Given U.S. President Joe Biden’s decision to soften sanctions on Nord Stream 2, Biden’s summit with Vladimir Putin, and negotiations between Berlin and Washington on possible compensation for Ukraine in case of the successful Nord Stream 2 launch, the last few weeks were marked by constant attention to the Russian pipeline.
Keeping in mind the visits of Ukrainian President Volodymyr Zelensky to Germany and the United States, Ukraine is trying to find new weapons capable of convincing Western capitals, namely Washington, to freeze the pipeline. In the Ukrainian informational space, voices have been raised regarding a possible creation of a gas consortium to take charge of the Ukrainian gas transmission system (GTS). However, is an idea to form such a consortium “magic” per se?
A proposal to invite European and American companies to become shareholders of Ukrainian GTS isn’t something new. It arose as a possible defense means against Russian gas blackmail. However, in itself, a plan to create a consortium doesn’t bode well. Moreover, it may reasonably sound unrealistic for Western companies.
Unlike Russian state-owned vertically integrated Gazprom, American, German or French companies do not perceive gas as a weapon, which may help gain political profit for their home states. Western “energy giants” would perceive a share acquisition of Ukrainian GTS from mostly a financial point of view, keeping in mind risk and return philosophy and rating the Ukrainian gas system only as a possible risky portfolio asset.
Unfortunately, Ukraine has not fully realized its potential towards gas diversification, remaining dependent on Russian transit. Even though Kyiv ceased Russian “blue fuel” imports in 2015, 90% of Ukrainian gas imports (from Hungary and Slovakia) do physically come from Russia. Given Kremlin`s policy to use the bare minimum of possible gas amounts, stipulated by a renewed Ukrainian-Russian gas transit contract, Ukraine finds itself in a situation of having national GTS filled by less than 30% of its maximum capacity.
The fact that Ukraine owns one of the largest gas transmission systems in Europe also has a dark side. There is a dire need for modernizing existing infrastructure, which demands a high annual budget allocation for its maintenance. That’s why prospects for creating an economically attractive Ukrainian gas consortium do not seem well.
More importantly, the gas consortium itself cannot be seen as a means to change the German or American position on Nord Stream 2. Nord Stream 2 and the Ukrainian gas consortium do correlate in another way. Freezing Nord Stream 2 or finding ways to operate on the market after its launch as well as engaging Western energy companies to invest in national GTS are possible rewards for proper Ukrainian successful gas policy.
Ukraine has to do a lot of its homework to achieve these aims. Ukrainian policymakers should prioritize further gas market liberalization, leaving in the past the possibility to interfere in the market and impose some price caps. Institutional stability and predictability of critical state-owned enterprises and proper anti-trust functions are milestones for an adequate gas policy. A connection between a leadership change in Naftogaz, a Ukrainian state-owned oil and gas company, and Biden’s softer approach may be exaggerated. However, the independence of supervisory boards alongside implementing other elements of a good governance model in the Ukrainian gas system is one more key for creating a resilient and investors-friendly market.
Kyiv should also not forget about its gas diversification policy. Ukraine should abandon old-fashioned ideas related to getting access to Central Asian gas. The chances for Kyiv to win an arbitrage against Moscow, which may force Kremlin to unblock Central Asia gas exports via Russia to Ukraine, remain very low. More importantly, Central Asia is not ready for exports to Europe, either via Russia or via theoretical Transcaspian pipeline. Uzbekistan consumes more than 75% of its gas domestically. Turkmenistan, the biggest regional gas exporter, has completed a total “pivot to Asia” shift in its energy diplomacy, prioritizing dealing with China, India, Pakistan, and Afghanistan.
When it comes to the gas shortage and remaining capacities of the Ukrainian gas transmission system, Kyiv should focus on more realistic things such as increasing its gas production, developing interconnector infrastructure with Poland and Hungary to get “blue fuel” from LNG terminals, and joining South Gas Corridor via Trans-Balkan pipeline to access Azerbaijani gas fields. If implemented correctly and on time, the idea of creating a Ukrainian liquified natural gas terminal, which Zelensky discussed with Emir of Qatar Tamim bin Hamad Al Thani, also seems promising.
All in all, with or without a gas consortium of American and European companies, a proper and effective gas strategy is a backbone for Ukrainian possible achievements. If Ukraine becomes an Eastern European gas hub with the liberalized market, predictable gas flows from multiple destinations and filled transit and storage capacities, Kyiv levels for itself negative influence of Nord Stream-2. Ironically, the same strategy is a key to fighting against Nord Stream-2.
Viktor Karvatskyy is the CEO of the Ukrainian consulting firm Adastra agency.
