have confident positions, not become a victim of pressure in the negotiations, the state has prepared a system to be minimally vulnerable to attempts to put pressure during negotiations. We feel confident enough,” MP Honcharuk emphasized.
By the way, US Special Representative for Ukraine Kurt Volker believes that Kyiv’s position in gas negotiations with Moscow has strengthened compared to the previous years. He also predicted the likelihood of further threats by the Russian Federation on gas issues, however, according to Volker, these threats are already losing their weight.
Russian position: We agree, but for a short time only
In the meantime, the Russian Federation will insist on a short-term contract in order to gain time to build gas pipelines bypassing Nord Stream 2 and TurkStream. “Ukraine is looking for a long-term, 10-year deal. It’s not beneficial for us. A one-year deal would be OK so we would build up our strength and launch all those ‘streams’ (Nord Stream 2 and TurkStream),” Reuters cites the words of a source, familiar with the situation. According to another source, an extension of the existing transit contract for a short period would be the “best option” amid Kyiv’s desire to reform its gas transportation system.
Putin's meeting with Gazprom head Miller
In addition, Russian media reported about a meeting between Gazprom head Alexei Miller and Russian President Vladimir Putin. Miller said that the primary issue at the September 19 talks would be the supply of Russian gas directly to Ukraine. "In the case of a direct gas supply agreement with Gazprom, the price of gas for the consumers in Ukraine might be 25% lower than the current level," Miller said. At the same time, Putin emphasized the need for a transit contract through the Ukrainian GTS.
Possible scenarios for ending negotiations
Brussels can offer the Russian side to make gas supplies to the EU without signing a contract with Ukraine if the latter fulfills the obligation to implement European energy standards. In this way, Gazprom will be able to buy back the transit capacities of the Ukrainian gas transportation system for the short and medium-term, some source of RBC, close to the upcoming negotiations, reports.
The possibility of such a development of events was also announced by the source of TASS agency in the European energy sector. According to this source, Kyiv, as a member of the European Energy Community, has committed itself to implement European energy standards in its legislation. This means that the operator of the gas transportation system of Ukraine, even in the absence of a contract, will be required to auction its transit capacities.
Naftogaz head Andriy Kobolev
In November 2018, Naftogaz head Andriy Kobolev admitted Gazprom’s refusal to sign a long-term contract. Gazprom might, actually, refuse from signing a contract with the Ukrainian side. At the end of 2019, Gazprom might come to the Ukrainian GTS operator, which at that time should be fully prepared for separation from the Naftogaz group, and simply order services, as other shippers (transportation service customers, - ed.) do now," Kobolev admitted.
However, it would not work out without a contract. The above scenario might be suitable for Gazprom because it will allow the company to buy back the transit capacities of the Ukrainian gas transportation system without concluding a long-term contract with Ukraine. However, let us pay attention to one important fact: booking capacities of the Ukrainian gas transportation system on general terms still provides for the conclusion of a contract. "It will not work completely without a contract. Some conditions still must exist," Olena Pavlenko, head of the DiXi Group analytical center, explained in a comment for DW. In addition, when participating in auctions according to European rules, Gazprom must show Ukraine all information about gas transit and trade with its European partners (that is, how much Russian gas reaches eastern border of Ukraine and how much goes reaches its western part).
In case of problems with the unbundling or unwillingness of the Russian Gazprom to take risks, associated with the Ukrainian regulator and operator of the gas transmission system, Naftogaz would offer the Russian company a backup option - a gas swap. Under these conditions, Gazprom will transfer to Ukraine a certain amount of gas at the border with the Russian Federation, and Naftogaz will transfer exactly the same volume at the border with the EU.
According to Yuriy Vitrenko, a “gas swap” is as a kind of a fallback if Gazprom does not want to conclude a contract for booking transit facilities. This scenario was voiced in the spring of 2018 during the official negotiations with its delegation, head by PM Dmitry Medvedev, who at that time, was Miller's deputy.
Ukraine’s “plan B” in case of a transit stop. “It would be completely irresponsible not to have a certain “plan B,” said Oleksandr Danyliuk, the Secretary of the National Security and Defense Council of Ukraine. He did not disclose the details of the plan, having only announced the creation of a group that would be responsible for negotiations regarding the signing of a new one, or the extension of the current contract. Kobolev also reported the existence of “plan B” in the event of a transit interruption.
NSDC Secretary Oleksandr Danyliuk
At the same time, it is no secret that if the contract on the transit of Russian gas is not signed in 2020, Ukraine will lose about $ 3 billion a year. Vitrenko convinces that with this scenario, Ukraine has high chances to win another $ 12 billion arbitration lawsuit against Gazprom as compensation for accelerated depreciation.
In any scenario, Ukrainians are assured that “it is possible to survive” without transit. “Of course, we will survive. Ask people’s public opinion. But this is not only a question of survival; it is a matter of the country's development. Therefore, when we talk about transit, these are the funds we receive and the development of the gas transportation system and the possibility of attracting investments, which means the development of our country," Danyliuk assures.