You're reading: Consortium with Russia, others seen as likely for gas pipelines

Ukraine’s prized gas transportation system has been at the heart of ongoing talks with Russia.

The sale of a stake in the asset – which was previously off the table in any negotiations – will soon come, some experts believe.

The pipelines currently pump the lion’s share of Russian natural gas to European markets and are key to Ukraine’s energy independence.

But the futility of the current gas talks became clear during the July 12 presidential meeting in Crimea between Vladimir Putin and Viktor Yanukovych. Putin kept his Ukrainian counterpart waiting for five hours, spending time with a group of Russian bikers called the Night Wolves instead.

“President Putin exceeded the limits of delay. He visited the bikers and their friends, and thus showed his priorities,” a frustrated Ukrainian Emergencies Minister Viktor Baloha wrote on his Facebook page.

Since taking power in 2010, Yanukovych has been trying to get Russia – its main fuel supplier – to lower its price on gas, for which Ukraine currently pays $425 per 1,000 cubic meters.

In April 2010, Ukraine and Russia signed the Kharkiv Accords. Russia offered Ukraine a $100 discount per 1,000 cubic meters in exchange for letting Russia’s Black Sea Fleet stay in Sevastopol to at least 2042.

Little progress has been made since then.

The two sides met repeatedly, with Ukraine balking at Russian demands for a stake in domestic state gas monopolist Naftogaz or gas transportation system in exchange for a better price.

“The issue of [a pipeline network] sale has never been on the agenda. We dismissed it immediately,” Energy Minister Yuriy Boiko told journalists earlier this year.

However, a consortium that gives Russia a stake in managing the pipeline appears to be on the agenda.  A publicly commissioned audit by Baker Tilly is expected to put a price on the asset soon.

“We expect a Russian gas deal [after the Oct. 28 parliamentary elections], which will trade a lower gas import price and a reduced current account deficit for a Gazprom stake in the gas transit system,” noted Alina Slyusarchuk, a Morgan Stanley analyst.

But some worry that a consortium with Russia will jeopardize Ukraine’s promise to abide by the European Community’s energy rules, which in turn could give Ukraine a legal basis to withstand Russian pressure.

Ukraine has promised by 2015 to meet the European gas directive, an accord not liked by Russia, said Oleksandr Chalyi, a former deputy foreign minister and career diplomat who heads Ukraine’s affiliate of international auditing and business consulting major Grant Thornton.

But Dmytro Marunych, director of the think tank Energy Studies Institute, expects a German company to join the consortium with Ukraine and Russia. Germany’s presence is seen as helpful in curbing any bullying by Russia.

Marunych said that the best option for Ukraine is to renovated its Soviet-built pipelines on its own. But it is unlikely to be able to raise the billions of dollars needed alone, he said.

Russian leverage over Ukraine is becoming stronger, with new and planned pipelines circumventing its former colony. Nord Stream carries fuel beneath the Baltic Sea from Russia to Germany.

Currently at 55 million cubic meters, the route’s capacity may be doubled, Gazprom head Alexei Miller recently said.

From the other side, South Stream will run under the Black Sea, providing 63 million cubic meters through Central Europe. Initially seen as prohibitively expensive, with total costs estimated at up to $30 billion, the pipeline is now expected to be commissioned by 2015.

If completed, these projects will have the capacity to transport 173 million cubic meters, just below the Ukrainian gas pipeline’s output capacity of 178 million cubic meters.

“This will affect the volumes of gas transit through Ukraine’s gas transportation system in the future. We are dealing with it today. But in principle they do not change the strategic importance of Ukrainian gas transport system on the market,” Chalyi said. “It is the biggest route and indispensable in the winter.”

The Ukrainian pipeline’s value is heightened by its integration with underground storage centers located near Ukraine’s border with the European Union. The storage allows for large volumes of gas to be swiftly pumped westward to meet demand during bitter-cold snaps.

But Marunych and Chalyi say realities of the trade make a Ukraine-Russia consortium likely.
“Russia will have a surplus of capacity and will no longer depend on Ukraine,” Marunych said. “In fact, Ukraine has almost nothing to lose by allowing Russia to join a consortium. It should have set it up five years ago.”

Chalyi said a consortium should manage the asset, but insisted the nation “must remain the sole owner.”

As Ukraine hopes for cheaper Russian gas, the nation is also trying to develop shale gas and other alternative sources of energy.

Also, creation of a liquefied natural gas terminal is now seen by the government as a strategic investment. However, its initial production potential is low and, as Marunych noted, “it is still lacking an investor.”

Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].