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The crisis in the Kerch Strait erupted almost on the third anniversary of the independence of Ukraine from Gazprom. Poland and the USA may stream more gas on the Dnieper, but the Poland-Ukraine gas pipeline project is still waiting for implementation – writes Piotr Stępiński, editor of BiznesAlert.pl.
Last Sunday, the media followed the developments of the incident in the Kerch Strait. First, the Russian ship rammed the tug boat belonging to the Ukrainian Navy, which along with two armored troops headed for the port of Odessa. Then the Russians shelled Ukrainian ships, which led to increased tension in the region. A day later, President Petro Poroshenko signed a decree on the imposition of martial law on the territory of Ukraine. This is another example of aggressive Russian actions against Ukraine.
This is also evident from the example of the energy sector. Energy resources, and in particular natural gas, are an important element of Russia’s foreign policy. One of the countries that has been most affected by its operation is Ukraine, which has been subjected to energy blackmail on its part over the past few years. We remember the crises of 2006 and 2009 or later situations, when the Russians withheld or significantly limited gas supplies to Ukraine, thus wanting to undermine confidence in it as a transit state. This policy of destabilizing and presenting Ukraine as an unreliable partner is also in line with Russia’s recent aggressive actions in the Kerch Strait. Moscow is trying to portray Ukraine as an unstable and unreliable partner. Meanwhile, Ukrtransgaz (operator of the Ukrainian gas transmission network – editorial note) argues that regardless of the imposed martial law Ukraine is ready to ensure gas transmission through its territory. It is possible that also this time Russia will reach for the gas argument and will manipulate the supply and transit of fuel through the territory of Poland’s neighbors.
Earlier, Kiev decided not to passively watch Moscow’s actions. In the wake of other countries of the region, it placed much more emphasis on reducing dependence on Russian gas supplies and seeking alternative sources of fuel supply.
Gas divorce with Gazprom
November 26 is not just the date of imposing martial law in Ukraine. On that day three years ago, the then Ukrainian government, with Arseniy Yatsenyuk as prime minister, ordered Naftogaz to stop direct gas purchases from Gazprom, stating that the prices offered by European partners are more attractive than those offered by the Russian monopoly. In response, the Russian company declared that due to the lack of payments for gas, it suspended its supplies to Ukraine. From that moment, a new stage in the history of energy relations between Kiev and Moscow began. It is true that Ukrainians are buying Russian gas, but not directly from Gazprom, while seeking the possibility of obtaining gas from other sources. At present, Naftogaz receives fuel on the basis of reverse deliveries carried out on gas connections with Poland, Slovakia and Hungary. From November 25, 2015 to November 22, 2018, Ukraine thus received 33,5 billion cubic meters of the resource. According to data from Ukrtransgaz, from January to October 2018 Ukraine imported 8,065 billion cubic meters o gas, which in comparison with the same period last year means an increase of 24,7 percent. From the direction of Slovakia, 5,017 billion cubic meters were delivered over the Dnieper (-36,4% y / y), from Hungary – 2,50393 bcm (+ 27,9% y / y), and from Poland – 0,5387 bn cubic meters. (-37,4% y / y).
In the Ukrainian media there was information about a possible resumption of purchases of Russian gas. At the end of December last year, the Arbitration Tribunal in Stockholm issued a decision on mutual claims between Naftogaz and Gazprom. One of the provisions was also to reduce the amount of gas that the Ukrainian company is obliged to purchase from the Russian company from the level of 52 billion cubic meters up to 5 billion cubic meters annually in 2018-2019. In an interview with BiznesAlert.pl, representatives of the Naftogaz press office emphasized that despite this, the Russian company ignored the decision of the court in December 2017 regarding the contract for the supply of gas. In March, Gazprom refused to deliver gas to Ukraine based on the terms of the contract, which were amended by a decision of arbitration. At that time, Naftogaz urgently needed to conclude a contract with PGNiG for the supply of 2 out of 18 billion cubic meters.which Ukraine needed. – We appreciate the quick reaction and support of our Polish colleagues in this difficult period. The next day, the missing volumes were covered by deliveries from other entities – notes Naftogaz.
At the same time, the representatives of the press office of the Ukrainian company pointed out that it would demand compensation for any additional costs incurred due to Gazprom’s failure to comply with the gas supply contract. As Maksym Bielawski, adviser to the Ukrainian Minister of Energy and Coal Industry of Ukraine and an expert of the Razumkov Center pointed out in an interview with our portal, for them, the topic of the resumption of direct gas purchases from Russia is currently not discussed. He stressed that Kiev is seeking to diversify sources of fuel supplies. – Transmission capacities on reverse connections with Slovakia, Poland and Hungary amount to 24 billion cubic meters, but they are used only in 48 percent. Greater diversification can be achieved thanks to interconnectors with Romania, which will allow access to gas extracted there, which this country has in excess. A promising direction seems to be the organization of connection with the Isaccea measurement station (on the Romanian-Ukrainian border – ed.), In order to enable the receipt of gas sent through the TANAP gas pipeline – he stated.
Gas pipeline Poland – Ukraine
Bielawski paid special attention to the Poland-Ukraine Gas Pipeline. In his opinion, it will allow to increase the diversification of gas supplies, because it opens access to the raw material extracted on the Norwegian Sea shelf (from 2022, the Baltic Pipe pipeline is to reach Poland 10 billion cubic meters of gas per year) and to the fuel supplied to the LNG terminal in Świnoujście. – In my opinion, in the near future it will be very important to organize the work of the gas connection with Poland, because in the case of reduction of gas transmission through Ukrainian gas pipelines it will be necessary to open new sources of fuel supply – said the Ukrainian minister’s adviser.
For this purpose, it is necessary to expand the current connection between Poland and Ukraine, whose capacity is 1,5 billion cubic meters. After the end of the project, planned for 2020, it is to increase to 5-6 billion cubic meters, which will allow much more gas to flow from the direction of Poland over the Dnieper. The market wants to receive fuel that will flow through this connection in the future, as demonstrated by the results of the non-binding market interest survey procedure finished in July (about 3,9 bcm per year in the direction of Poland-Ukraine and about 1,6bn cubic meters per year in the direction of Ukraine – Poland – ed note).
In the past, PGNiG has repeatedly pointed to its interest in gas supplies to Ukraine. From August 2017 to the end of June 2018, the Polish company supplied over 1,3 billion cubic meters of the blue fuel. Let’s also remind that at the beginning of October, PGNiG signed a contract with ERU Trading for the supply of 0,2 billion cubic meters for Ukrtransgaz. The contract is in power from October 2018 to May 1, 2019. Both companies have been successively cooperating with each other since April 2017, when they signed a contract for the supply of 0,218 billion cubic meters of fuel for Ukrtransgaz.
Gas production in Ukraine does not cover consumed volumes, so it has to import gas from abroad. Our neighbors have the second largest gas resources in Europe. According to the Ukrainian gas sector development strategy, by 2020, the output will increase from the current 20 to 27,6 billion cubic meters. Theoretically, it would be possible, but not without significant investments, and therefore measures that may be missing in the event of deprivation of Ukraine as a transit state. For this reason, a foreign investor is needed.
There will be a gas pipeline, there will be more supplies from Poland and the USA
Nevertheless, in an interview with the BiznesAlert.pl portal, the Naftogaz press office announced that the company is pursuing a policy of diversifying its import portfolio and also negotiating new sources of gas supplies with Poland, Romania and the USA. However, the company did not specify at what stage the talks are held and which entities are conducted. It is worth recalling that in March 2018 the head of PGNiG Piotr Woźniak assured that the company is able to guarantee stable and safe gas supplies to Ukraine thanks to a diversified gas portfolio that comes both from our own extraction in Poland and from imports – including regular LNG supplies from Qatar and the USA. In October 2017, the possibility of delivering the American LNG over the Dnieper was not ruled out by the vice-president of PGNiG Maciej Woźniak. At the time, he stated that with good coordination a competitive offer of LNG supplies from the USA via Poland to Ukraine is possible. In December last year, the Ukrainian client of PGNiG confirmed that he had already received the delivery of American gas from Poland, which was delivered to the terminal in Świnoujście.
The novelty, however, is that Naftogaz speaks openly about talks on gas supplies from the United States. Perhaps this is the effect of the last visit of American secretary Rick Perry in Poland and Ukraine. According to him, Ukraine may be the leading importer of LNG, mainly from Poland, but it could also sell this gas further. Kiev may become a beneficiary of the growing Polish-American energy cooperation, which we wrote about in BiznesAlert.pl in April last year. Advisor to the Ukrainian minister of energy and coal industry in Ukraine, Maksym Bielawski, said that gas purchases from Poland will grow because it will result from the economic situation on the market. – Cooperation with the United States in the area of gas supply is one of our priorities. I think that in the next few years it will be a natural direction. I want to point out that in order to ensure an appropriate volume of supplies from Poland and the United States, it is necessary to accelerate the process of the implementation of the Gas Pipeline Poland-Ukraine project – he stressed.
Nord Stream 2 is a blow to diversification
Kyiv is also aware of the danger of the Nord Stream 2 project proposed by the Russians. In his interview with BiznesAlert.pl, the Naftogaz press office emphasizes that its construction will ruin the diversification of gas supplies to Ukraine. – First, the new Russian pipeline would lead to a shortage of gas in Central and Eastern Europe, from where, due to the limited capacity of the Naftogaz pipeline, it is currently buying imported gas. Secondly, the end of transit would increase the risk of Russian aggression to Ukraine on a large scale. The state will lose revenues from gas transmission, which mainly feed the budget for defense and the factor that deters Russia. Without these funds, Ukraine will not be able to realize its own extraction and diversification of gas supplies – believes the Ukrainian concern. At the same time, Naftogaz points out that despite the support from the German government, the fate of Nord Stream 2 is still uncertain. – Denmark still has no consent to the pipeline, there are also changes to the gas directive, as well as US sanctions – adds the press office of the Ukrainian concern.
Nevertheless, Gazprom continues to implement the project, which means not only the greater dependence of Europe on the supply of Russian gas, but also deprives Ukraine of the role of the transit state. As a result, Kyiv will lose around USD 3 billion annually for transit fees, or approximately 3 percent of local GDP. These resources are needed, among others to implement an expensive reform program to bring about the Euro-Atlantic ambitions of the authorities in Ukraine.
Too slow reforms
In Kiev’s opinion, it may be helpful to retain transit if you have a foreign partner to manage your gas pipelines. However, the success of this plan will depend mainly on the pace of energy sector reforms implemented on the Dnieper, which are not going as fast as Western partners would expect. I mean, among others provided for in the Act on the 2015 gas market, the unbundling of Naftogaz and the separation of an independent operator of the segment of extraction and transport of fuel and the operator of underground storage facilities. According to the Ukrainian company, unbundling will allow to acquire new partners from abroad and will enable the integration of the Ukrainian gas market with the EU. Likewise, adviser to the Ukrainian energy minister Maksym Bielawski. – Ownership of Naftogaz will create the conditions for building a liquid market, which means attracting new investors who will have adequate financial resources to fully use the capacity of reverse connections – he said.
The success of Ukraine’s plans for the diversification of gas supplies and the acquisition of foreign partners depends on the determination and results of reforms carried out by Kiev. It will also strengthen Ukraine’s image as a reliable partner and weaken Russia’s influence on the energy sector there. Ukraine’s energy independence is particularly important in the context of Moscow’s aggressive policy not only in the east of the country, but also in the activities that it conducts in the Black and Azov Seas. There can be no consent to violations of international law and leaving Kiev alone in the face of Russian aggression.
