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    EC, Russia, UKraine Discuss 2020 Transit

Summary

With the contract due to expire and new capacity coming on line that avoids Ukraine, Kiev and the EC are keen to keep Russian gas flowing.

by: William Powell

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EC, Russia, UKraine Discuss 2020 Transit

The European Commission hosted the second round of talks on transit between ministers of Ukraine and Russia and the CEOs of the two warring companies, Gazprom and Naftogaz Ukrainy, said the vice-president for the energy union Maros Sefcovic January 21.

Representing Russia were its energy minister Alexander Novak and Alexei Miller; representing Ukraine were foreign affairs minister Pavlo Klimkin and Andriy Kobolev.  

The transit contract is due to expire at the end of this year, and the 55bn m³/yr Nord Stream 2 line is due to start then, along with the 15.75bn m³/yr TurkStream line. These Gazprom-owned lines will allow Russia to transit less through Ukraine, although German chancellor Angela Merkel and Miller both expect some gas to continue to flow through Ukraine.

Losing transit fees will cost Ukraine dear: it earns well over $2bn/yr from this. However the Soviet-era Ukraine system is by now amortised; its transit system is not separate from the domestic gas supply network; and the route is not as economical for Russian gas deliveries to western Europe as Nord Stream as the gas has to travel further south in Russia to the border with Ukraine from the growing production region on the Yamal Peninsula.

Sefcovic said the meeting "took stock of the progress achieved so far, covering all key areas – the legal framework for a future transit contract; tariffs; unbundling of the transmission system operator in Ukraine; and the EU's future gas demands. In addition, security of gas supply this winter was also discussed."  

He tabled proposals addressing three main parameters of a future transit agreement: duration. volumes and tariffs. But it also covers other important parameters, such as investment and maintenance of the gas system; legal requirements; and technical requirements. He said the next such meeting will be in May and the work until then will be done by senior experts. 

"If all goes well and if all actors work towards the same goal, I am confident that this process will be successfully completed by the end of this year," he said. Sefcovic will be replaced by the vice-president for climate change commissioner Miguel Arias Canete with effect from February 1, as he is standing in Slovakia's presidential elections.

In its own summary of the meeting, Naftogaz said Ukraine was ready to consider future contracts with Russia if they fully complied with European energy legislation implemented in Ukraine. Only a contract based on European principles would fully secure Ukraine’s interests and prevent Russia from non-market and non-competitive actions it had repeatedly demonstrated in the past, Kobolev said.

The EU network codes enforce practices such as reverse flow and use-it-or-lose-it capacity, which block hoarding and obstruction of flow.

According to Kobolev, the next contract should be for at least ten years and for sufficient annual volume to attract foreign investors as Ukraine prepares to unbundle its pipelines.

Kobolev said the proposal was "comprehensive" and showed that the EC and Ukraine "shared the vision of how European rules and procedures should be applied to the new contract. The EC’s proposal will be a starting point for further negotiations on the transit contract. We are going to study it closely and discuss with our shareholder." However, he said that given its past experience with Gazprom, "we see significant risks to those negotiations."

Naftogaz said last week that the gas transit and supply contracts with Gazprom were ten years old at the weekend. “Gas contracts with Gazprom, as concluded in 2009, put a strain on Ukraine. The asymmetric liability of the two parties put Naftogaz at risk of predatory penalties, while Gazprom gave Ukraine promises not backed up by penalties for failure to comply. These were perhaps the most unfavourable contracts ever concluded in the history of independent Ukraine."

The cost Ukraine $32bn, a figure that would have been much higher had Naftogaz not won its case against Gazprom a year ago at the Stockholm arbitration tribunal. Gazprom however has yet to pay any of the award, which it has not recognised.