The Ukrainian government is bracing for the completion of Russia’s Nord Stream 2 natural gas pipeline, which would likely end Russian gas transit through Ukraine and give Moscow greater political leverage in Europe, Naftogaz executive Yuriy Vitrenko told during the 5th EU Energy Summit on March 7.
“In 2020, there will be no transit through Ukraine,” said Vitrenko, director of business development at Ukraine’s state gas company. “It will mean that Ukraine will lose approximately four percent of its (gross domestic product)… Next year we’ll have an economic decline.”
More than 500 representatives of national governments, the EU, business, and civil society attended the Brussels summit, which discussed Europe’s clean energy and energy security targets.
Meanwhile, U.S. officials warned summit attendees that Washington would issue sanctions against companies involved in building the new pipeline. The United States has been a vocal critic of Nord Stream 2 under the administrations of both presidents Donald Trump and Barack Obama.
Nicole Gibson, deputy director of the U.S. State Department’s Europe office, called on European leaders to prevent Nord Stream 2 from being implemented, saying that the United States does not consider the pipeline a done deal.
Nord Stream 2, built along the Baltic Sea floor, will be a new gas pipeline with an annual capacity of around 55 million cubic meters and will deliver Russian gas to Germany, bypassing the previous overland transit points in Ukraine and Poland. As a result, Ukraine would lose valuable transit revenues and Russia would be able to blackmail Europe into turning a blind eye to its aggressive actions against Ukraine, according to Ukrainian officials.
Another pipeline, Turk Stream, is set to run from Russia to Turkey through the Black Sea and will also deliver Russia’s gas to Europe bypassing Ukraine.
The Nord Stream 2 project also has many critics among EU officials, who are concerned that it will increase Europe’s dependence on Russian gas and give the Kremlin greater political and economic influence on Europe. The Danish Energy Agency is currently considering whether to allow the pipeline to pass through its territorial waters.
However, Germany has remained a firm supporter of Nord Stream 2, which will greatly reduce its energy costs. Berlin has argued that the new pipeline will improve Europe’s energy security by eliminating potential interruptions in Ukraine.
The EU recently drafted a compromise deal on rules governing pipelines, which may allow construction to continue. The rules include an unbundling requirement to give other gas suppliers access to Nord Stream 2.
However, Vitrenko cast doubt that Russia would play by the rules, pointing to the country’s refusal to agree to binding negotiations on an overland gas route through Ukraine.
A Stockholm arbitration court ruled in 2018 that Russia’s state gas giant Gazprom owes Naftogaz a net $2.56 billion for violating a 2009 gas transit agreement. Gazprom has appealed the decision, saying it will not agree to any new transit routes through Ukraine until the Stockholm arbitration court rules on the appeal in 2020.
By the time this happens, Russia will no longer need Ukraine as a transit point, said Vitrenko. According to Gazprom, one third of the Nord Stream 2 pipeline has been built so far.
“The only leverage that Ukraine and the EU have is to say no to Nord Stream 2 unless the Ukrainian route is secured,” Vitrenko said.
Ukraine is currently taking steps to develop its own substantial gas reserves on land and in the Black Sea. It recently put 10 oil and gas concession blocks up for online auction on March 6.
So far, three have been sold for a total of Hr 141 million ($5.1 million) – to tycoon and former Ecology and Natural Resources Minister Mykola Zlochevsky’s Burisma Group, oligarch Rinat Akhmetov’s DTEK, and Naftogaz subsidiary Ukrgasvydobuvannya.
However, interest in the remaining seven blocks is limited due to high prices, unknown production potential, and a bidding process that is difficult for foreign companies, said Roman Opimakh, head of the Association of Gas Producers of Ukraine.
Meanwhile, Naftogaz’s immediate future is unclear after Prime Minister Volodymyr Groysman announced earlier this month that the government will not renew its contract with CEO Andriy Kobolyev. In turn, Kobolyev fired back that only Naftogaz’s supervisory board can make this decision. In February, the board offered him a three-year contract extension.
Kobolyev’s conflict with the government erupted when his salary and bonuses became public. The company’s top managers paid themselves $46 million in bonuses after winning the Stockholm arbitration court award, despite having not yet received the $2.56 billion.
