To the rancor of Russia, Ukraine has quietly yet steadily been preparing for the cold winter months by increasing purchases of natural gas from Europe and storing any excess supplies in its vast storage facilities.
The orchestrated strategy is designed to cut back on more expensive Russian gas purchases – Ukraine’s main supplier at $410 per 1,000 cubic meters on top of a $100 discount – and free up hard currency to service some $5 billion in debt that is due by the end of this year.
Ukraine’s energy ministry said gas imports from Europe are expected to account for 10 percent of the nation’s total imports this year, and could increase in the future. Thus far, Ukraine has paid its Hungarian and German suppliers $20-$30 less than what it pays Russia for 1,000 cubic meters of blue fuel, according to the energy ministry.
Energy Minister Eduard Stavitsky said Ukraine is also purchasing gas on Europe’s spot markets for $340-$370 per 1,000 cubic meters.
Meanwhile, Ukraine has the second biggest underground gas storage facilities in Europe, after Russia, which can store up to 30 billion cubic meters. However, only 6.5 billion cubic meters are stored currently and the government said it needs to pump in at least 14-16 billion cubic meters more. The process started recently, the government reported on July 16.
To meet winter consumption needs and transit obligations, and to save money, Ukraine has to switch over from Russian to European gas imports as much as possible.
In 2012 Ukraine imported 26 percent less gas from Russia than the previous year, or 32.9 billion cubic meters. In the first four months of 2013 Russian imports were again cut by 22 percent compared to the same period in 2012, with Ukraine buying just 8.3 billion cubic meters for $3.5 billion, according to official figures.
To diversify and get cheaper gas Ukraine started pumping 5 million cubic meters of it a day from Poland in November, purchased from Germany’s RWE concern, which is partially supplied by Russia. This year, Ukraine started importing similar volumes of gas from Hungary, which could rise to 10-15 million cubic meters when renovation works are finished in early August, according to Stavitsky, the equivalent of around 5 billion cubic meters annually.
But the big prize remains Slovakia, which could channel up to 10 billion cubic meters annually. The European Commission is working to give Ukraine access through Slovakia to liquefied natural gas terminals in the Mediterranean region and the Netherlands. So far, reverse flows from Slovakia have been blocked by Russia’s Gazprom, which has partial ownership of the transit network in the country.
Overall, Ukraine expects to get 5 billion cubic meters of gas from Europe in 2013, cutting Russian gas imports to 20 billion.
Ukraine’s government also hopes to earn money by storing gas belonging to European companies. Prime Minister Mykola Azarov said on June 28 that there is interest in Europe for Ukraine to become a gas-energy hub.
One problem, according to Dmytro Marunych of the Institute of Energy Research, is that under the current contract with Gazprom, Ukraine needs the Russian monopoly’s consent for this to happen since it legally owns all the transit gas it pumps through Ukraine.
Nonetheless, Gazprom is on the offensive. Speaking at an annual press conference in Moscow on June 28, company CEO Alexei Miller warned against Ukraine’s gas storage plans.
“Gazprom has experience with pumping gas into Ukraine’s facilities, and this experience is completely negative… We have made a very strict decision based on this sad experience – never, under no circumstances to pump gas into underground facilities of Ukraine, no matter what conditions Ukraine offers,” Miller said.
He also spoke harshly about Ukraine buying gas from Europe, questioning it on legal grounds. He outlined Ukraine’s “take-or-pay” contractual obligations with Gazprom (the company slapped Ukraine with a $7 billion fine under the clause earlier this year, but didn’t demand payment) and said Ukraine has “no right to treat Russian gas as its own on its territory. That is why any virtual reverse is unlawful.”
However, Mykhailo Gonchar, head of energy programs at the Nomos think tank, said Ukraine stands on strong legal footing with regard to reverse gas flow purchases.
“Gazprom understands this, which is why they are not taking any legal steps. All they can do is to sustain this political campaign,” said Gonchar.
Another energy expert, Valentyn Zemlyanskyi insisted that Ukraine actually pumps the gas back into Ukraine, and “not virtually,” as Gazprom claims.
Meanwhile, Ukraine’s government also hopes to add 1 billion cubic meters to storage facilities by forcing domestic producers to fork over half of the gas extracted in July-October (see sidebar).
Gonchar noted this would be of symbolic help at best as private gas extraction only accounts for 10 percent of the market, and the most the government can hope for is 500 million cubic meters.
Zemlyansky said nothing like this has happened in recent memory. He called it a “desperate measure, which can be understood on some level, as facilities have to be filled with some gas and Naftogaz has little of its own, as they are not buying it from Russia.”
But with spot prices at $350-$390 per thousand cubic meters and expected to drop further by autumn, experts say Ukraine should not rush into filling its storage facilities.
Increasing transparency in the shadowy sector would also help attract financial support for renovations and boost trust for Ukraine as a partner for strategic energy projects.
“European companies can buy their gas in Russia or elsewhere, pump it in our storage and then get it back in winter. The problem is Europeans are not happy with the ‘pump it in and then we will see’ attitude that Ukraine has been demonstrating. They want transparency and unless we provide it, the whole gas hub of Europe idea is never going to take off,” Gonchar said.
Kyiv Post staff writer Svitlana Tuchynska can be reached at [email protected]
