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Ukraine can not continue gas reform because of the dispute with Gazprom. However, its controversial project Nord Stream 2 has problems that may delay its implementation – writes Wojciech Jakóbik, editor-in-chief of BiznesAlert.pl.
Tripartite process
Although Naftogaz originally announced that it would lead to the separation of an independent transmission pipeline operator in Ukraine after the settlement of the arbitration dispute with Gazprom, Russia’s failure to comply with the court’s judgment prompts Ukrainians to postpone the plan at the beginning of 2020, when the transmission contract with the Russian company will end.
The supervisory board of Naftogaz of Ukraine and the new operator of the gas transmission system The main Ukrainian gas-stations (MGU) signed a memorandum on an agreement on a roadmap for the full separation of the ownership transmission system over the Dnieper. It would be the implementation of antitrust laws of the third energy package of the European Union required by the Energy Community, ie the foreign dimension of the EU energy policy and the organization to which Ukraine belongs.
Naftogaz said that the sides agreed to finalize the so-called unbundling at the beginning of 2020, when the existing transit contract with Gazprom will end. Naftogaz won a dispute over this agreement at the Court of Arbitration in Stockholm, but the Russian side did not comply with the verdict. Meanwhile, the decision was important for the transfer of the transmission contract from Naftogaz to the Ministry of Economy. For now, the parent company is still serving it.
In November 2016, the Ukrainian government adopted a regulation on the establishment of the MGU operator by separating the daughter company Ukrtransgaz, which belongs to Naftogaz. Ultimately, the MGU is to be an independent operator based on the provisions of the third energy package. Interestingly, PwC Polska, a partner of BiznesAlert.pl, became the manager of ownership division of the project.
Raising the stakes
The dispute over the conditions of gas supplies to and through Ukraine after 2019 is to be resolved by a tripartite process, i.e. a series of negotiations with the participation of the European Commission, Ukraine and Russia. I wrote in BiznesAlert.pl that trilateral talks with the participation of the energy ministers of Russia and Ukraine and the vice-president of the European Commission for Energy Union about the future of gas supplies through Ukrainian territory after the end of the current transmission contract took place on 17 July in Berlin. The transmission contract ends on December 31, 2019, when the alternative route, Nord Stream 2, criticized by the Ukrainians is to be ready. After the meeting in Berlin on July 17 there will be more, now with the participation of high-level experts. For this reason, you could not count on a breakthrough during the first conversations. The topics of further talks will be the demand for natural gas in the European Union, ways of applying EU law in Ukraine and their impact on the transmission contract, the role of the certified transmission system operator and tariffs.
Tug of war between Ukraine and Russia. The meeting of experts is to take place in September. Politicians are expected to meet in October, unless there is a delay that would work in favor of Gazprom. On November 1, the heating season begins and Ukraine needs to have accumulated supplies for the winter. In the past, the Russians have repeatedly used this period to create pressure in the negotiations, even despite the European Commission’s commitment. This is a way to raise the stake using the spectrum of problems during the heating season.
The first success of the tripartite process was the lack of agreement on package negotiations [/ tt [in which the Russians would link the conditions of transit after 2019 with arbitration arrangements. Gazprom has not complied with the court’s ruling and will now seek to undermine it by a new agreement. Against such a solution, the European Commission and Ukraine agreed. This confirmed the position of Naftogaz. Jurij Witrenko, commercial director of Naftogaz, emphasized that the whole dispute stems from the fact that the Russians are undermining the arbitration court’s ruling and do not want to submit to it. Meanwhile, the court has already decided what the Gazprom-Naftogaz relationship should look like. Nevertheless, it can be expected that after the unsuccessful charge in Berlin, the Russian side will continue to try to impose package negotiations, which the Commission will not agree to. The Russians want to roll the dice until the number of stitches satisfies them. However, Naftogaz does not plan a settlement with Gazprom, although this was suggested by the Russian media promoting package negotiations. This information was denied by the Ukrainian company.
Nevertheless, the Ukrainian side also raises the stake by referring to arbitration additional demands – USD 11,58 billion due to transit tariffs from the Naftogaz-Gazprom contract unjustified in relation to changes in the gas market in Europe. Ukrainians are demanding a retroactive revision from March 2018. It was then that Gazprom did not comply with the arbitration award and limited supplies through Ukraine, forcing it to reach for reserves in order to maintain a minimum technical pressure for transmission to Europe.
The most important matter remains to be resolved, i.e. what the term “minimum level of supply” guarantees stability in Ukraine. According to the Russians, it would be 15 bcm annually. The Ukrainian side expects more. According to Kommersant’s calculations after the launch of the alternative route Nord Stream 2 (Russia-Germany), deliveries through Ukraine may fall by about 50 percent to 20-30 bcm annually and constitute 10-15 percent of Russian exports to Europe. It would be a threat to the stability of the gas transmission system on the Dnieper and its budget, as it would force Kiev to reduce the capacity of the gas pipelines there.
Naftogaz declares its readiness to reduce transit tariffs by 20 percent to USD 2,17 per 1000 cubic meters for 100 km, if the transmission volume will increase to 141 bcm per year, i.e. the level recorded in 1998. According to Naftogaz’s CEO Andrey Kobolev, it would be possible in case of unblocking supplies to Ukraine from Central Asia using Russian territory. In his opinion, in such a scenario the costs of deliveries on the Dnieper would be lower than in Nord Stream 2. Kommersant calculates, however, that the Nord Stream 1 tariff in 2017 is about USD 1,7 per 1000 cubic meters for 100 km, and for Nord Stream 2 it will be around $ 2. It is also a form of raising the stake. Gazprom reported about 15 bcm annually, and Naftogaz wants 141 bcm. Unofficially, you can hear that the range is 30-60 bcm annually. Participants in the trialogue process are to agree on a satisfactory level for all stakeholders.
What’s next?
BiznesAlert.pl informed what Kommersant confirmed later, that in 2019 the Nord Stream 2 branch carrying gas in Germany (EUGAL) will be ready only in the middle, which means that the full capacity of the new gas pipeline will be achieved by 2020, provided that that there will be no delays. This means that the Russians will be forced to maintain the minimum level of supply through Ukraine until the German route is completed. The problems of Nord Stream 2 can also be seen from the pale results of the project compared to Turkish Stream and the Strength of Siberia, which do not have to count on the opinion of Europeans. The Turkish project is approaching with pipes to the edge of Turkey. The Chinese gas pipeline is 90 percent ready. They are to be ready in 2019 and 2020 respectively. Meanwhile, Nord Stream 2 is to be ready by the end of next year, and the construction has not yet started. The last preparations in Germany are coming to an end, but it is not known if work on the water can start without Denmark’s consent. There is still no certainty that Nord Stream 2 will be built on time. Despite the demonstrative self-confidence of the Russian side, it is certain that supplies through Ukraine will be maintained.
