Russia is unhappy with the conditions under which it transits its gas through Ukraine.
That’s why it is trying to push through the construction of two new gas pipelines — one to Germany and the second one to the Turkish-Greek border. If built, the two pipelines — with a combined total capacity of over 85 billion cubic meters of gas a year — would mean Russian transit gas could completely bypass Ukraine.
But despite Russia’s war on Ukraine and its occupation of Crimea, Ukraine wants to keep its only transit customer even after 2019 — the year Nord Stream 2 and TurkStream pipelines are due to be launched.
Unbundling
Ukraine broke up with its main gas supplier Russia after the Kremlin seized Crimea and occupied part of the eastern Donbas in 2014. Ukraine stopped buying gas from the aggressor for more than two years, until the Stockholm International Court ruled that Ukraine has to import 5 billion cubic meters of gas over the next two years, until its present contract with Russia ends.
In gas transit, Ukraine has only one customer: Russia. Ukraine risks losing an estimated at least $2 billion in transit fees — a serious blow for an economy with a gross domestic product of only $100 billion.
Russia uses up 80 percent of Ukraine’s gas transportation capacity, according to state operator UkrTransGaz. Last year, Ukraine transported 86 billion cubic meters of Russian gas through three pipelines that are roughly equal to the total capacity of Russia’s soon-to-bebuilt pipelines.
“As a monopolist, Gazprom aims to control every component in the value chain, starting from gas extraction in Siberia to its delivery to European consumers,” said Roman Nitsovych, a program director at Dixi Group, a Kyiv based energy analytics center. “And Ukraine’s gas transmission system is the only route Russia has no control of — that’s why it wants to bypass us so much.”
In order to comply with the European Union’s internal energy market rules, known as the Third Energy Package, Naftogaz decided to separate the state’s gas transmission and storage systems from production and supply. The so called unbundling process began last December, when UkrTransGaz set up a new independent entity called the Gas Transmission System Operator, or GTSO. It is currently searching for a Western partner to manage it.
Having an independent operator that is compliant with European standards will attract more European gas suppliers to use Ukrainian storages and pipelines, Nitsovych said. This will guarantee fair competition and make the gas sector less vulnerable to political influence. “It will also help renegotiate a transit contract with Gazprom after 2019.”
The GTSO will replace Naftogaz as the transit services provider to Gazprom — but only if the Stockholm arbitration tribunal allows it. Naftogaz and Gazprom have been in dispute over the terms of their 2009 transit contract, and Ukraine has demanded compensation of $16 billion in underpayment for transit from 2009 to 2017. The court’s final decision is expected by the end of February.
Lower fees?
Naftogaz also hopes that its lower fees will be a good reason for Russia to continue using it as a transit country. The existing contract has a fixed transit fee, which in 2017 was approximately $2.65 per 1,000 cubic meters of gas per 100 kilometers. Right now Gazprom claims the price is too high, and uses it as an argument against transit through Ukraine.
As Nitsovych explained, once the Stockholm arbitration tribunal allows a change in the terms of the old contract, Ukraine will be able to apply a new pricing scheme by charging at entry and exit points — as is done in the EU. This will also make the prices cheaper than Nord Stream 2.
Nord Stream 2
In the meantime, the EU is split regarding the Nord Stream 2 pipeline project, with different states concerned over its security, economic, and environmental implications.
According to the project’s plans, the new pipeline will increase the total amount of gas delivered from Russia to Germany to 110 billion cubic meters — double the present amount. The cost of the 1,200-kilometer pipeline is estimated at 9.5 billion euros. Russia’s Gazprom has been backed by German politicians and European energy companies OMV AG, Wintershall, Uniper SE, Engie SA, and Royal Dutch Shell Plc.
However, the project is strongly opposed by the Baltic States, Slovakia, Poland, and Ukraine — mainly for the looming losses of billions of dollars in transit fees. But there are broader security concerns, as Gazprom already supplies almost a third of current EU gas consumption. Critics view energy dependence as a Kremlin lever of political influence over Europe.
Purely commercial?
Germany and Russia insist that Nord Stream 2 is a purely commercial project, as the EU is trying to diversify its gas supplies, at a reasonable price. At the same time, German Chancellor Angela Merkel insists that Ukraine has to stay in the transit mix.
“We also want Ukraine to continue to have transit gas traffic, but we believe Nord Stream 2 poses no danger to diversification,” Merkel told reporters in Berlin on Feb. 16 after meeting Polish Prime Minister Mateusz Morawiecki, as reported by Bloomberg.
Poland itself has decided to stop buying gas from Russia, which provides two thirds of the gas Poland consumes. Warsaw has also announced plans to build an alternative Baltic pipeline, which would carry gas from Norway’s North Sea oil and gas fields to Poland.
Morawiecki also called on the United States to impose sanctions on Nord Stream 2, which the U.S. government sees as a threat to Europe’s energy security.
Possible delays
Fewer geopolitical wrangles surround the construction of Russia’s southern route, TurkStream, which is estimated to cost 7 billion euros. Once completed, the pipeline is expected to carry 32 billion cubic meters of gas annually from Russia to Turkey across the Black Sea and then to Greece.
In February, the Turkish government exempted Gazprom from value added tax and income tax on operations of the pipeline. Gazprom has already built 884 kilometers under the Black Sea, but Turkish authorities have not yet issued a permit for the construction of the on-land part of the pipeline, according to Reuters.
Nord Stream 2 is still waiting to receive permits from Finland, Denmark and Sweden.
There are divided opinions on the legal regime for the new pipeline too. The EU Commission has to decide whether to extend existing EU energy laws to cover offshore gas pipelines like Nord Stream 2.
Note: The price on gas transit was corrected.
