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    Gazprom Does Not Give Up Ukraine

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Summary

Gazprom will need alternatives for transmitting gas to the Urengoy–Pomary–Uzhgorod pipeline, which supplies gas to Slovakia, the Czech Republic and Balkans

by: Wojciech Jakóbi | New Eastern Europe

Posted in:

Top Stories, Pipelines, Security of Supply, Eastring, Nord Stream Pipeline, Power of Siberia, Yamal/Yamal 2, News By Country, Russia, Ukraine

Gazprom Does Not Give Up Ukraine

The head of Gazprom Alexei Miller argued in June during a press conference that the third and fourth lines of Nord Stream will be laid by 2019 as part of the project Nord Stream 2. On June 29th 2015, the construction of the gas pipeline Power of Siberia began on  Chinese territory. According to Alexander Medvedev, Deputy Chairman of Gazprom, the construction of the latter will take four years. By the end of the decade, Russians are planning to complete the construction of the pipeline Turkish Stream. It is all supposed to allow them, as the Russians claim, to give up gas transit through Ukraine entirely.

The capacity of four lines of Nord Stream is 110 billion cubic metres. Power of Siberia is to pump 38 billion cubic metres annually. Turkish Stream's capacity is to reach 63 billion cubic metres per year. Altai Gas Pipeline, which was renamed to Power of Siberia 2, has a potential transit capacity of 30 billion cubic metres annually.

Gazprom assumes that in 2015 the gas export from Russia may be 165-167 billion cubic metres from which 153-155 billion cubic metres would be provided to Europe. Natural gas is to ensure an output increase from the Bovanenkovo deposit, among others. In 2015, the output will be 48 billion cubic metres, in 2016 – 51 billion and in 2017 – 63.3 billion cubic metres.

Based on the assumption that Gazprom really wants to give up the transit of gas through Ukraine, it will need alternative routes for transmitting gas to the Urengoy–Pomary–Uzhgorod pipeline, which supplies gas to Slovakia, the Czech Republic and the Balkans. Its capacity is 115 billion cubic metres annually, from which 15 billion cubic metres may be used for reverse supplies to Ukraine. Ukrainians would like to receive as much as 30 billion cubic metres, but these changes are blocked by Gazprom, which has the supplier codes for the main pipeline. Without them, it is impossible to identify how much and who takes what gas, as well as the allocation of the virtual capacity and therefore the start-up of the reverse.

While giving up Ukraine, Gazprom would have to resign from this main line, because Poland did not agree to the Yamal 2 line, a gas bypass line from the Yamal Pipeline southwards to Slovakia. Therefore, the only option would be the maximal use of the whole capacity of Nord Stream. To distribute these 110 billion cubic metres in Europe, it is necessary to obtain the European Commission’s approval for releasing the Nord Stream branches – NEL and OPAL (20 and 35 billion cubic metres annually) and using the new corridors as the modernised reverse on the Yamal Pipeline and/or Bernau-Szczecin Pipeline. However, these lines would have to contend with Gaz-System, which decides on the admission of capacity in the Polish gas transmission network. This commission will not be interested in a new source of Russian gas supply, which additionally will undermine the profitability of the Liquefied Natural Gas (LNG) terminal in Świnoujście.

The problem would be a situation in which the biggest customers of the PGNiG (Polish Petroleum and Gas Mining, Polish state-controlled oil and natural gas company)would leave for a supplier who would provide them Russian gas not from Yamal, but from Nord Stream, and for a more attractive price. It is unknown how Gaz-System would behave if state-owned companies like Azoty Group requested access to Polish pipelines for gas from Germany. So far, however, such a scenario is only hypothetical, because the question of Bernau-Szczecin pipeline is waiting until the elections. Besides, its designers declare that gas from Russia is to be only a fraction of the supply provided by this connection.

Gazprom's situation may be improved only by separatism of energy companies from Europe, which may make Nord Stream real through the agreement for participation in the project or proposal for its extensions increasing the profitability as a branch to Great Britain or Poland. Such developments will be blocked by the European Commission, which puts pressure on the diversification value of gas projects. It supports only those projects which may provide alternative sources and not a supply route.

This is probably the reason why during the meeting of Gazprom shareholders, director Alexei Miller said that his company may negotiate with Ukraine, maintaining transit through its territory after 2019 in spite of Putin's words that, by that year, Russia will entirely abstain from the transit of gas through Ukrainian territory. “Gazprom does not refuse to negotiate gas transit through Ukraine after 2019, but it is not satisfied with the terms and conditions proposed by Kyiv,” stated Miller, referring to the proposal of increasing the transit duty made by the Ukrainians. To ensure a better position in Ukraine, it will take advantage of the opposition of some Ukrainian oligarchs towards the third energy package.

After Austria rejected the extradition of Dmytro Firtash to the US, he has been lobbying in European energy companies, searching for methods of avoiding the changes in the European energy sector. These efforts may hinder acquiring a European investor in the Ukrainian gas transmission system and warehouses which would finally guarantee supply stability in this route. Modernisation without capital will not succeed, but in return for influence in the sector, Gazprom itself might pay for it, which perhaps would be even cheaper than the construction of new gas pipelines through the Baltic Sea and the Black Sea.

According to the Russian estimations from June, Russia has sent 704 million cubic metres of natural gas to Donbas since February 19th. As a result of that, Gazprom demands 212 million dollars of payment. The separate charging of delivery costs to the self-proclaimed people's republics in the east of Ukraine itself is an element of the game for the destabilisation of Ukraine. The increasing due payments for gas is another tool which may be neutralised only by further instalments of aid from the European Union and the US. There is a similar situation with the debt incurred by President Viktor Yanukovich. Only further help from the West will protect Kyiv from Russia's win in this bidding.

It is most likely that Gazprom’s primary plan in Ukraine is to keep transit through its territory and take control of its pipelines. Projects of other pipelines are to be implemented in case they are needed. Gazprom itself admits though that this plan is going to increase gas sales in Europe, no matter if its Chinese investments are successful or not.  Whether or not it will be able to give up Ukraine in its framework depends on Europe's reaction. OMV, E.ON and Shell have enrolled in a list of co-operators in accomplishing this plan. The companies that propose Eastring or other variations on supplying gas from Turkish Stream to Central Europe may also be added to this list.

What the negotiators from West, where a compromise is always a superior solution, is the fact that uncompromising stand of the EU would be the best way of getting concessions from the Russian side.

 

Wojciech Jakóbik is an energy analyst at Jagiellonian Institute and editor-in-chief of economic portal biznesalert.pl.   Our thanks to New Eastern Europe, a Natural Gas Europe Knowledge Partner