Lately, the fate of Ukraine’s gas transport system has been worrying us more and more. The reasons are many. For one, Russian Federation is actively promoting gas pipeline projects that bypass Ukraine (Nord Stream 2, Turkish Stream). For another, our European partners are also seriously considering options for bypassing Ukraine’s gas transport system (the Eastring project).
In Ukraine itself, consumption of imported natural gas is decreasing, which means domestic gas transportation operations are declining. The gas transport system operator transported 34 billion cubic meters of gas to consumers in 2015 (excluding transit), while in 2016 this figure had dropped to 32 billion cubic meters.
What needs to be done to preserve our gas transport system, not as a monument to past achievements, but as a fully operational business entity generating substantial income for Ukraine and having pan-European significance?
A few years ago, Russia (via Gazprom) announced it would stop transiting Russian gas via Ukraine’s gas transport system beginning from 2020. However, the Russians soon changed their minds: transit across the Ukrainian territory would continue, but only at an annual rate of about 15 billion cubic meters of gas.
As a reminder, in 2016 Ukraine’s gas transport system transported 79.2 billion cubic meters of gas under its transit contract with Gazprom.
According to estimates by Naftogazbudinformatyka Ltd., the minimum real volume of transit after 2019 will be 30 billion cubic meters per year. But that’s not enough for the gas transport system to make a profit.
It is also worth noting that our expectations of substantial support from the European Union are obviously exaggerated. The business of particular countries and their resident companies overweighs the desire for general European energy security. Perhaps only a number of Eastern European countries and, of course, the United States can be considered our consistent allies.
At the same time, we believe that neither Nord Stream 2 nor the second branch of Turkish Stream will be built by 2020. So maintaining the volume of gas transportation (transit) via Ukraine’s existing gas transmission system will remain a task after 2019 as well.
So, in our opinion, the situation is far from a loss.
Geopolitical trends
By changing its pricing policy, Gazprom is trying to prevent North American natural gas coming to European markets. On 7 June, the first tanker carrying 100,000 cubic meters of North American LNG berthed at the terminal in Świnoujście, Poland. European states are preparing for redistribution of natural gas flows due to the inception of two large European gas hubs, in Germany and Italy.
How can Ukraine take advantage of these changes in the European energy and gas markets for its own benefit and to enhance national security?
In our opinion, there are several local options. The most realistic and sophisticated one is to use the new Poland-Ukraine interconnector for possible receipt of North American natural gas from the LNG terminal in Świnoujście, Poland and subsequent deliver it to Europe using Ukraine’s underground gas storages.
Another noteworthy option is “alteration”, jointly with the Slovak operator Eustream, of Eastring project, by engaging part of Ukraine’s gas transport system to transmit natural gas from Central Europe to the Balkans and in the opposite direction (including from Romania to Ukraine). Both these projects can receive support from not only our European partners but also the United States.
Of course, the aforementioned projects will not fundamentally solve the problem of declining gas transit via Ukraine’s gas transport system. Still, they can help increase the use of our gas transport system and our underground gas storage facilities.
We share Naftogaz’s opinion that engaging a foreign partner can help maintain a substantial volume of transit via Ukraine’s gas transport system. It’s just that we doubt the assertion that these partners (and first of all, Slovakia’s Eustream which would also lose from the reduction of transit via Ukraine’s gas transport system) are ready to take responsibility (on lease, concession or joint use terms) for the entire gas transport system, with its branch pipelines, all gas distribution stations and so on.
In fact, our foreign partners are interested only in the “transit part.” The same applies to Italy’s Snam, with which Naftogaz and Ukrtransgaz recently signed a memorandum on studying the feasibility of joint use of Ukraine’s gas transport system (in the essence, its gas transit capacity).
In any case, the search of foreign partners must continue, both for the gas transport system as a whole and for its “transit part.” In that respect, we might have to prepare and pass a special law protecting interests of both Ukraine and foreign partners (investors).
Unfortunately, we do not see a systematic, coordinated policy by government agencies to defend our “gas” interests. Naftogaz alone, as well as sporadic speeches by MPs, can change little.
System reliability
Most of our gas pipelines have been in service for over 40 years. Equipment efficiency is lower than in more advanced system, not to mention fuel gas consumption and environmental issues. This system needs continuous attention, maintenance and reconstruction. Let’s assume that we have managed to preserve transit at the intergovernmental level. Still, a few accidents, never mind the economic indicators, would be enough to give more cause for talk about bypassing routes, and in that case, they will indeed come true.
In that respect, we can’t understand the decision of Naftogaz of Ukraine to plan capital investments in gas transport system in 2017 on the premise of “zero” transit after 2019. If that actually happens, and repeats in 2018-2019, the problem of transit will, apparently, no longer be on the agenda.
Bottom line
According to our information, as of June 1 Ukrtransgaz had completed only 3 percent of the annual plan on capital investments in gas transport system.
The optimization of costs is certainly a good thing. But why do it at the expense of transit? Or are the management of Naftogaz absolutely confident that there will be no more transit in a couple of years, and there are some other “aggravating” circumstances which neither lawmakers nor experts know anything about?
Why did Naftogaz, in its letter to the National Energy and Public Utilities Regulatory Commission, ask the regulator not to approve Ukrtransgaz’s capital investment plan for 2017?
The way the trader interferes with the operator’s activity is truly surprising. Naftogaz is supervising Ukrtransgaz for the time being, but in view of strategic importance of our gas transport system, the matter of the gas transport system’s reconstruction and modernization has to be handled at the government level.
According to information available to us, even when setting tariffs for storage, withdrawal and injection of gas into underground storages, Ukrtransgaz must seek approval, first from Naftogaz and then from the regulator. What kind of independence of the gas transport system operator are we talking about in this case?
And if we want to fight for retain gas transit today, while it’s still not too late, we must have, first of all, proper technical capabilities.
What to do?
In order not to ruin the gas transport system’s fragile future with our own hands, we believe we need to:
- revise Ukrtransgaz PJSC’s investment plan on gas transport system modernization for 2017 to allow for transit capacity of at least 40-50 billion cubic meters of gas per year beginning from 2020, and envisage this possibility in the plans for 2018-2019;
- develop and approve, at the government level, a gas transport system operation strategy envisaging various gas transport system usage scenarios;
- directly engage Ukrtransgaz, and then the new operator, Trunk Gas Pipelines of Ukraine PJSC (TGP), in negotiations with Eustream on joint management of Ukraine’s gas transport system. This work must be coordinated by the government agency responsible for energy policy, i.e. the Ministry of Energy and Coal Industry of Ukraine;
- accelerate the “unbundling” required by the Third Energy Package to actually separate the transportation and storage of gas from its production and sale by Naftogaz;
- develop proposals from Ukraine (Ministry of Energy and Coal Industry of Ukraine, Naftogaz of Ukraine NJSC, Ukrtransgaz, TGP) regarding the contract for the transit of natural gas via Ukraine, based on the judgments of the Stockholm Arbitration Institute (hopefully, they will be adopted by the end of summer 2017 at the latest). After the end of the “transit” litigation, these proposals regarding the transit of Russian gas after 2019 are to be published as the basis for the start of negotiations;
- task the Ministry of Energy and Coal Industry of Ukraine, Naftogaz of Ukraine NJSC, Ukrtransgaz PJSC and TGP with initiating, jointly with our European partners, negotiations with Gazprom regarding the volume of gas transit via Ukraine after 2019.
Leaving these decisions until tomorrow will quickly turn into leaving them until “never.” We have no moral right, before the country and its future, to allow this.
