It’s a “good deal,” according to Andriy Kobolyev, the CEO of Ukrainian state energy company Naftogaz. To others, it’s deeply controversial.
Either way, now it’s official.
In the early morning hours of Dec. 31, Naftogaz — the state’s largest producer of oil and gas — signed a new gas transit agreement with its Russian counterpart, Gazprom, just in the nick of time. The previous agreement was scheduled to expire that day.
Signed after less than a week of intense negotiations, the agreement formalizes the shipment of 65 billion cubic meters of natural gas through Ukraine to Europe in 2020, followed by annual shipments of 40 cubic meters each ensuing year.
Yuriy Vitrenko, Naftogaz’s executive director, also announced on Facebook that the company would save Ukraine $2 billion by cutting the price of gas, lowering it from $485 to $356 per 1,000 cubic meters.
The contract will last for five years and can be extended on the same terms for another 10 years.
At a press briefing on Dec. 31, Kobolyev described the deal as a “hard-won compromise” signed for the sake of stability.
But Kobolyev also declined to comment on the terms of the agreement and the exact transit volumes and transit-fee profits that would potentially be generated by the deal — even though Vitrenko publicly announced these figures on his Facebook page that same day.
Kobolyev said the exact terms might be revealed in January, after “the emotions have passed.”
Rushed deal
On Dec. 20, Ukraine and Russia signed a protocol in Minsk to continue the transit of Russian gas to Europe via Ukraine’s gas transmission system.
But the terms of the agreement still needed to be negotiated. Now, the two countries have finally reached a deal after five days of “hard and long negotiations,” Kobolyev said.
Kobolyev views the deal as a victory. However, it includes several controversial clauses.
As part of the contract, Russia and Ukraine agreed to rescind all legal claims against one another over gas in which there have not been court rulings. They also agreed to waive any possible claims connected to the controversial gas supply and transit contract signed in January 2009.
Gazprom has paid Naftogaz around $3 billion it owed the company under a ruling of a Stockholm arbitration court. However, in exchange, Naftogaz agreed to renounce other claims against the Russian energy giant worth over $12 billion.
Ukraine will also waive a $7 billion fine imposed on Gazprom by its Anti-Monopoly Committee.
The arbitration debt was one of the key issues in the transit talks.
Before the talks, Russia insisted that Naftogaz relinquish all its arbitration claims as a prerequisite for negotiations. The payment of $3 billion came as a compromise. Asked about the future of the dropped claims, he said: “There’s no coming back.”
Kobolyev explained that, from now on, Naftogaz would only serve as a gas production and storage company, with transport functions spun off to a separate, state-owned entity, known as the gas transmission system operator. The benefit of a separate, or “unbundled” transit company, is that it would be to operate as a stand-alone company, without providing subsidies to other Naftogaz operations.
Naftogaz has got a lot of work to do in boosting natural gas production — stuck at roughly 20 billion cubic meters annually since Ukrainian independence in 1991. That total is 10 billion cubic meters annually less than consumption, forcing expensive imports. Similarly, oil production is lagging. Moreover, companies associated with two oligarchs remain problems. Exiled oligarch Dmytro Firtash controls gas distribution networks that owe Naftogaz at least $2 billion, and Ihor Kolomoisky, a minority shareholder of state oil producer Ukrnafta, owes at least $2 billion in unpaid taxes.
Populism
Had no agreement been reached, Russia could have stopped gas supplies to Ukraine, pushing Kyiv to buy it from Poland, Slovakia, and Hungary. Such gas is usually extracted in Russia, transported to Europe and then sold to Ukraine in a procedure known as “reverse flow.”
Starting in 2016, because of Russia’s war, Ukraine purchased gas exclusively that way for over two years. However, transit through EU member states’ gas transmission systems can be more expensive, which leads to increased gas prices on the Ukrainian market.
Ukraine came into the negotiations, however, in a much stronger position than in previous years. It borrowed money to boost the amount of natural gas in storage to 20 billion cubic meters — two-thirds of the annual consumption. So there was no danger that Ukraine would freeze throughout the winter. Moreover, because of a worldwide glut in natural gas, prices have been declining.
President Volodymyr Zelensky hailed the agreement as a win for Ukraine, saying it would allow the country to receive at least $7 billion in transit payments from Russia over the next five years.
But according to Kobolyev, that figure is based upon the minimum gas transit between the two countries. At the press briefing, he assured attendees that Naftogaz would turn a profit from the deal, without specifying the exact numbers.
At the briefing, Olena Zerkal, deputy foreign minister for European integration, said that the deal would also help Zelensky’s popularity by avoiding a sharp rise in gas prices for Ukrainians.
Nord Stream 2
The start of negotiations on the deal coincided with the United States’ decision to impose sanctions on Nord Stream 2, a Russian gas pipeline that is under construction and nearing completion.
If and when launched, Nord Stream 2 — combined with the existing Nord Stream pipeline under the Baltic Sea — would allow Moscow to ship 110 billion cubic meters of gas annually directly to Germany, which would then transport to other places in Europe, while bypassing Ukraine. That, in turn, could cost Kyiv up to $3 billion in annual transit fees.
As a result of the sanctions, Switzerland-based company Allseas stopped working on the pipeline. It is currently the only firm with the technological capabilities to complete the project.
Kobolyev insisted that Nord Stream 2 is now stalled and that this issue could block the project’s completion for three years.
The imposition of sanctions proved to be a critical factor in clinching a deal. The delay of the pipeline, which was supposed to be completed in January 2020, was a major factor in the extension of the gas transit contract between Ukraine and Russia, Thomas O’Donnell, a senior analyst on energy and international affairs, said at the briefing.
No guarantee
Although the agreement will last five years, Russian President Vladimir Putin could still break the terms of the contract, since he is famous for having no respect for international agreements. For example, Russia continues to violate the 1994 Budapest Memorandum assuring Ukraine’s territorial integrity. The Kremlin invaded and continues to occupy 7 percent of Ukrainian territory.
In 2014, Russia briefly cut off gas supplies to Ukraine after Kyiv refused to pay $2 billion for previous gas deliveries due to a pricing dispute on the backdrop of Russia’s annexation of Crimea and invasion of Donbas. But the longest shut off occurred through much of January 2009, when a pricing dispute led to shortages that winter.
Kobolyev admitted that there is “no guarantee” that Moscow won’t repeat this pattern.
Still, he added, if Russia violates the contract, new legal claims could be filed under the new agreement.
