Gas transit “for good hands”: Kiev seeks to retain gas incomes

To retain the Russian gas transit, Ukraine is ready to transfer its gas transportation system under management of a European company that will guarantee the transit via Ukraine’s territory. Nataliya Boyko, Deputy Minister of Energy and Coal Industry of Ukraine, made such statement on Public TV of Ukraine. “It is important to find a partner that is able to help us maintain transit volumes via Ukraine. This is the key idea. As regards 2019 and a new contract, we are ready to make partnership with a European company and work transparently to ensure additional reliability for EU,” the deputy minister said.

According to her, Ukrainian government is currently holding consultations with European companies from five countries to re-assign the responsibilities in management of the Ukraine’s gas transportation system. Nataliya Boyko did not name the potential partner companies, saying these are companies from Slovakia, Poland, Italy, France, and the Netherlands.

So far, Ukraine considers Snam, operator of Italian gas transportation system and part of Austrian gas transportation system, as the most promising partner. Together with the Slovakian Eustream, it signed a memorandum of cooperation with Naftogaz of Ukraine and Ukrtransgaz. “The idea is clear. If Snam, once subsidiary of Eni, becomes a partner in managing Ukraine gas transportation system, ENI will trust the Ukrainian system more and there will be more chances that ENI will buy gas on the Ukrainian-Russian border,” Yuriy Vitrenko, Director for Business Development at Naftogaz of Ukraine, said earlier.

Gazprom planned to keep the transit via Ukraine at 15-30 bln cubic meters, after Turkish Stream and Nord Stream-2 projects are completed. Dmitry Marunich, Co-Chair of the Energy Strategies Fund, says at least 60bln cubic meters of gas transit are needed to make Ukraine’s gas transportation system profitable under current contractual rates. Last year, Italy imported about 24 bln cubic meters of gas from Russia and Snam Company needs to find other European partner companies, not just Italian ones. It may be countries not involved in Nord Stream-2: Moldova, Bulgaria, Slovakia, Slovenia, Czech Republic and Romania. However, even together with these countries, the transit volume will not exceed 50 bln cubic meters.

Marunich sees no conditions so far to retain gas transit via Ukraine. Much will depend on implementation of Nord Stream-2 and Turkish Stream projects, he says.

Evidently, Ukraine cannot hold a constructive dialogue for a new transit contract with Gazprom. Whether a new operator will manage to do it is not clear either, says Deputy Director of the National Energy Security Fund Alexey Grivach. “The operator cannot guarantee transit. It has no gas resources for it.”

Besides, it is not known what powers it will have, what guarantees of stable legal system of Ukraine it will get and whether it will offer competitive terms to Gazprom and implement them strictly. So far, there is neither operator nor any strict frameworks of Ukraine’s gas transportation system operator for a long-term outlook. Besides, this process can be blocked at any stage, for instance, by the country’s parliament,” the expert said.

In 2014, Ukraine’s parliament passed a law authorizing the government to set up a gas transportation system operator with investors from U.S. and EU that may get up to 49% of total profits. Kiev says the main incomes will go to the government, whereas the Italian company offers creating an operator consortium on the basis of gas transportation system of Ukraine. It will be operating only on the part of the gas transportation system that is used for transit: from Sudzha gas metering station in Russia to Moldova and Uzhgorod. The main point of the consortium is that Italians shall manage part of the system and get certain percentage of incomes from gas transit. This will not be a small amount.

“According to the existing data, the key subject of talks with European companies is the concession format with no investment obligations. Besides, the European company will get up to 50% of total profits from operation of gas transportation system, which amounts to 1-1.3bln USD annually,” energy expert Yuri Korolchuk told RIA Novosti Ukraine.

In this light, it is not surprising that the opposition will try to block any deals on transfer of the gas transportation system to management of a foreign company. For instance, Yulia Tymoshenko, the former prime minister and leader of Batkivshchyna party, urged the parliament to pass a bill banning any deals on the gas transportation system. “It costs 300bln EUR. Remember this figure! At present Naftogaz CEO Kobolyev has launched a process of transferring the system without compensation, in fact. They are transferring 49% of the system under concession of a foreign company and weigh methods to transfer the ownership of the system,” Tymoshenko said.

Co-Chair of Opposition Bloc Yuriy Boyko is sure that without EU-mediated talks with Gazprom, the gas transportation system may stop operating.

“If they speak of energy independence, saying that we have enough gas, while it is not true, someone should answer for this. First of all, I am speaking about the government and Naftogaz. The president of Ukraine must stop its PR-campaign and start working, negotiating for the future of the gas transportation system. The contract for Russian gas transit will expire in less than two years. If the contract is not extended - all the indications are that it will not be extended – they are building gas pipelines passing by Ukraine – we will face a big problem. We will lose budget revenues from gas transit. The system may collapse. Meantime, it provides 50,000 jobs,” Yuriy Boyko said.

Valentin Zemlyansky, Director of Energy Programs, Center for World Economy and International Relations, National Academy of Science, Ukraine, says 30% of Ukrainian gas transportation system capacity is surplus now and transit will be reduced after 2019. “We will lose the main volumes and we need direct talks to minimize losses,” the expert says. He is not sure that European operators will manage to persuade large consumers of Russian gas, many of them are Gazprom’s partners in Nord Stream-2. “A European operator with no guarantees is senseless, as it will just have a share in our profits,” Zemlyansky says.

Naftogaz of Ukraine shows no willingness to hold a dialogue with Russia, he said. “We say that we won (at Stockholm Arbitration Tribunal – editor’s note) and if needed we will repeat it. We say we will get new gas transit rate approved through court action. By the way, the Stockholm Arbitration rejected this application. We go into personals and threaten with force and punishment. After all this, we still hope to agree with Gazprom?! While we make statements, the Russian company is building Turkish Stream, expanding Blue Stream and preparing for construction of Nord Stream-2.”

To recall, after Stockholm Arbitration Tribunal ruled that Gazprom shall pay $4.6bln compensation to Naftogaz for unsupplied gas, the Russian company started procedures to terminate contracts with the Ukrainian company. The current contracts will expire in 2019 and they in Ukraine already anticipate that Nord Stream-2 and Turkish Stream projects passing by Ukraine will deprive the country of its $2.5bln annual incomes. In early 2000s, Ukraine, Russia and Germany held talks to set up a consortium to manage the gas transportation system of Ukraine, however election of Viktor Yushchenko as president of Ukraine put an end to the project. Later, Nord Stream, the first gas pipeline passing by Ukraine, was built.