Has Gazprom lost Ukraine?

Gazprom CEO Alexey Miller says that his company has not lost the Ukrainian market. “The market? We have not lost anything. Perhaps, somebody else has lost his way but we have not lost anything,” Miller said at the last meeting of Gazprom’s shareholders, when asked if his company was not afraid to lose Ukraine. Experts share his opinion.

In 2011, Ukraine imported from Russia 44.8bn c m of gas. In 2013, it bought 28bn c m. Since the end of 2015, there have been no direct imports from Russia, with almost 10bn c m imported from the EU.

These statistics are not good for Gazprom but they do not mean that the company has lost the Ukrainian market.

“We must be realists. First of all, today, Ukraine is consuming much less than before and not because of Gazprom but because of economic decline. In 2013, it consumed 50bn c m, in 2016, 33bn c m. Today, the country’s industry is consuming 9bn c m – half of what it consumed some three years ago,” says Dmitry Marunich, Co-chair of the Energy Strategies Fund.

“Ukraine has ruined its gas market with its own hands. Today, it is consuming just half of what it consumed a few years ago,” says Alexey Grivach, Deputy Director of the National Energy Security Fund. According to Igor Yushkov, senior analyst at the National Energy Security Fund, Ukraine is transforming from an industrial-agrarian into agrarian country. “So, we should not expect any growth in gas consumption,” he says.

Today, Ukraine imports gas from the EU but that gas is mostly Russian, says Valentin Zemlyansky, Energy Programs Manager at the Center for World Economy and International Relations of Ukraine’s National Academy of Sciences.

“So, Gazprom has not lost the Ukrainian market. Simply, now its gas goes there through European agents,” says Yushkov. Even more, according to him, Ukraine has a big contribution to the growth in Gazprom’s exports to Europe. In 2016, Gazprom enlarged its exports to Europe by 149.9bn c m, of which 10.9bn c m was supplied to Ukraine (83% from Slovakia).

“This scheme is even more beneficial for Gazprom as the European agents pay in time and create no problems,” Yushkov says. According to him, the “cheap gas – political influence” scheme has proved to be inapplicable to Ukraine.

According to Grivach, the European agents are the key beneficiaries as they are earning millions of US dollars on Ukraine’s political phobias, while Gazprom is losing some of its earnings because the Europeans are paying for its gas less than the Ukrainians would pay.

According to the IMF, in May, Russian gas cost $179 per 1,000 c m on the German border while for Ukraine it would cost $220.

“May was an exception as during that month Russian gas was more expensive than re-exported gas. In Mar, Ukraine paid for re-exported gas as much as $248 or $40 more than it would have paid for Gazprom’s gas. In Mar alone, the Ukrainians overpaid $60mn, while during the last heating season, they overpaid a total of $250mn. Even more, had they bought Gazprom’s gas in Q3 2016and stored it up for the winter, they would have saved as much as $440mn,” says Grivach.

When the Stockholm court passed its interim verdict, Naftogaz said that it had satisfied most of its claims. Now there will be no take or pay rule and the price of Gazprom’s gas will be tied to the prices of European hubs. As a result, according to Naftogaz’s CEO Andriy Kobolev, now Russian gas will be cheaper for Ukraine than any other gas.

However, experts doubt that Naftogaz will start buying gas from Gazprom. “The Ukrainians have political motives for not buying Russian gas directly. So, they will continue rebuying its from Europe. In 2019, Russia will launch bypassing Turkish Stream and Nord Stream 2. As a result, its gas will become more expensive for Ukraine. If Gazprom cuts its transit to 10bn-15bn c m, Ukraine will no longer be able to rebuy its gas from Slovakia. After 2019, Slovakia will get gas from Nord Stream 2 and Ukraine will have to pay more for its transportation from the German border,” says Yushkov.

Now Ukraine is earning more from the Russian gas transit and has more enough money for rebuying Russian gas from Europe. In Q1 2017, the transit grew by 21% to 45.7bn c m. But once Gazprom builds the bypassing pipelines, Ukraine’s transit earning will fall from $2bn to $300mn and Naftogaz will no longer have money for buying gas. Today, 1/3 of the imported gas is bought due to loans borrowed from the EBRD and the WB. Besides, the Ukrainians will have to find money for satisfying Gazprom’s claims. Earlier EADaily quoted Miller as saying that Naftogaz might have to pay Gazprom $1.7bn. In its turn, Naftogaz says that the Stockholm court has not specified any figures and will do it only if the sides fail to come to terms.