Energy 7 March, 2018 10:00 am   

In Ukraine, Gazprom is losing clients and Russia is losing hearts that Poland can win

The hybrid gas war I wrote about continues. Gazprom has already lost its clients in Ukraine, and its activities consolidate the society around the authorities in Kiev, which may strengthen the resistance to Russia. For Poles this is the perspective of enhanced cooperation, which will, however, require a tough market game – says Wojciech Jakóbik, editor-in-chief of

Gazprom breaks the law

Despite the arbitration court ruling in Stockholm, Russian Gazprom refused to resume deliveries to Ukraine from March 1. Although Gazprom declared that it would use all available “legal tools” to enforce its arguments in the dispute with Ukrainian Naftogaz, it did not start deliveries to Ukraine and did not increase the level of transmission to the volume specified in the contract contrary to the contracts and the arbitration award.

Naftogaz emphasizes that Gazprom’s gas supply and transmission contracts do not include a one-sided termination of it. Naftogaz accepts the proposal of the European Commission, which proposed to hold trilogue talks on the implementation of the arbitration award, in both cases lost by the Russians. This is another confirmation of the unreliability of the Russian supplier, which Naftogaz uses in its information policy.

In 2015, I wrote that the biggest loser of the war in Ukraine is Gazprom, which lost a key customer in Europe. Even before the illegal annexation of Crimea and the offensive in the Russian east of the country, Ukraine was the second customer for Russian gas. In November 2015, it resigned from it completely. The arbitration ruling imposed the obligation to purchase at least 4 billion cubing meters of gas a year from Russia. It would be a way to regain the Ukrainian market at the hands of competition and normalization in gas relations with Ukraine, despite the frozen conflict with Russia.

Gazprom made a different choice. It maintains the pretense of acting in accordance with the law and defending its reasons, which will be important for the future of the contested Nord Stream 2 project, which would increase supplies by the German route at the Ukrainian expense. The dispute with Naftogaz is to be used to collect arguments for the interruption of supplies through its territory. The Russians argue that arbitration has taken the “asymmetric” decision that Gazprom is to pay the penalty and increase supplies through Ukraine to the level of 110 billion cubic meters annually, which according to the company’s representatives is to mean the order to subsidize the Ukrainian economy at its expense. Without a minimum level of supply, profits from transit will flow, which the budget depends on. Kommersant enumerates that even with the successful construction of Nord Stream 2 and Turkish Stream, Gazprom will need around 16-17 billion cubic meters supplies through Ukraine, because the daily capacity of Ukrainian gas pipelines is 300 million cubic meters and two projects planned by Russia – 165 and 90 million cubic meters respectively.

Kommersant reports that Gazprom’s actions are to be aimed at limiting the negative effects of the arbitration award. The newspaper reminds that in 2016, Gazprom broke off unilaterally the contract with Turkmenistan due to the price dispute. As a result of this action, there was an agreement on a “contract break” until 2019. A similar pause was negotiated with RWE on the Czech market in 2014. Perhaps, therefore, Gazprom’s actions are a new negotiation strategy that is difficult to understand for the representatives of Western civilization.

At the expense of this game, however, there may be a permanent reversal of Ukrainian society from the Russian Big Brother.

Consolidation of the society

Due to the Gazprom’s refusal, the Ukrainian company Naftogaz increased natural gas imports from the European Union, which helped “avoid the potentially catastrophic effects of Russia’s inability to supply paid gas”.

Naftogaz also reminds the role of the Ukrainian society, which responded to the appeal of the country’s authorities by reducing the consumption of natural gas in the heating sector by lowering the temperature in the home at one degree Celsius as part of the #coolitdown campaign. This together with the activities of the administration and Naftogaz gave the March 2 demand for gas in the largest cities of Ukraine by 13 percent compared to the previous day.

– We would like to thank everyone for the empathetic reaction to the last attempt to blackmail Russia’s gas – said the president Andriy Kobolev. – We also appreciate the efforts of the European partners who demonstrated solidarity, allowing us to increase supplies due to their urgency – he added.

The Ukrainian company counts on further cooperation of civil society. – We call for these efforts to be maintained until the sixth of March. Every cubic meter of gas you save will protect Ukraine from the danger of unpredictable behavior of Russia – added Kobolew. Gazprom has already lost the Ukrainian market. Its actions, perhaps dictated by a political order, can make it lose the hearts of Ukrainian society.

Threat to Nord Stream 2

Theoretically, another – this time a hybrid – gas war in Ukraine should trigger a reaction similar to historical ones. In 2006, 2009 and 2014, the European Union reacted with the consolidation of the gas supply diversification policy and the development of regulations protecting against shortages of supply, such as the SOS Regulation or the decision on intergovernmental agreements, in which the Polish diplomacy promoting the idea of ​​the Energy Union had a significant share.

Perhaps the aftermath of the new hybrid gas war will be a more skeptical attitude of the Union towards the Nord Stream 2 project. The crisis in Ukraine shows clearly what is visible in Europe during the frost period. Insufficient integration of gas markets and the level of diversification put the market at risk of shortages, as in Ukraine, or sudden price increases, as in the United Kingdom or after the catastrophe in Baumgarten, Italy.

However, it is not certain if the European Union will come to a reflection. Its activities may paralyze the defenders of Nord Stream 2, which is in the interest of gas companies with strong lobbies in Europe. The project’s lenders are five giants from Western Europe. It will be difficult for the Commission to overcome their resistance to decisive action.

Perspectives for cooperation with Poland

It is worth remembering that also Polish PGNiG is conducting an arbitration dispute with the Russian Gazprom. If it wins, the case of Naftogaz shows that it will not necessarily get the money back for overpayments and other claims. The verdict of the second arbitration forced Gazprom to pay USD 4,62 billion to Naftogaz’s account for non-performance of deliveries included in the transit contract. One should take into account the possibility that the Russians will also not recognize the arbitration award in favor of the Poles.

Ukraine’s problems have met with a quick response from the European Union’s partners. Due to the refusal to supply supplies by Gazprom, the Ukrainian company Naftogaz increased the import of natural gas from the Union, which allowed “to avoid the potentially catastrophic effects of Russia’s inability to supply gas paid”. Among others, deliveries from Polish PGNiG helped, as reported.

PGNiG will deliver a small volume of 60 million cubic meters in March. Poles declare their readiness to spread gas on the Dnieper by the end of the year, as well as to increase the volume. The limitation will be the price and the possibility of accumulation of funds for shopping in Naftogaz. Yuriy Witrenko admitted on Facebook that the freezing gas price in Europe is now over $ 1000, and the one from Gazprom is four times smaller.

If it were not for Gazprom’s harmful policy, Ukrainians would probably gladly accept the volume from Russia. Now delivery from the aggressor will be harder to explain. It all depends on the mediation of the European Commission, which proposed new trialogues. In 2014 and 2015, they allowed stabilization of supplies to and through Ukraine, as well as avoiding the crisis of supplies to Europe, whose stability depends on the pressure level in Ukrainian gas pipelines. Perhaps in 2018 they will allow to maintain the minimum levels of supply from Russia through Ukraine, which the Commission wanted to include in the agenda of the negotiations. It would be a factor making the investments on the Dnieper more attractive, which are considered by the Poles: the Poland-Ukraine gas pipeline, the long-term PGNiG-Naftogaz contract, capital commitment to gas transmission pipelines and gas storage facilities.

Incidentally, it is worth mentioning that the involvement of PGNiG or Gaz-System in Ukraine may be one of the factors improving Polish-Ukrainian relations despite historical disputes. It’s hard to find a better soft power over the Dnieper. I used to write about scholarships for local students. Maybe it is worth to take a shot?