Russian Exports Will Still Transit Ukraine in 2020 - OIES
Russian gas will continue to be transported across Ukraine post-2019, albeit at reduced volumes, concludes a recent report from the Oxford Institute for Energy Studies (OIES).
The report ‘Russian Gas Transit Across Ukraine Post-2019’ analyses how the role of Ukraine – in the past, the main transit corridor for Russian gas to Europe – will change after the current transit contract between Gazprom and Naftogaz Ukrainy expires on December 31 2019. In recent years Gazprom has switched more of its gas flows to the subsea Nord Stream pipe, and via Belarus/Poland, leaving only 62bn m3 that crossed Ukraine in 2014 – half what was transited in 2006.
Simon Pirani and Katja Yafimava present more than a dozen scenarios for how transit might be achieved in 2020 in their report. They note that Gazprom’s European buyers remain supportive of its policy of switching flows away from Ukraine, as evidenced by last year’s agreement between Shell, Uniper, BASF, Engie, OMV and Gazprom to build Nord Stream 2. But they see the outlook for Russia and Turkey resuming talks in 2016 on a new Turk Stream pipeline as “bleak”. They also estimate that direct Russian sales to Ukraine post-2020 are likely to range between zero and 18bn m3/yr.
The report suggests that it is “extremely unlikely” that any new non-Ukraine transit pipelines will be built by 2020. However, if any are built, it says the likeliest routes are: Nord Stream 2 (two extra lines each of 27.5bn m3/yr) enabling Gazprom to meet demand of all European countries except south eastern Europe and Turkey; Turk Stream (two new lines each of 15.5bn m3/yr) enabling it to cover southeast Europe and Turkey; South Stream (two new lines each of 15.5bn m3/yr) enabling Gazprom to cover southeast Europe and either Italy or Turkey.
If no new pipelines are built by 2020 and if use of the Opal pipe in Germany remains restricted, then the authors estimate that Gazprom could face a shortage of non-Ukrainian export capacity in the range of 27.6 to 77.6bn m3/yr - given its potential range of 130-180bn m3/yr of European exports in 2020 -- but would only be contractually committed to deliver 126-153bn m3/yr in 2020 (at 70% and 85% take or pay, TOP, respectively). This would bring its shortfall of non-Ukrainian export capacity down to 23.6-50.6 bn m3/yr, and further down to 6.6-33.6bn m3/yr if the Opal cap is lifted.
Russian gas exports to Europe in 2020 are unlikely to be much higher and might be less than the 150bn m3 under 2014 long-term supply contracts, the report says. Given that, then even assuming no new pipes by 2020, Gazprom would be short of only 6.6-23.6bn m3/yr of capacity needed to meet its minimum TOP obligations if it did not use Ukraine, so would need to conclude a medium-term transit contract with Ukrtransgaz for transit of that least that much during 2020-25, the report says.
OIES concludes that Gazprom would probably need the Ukrainian corridor for 40 to 60bn m3/yr of its exports to Europe – similar to the 62bn m3/yr it transited via Ukraine in 2014 -- but possibly as much as 60-75bn m3/yr bcm.
The paper also notes that, should Gazprom be unable or unwilling to use the Ukrainian corridor for some transits, it could re-negotiate its existing, or conclude new, contracts, which would specify the Russia-Ukraine border as a new delivery point – requiring European buyers to make their own contractual arrangements for transit with Ukrtransgaz.
In that case, Gazprom and its customers would either agree to shift the delivery points in a proportion – possibly no less than 25bn m3/yr -- of long term contracts to the eastern border of Ukraine, or else Gazprom prepares to declare force majeure on a proportion of its long term contracts which would most likely trigger EU-Russia-Ukraine tripartite negotiations. The authors see the force majeure scenario as less likely than other outcomes, but possible.
Professor Jonathan Stern, founder and chairman of OIES’ gas research programme said: “These are issues of paramount importance to the European gas market which needs to have clarity about the options for all parties in respect of the transit of Russian gas to Europe post-2019."