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    Russian Transit Through Ukraine to Persist in 2020

Summary

Both Russia and Ukraine need to be able to show Europe that they can work together on gas if they have to, observers have told NGW.

by: William Powell

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Russian Transit Through Ukraine to Persist in 2020

The risk that Russian gas flows through Ukraine will be interrupted from January 1 2020 is only small, even if the two countries fail to reach an agreement before that date, observers told NGW this week.

Last year, Ukraine transited about 90bn m3 of Russian gas to customers in central and southern Europe and Turkey. Both sides need the gas to continue to flow, commercially, but their 10-year transit agreement expires December 31, posing a risk of a major shortage of gas in central and southern Europe early next year. Gazprom's bypass routes: NordStream 2, its onshore extension Eugal, and TurkStream 2, cannot all be operational by then, according to analyst Simon Pirani. 

The Russian and Ukrainian energy ministers, alongside the European Commission, were due to meet at the end of this month in Brussels, but the date has now been postponed. Gazprom wanted to wait for a new president to be installed in Kiev, as well as for an unbundled, independent transmission system operator (TSO) to be put in place, the head of the Energy Community Secretariat Janez Kopac told the Flame gas conference in Amsterdam. 

The Russian company does not want to sign an agreement directly with the Ukrainian government, which is the present owner of the high-pressure pipelines, Kopac said. "All the stakeholders are working very hard not to find a solution," he added.

The comic actor Volodymyr Zelensky is due to be sworn as Ukraine's president at the end of May, having heavily defeated incumbent Pyotr Poroshenko on an anti-corruption, pro-EU ticket. Meanwhile, a new independent energy regulator has pushed through a very competitive, three-year tariff, despite opposition from the government, Kopac noted, suggesting that a more market-based methodology is now in place.

Unbundling is some way off, however. Although state-owned gas company Naftogaz has set up Main Pipelines of Ukraine (MGU) for the purpose, it cannot agree with the government what model of unbundling to follow. Both want to hang on to the lucrative business for a little longer, before Nord Stream 2 and TurkStream 1 and 2 divert gas away from Ukraine to arrive directly with Gazprom's customers in Europe and Turkey.

Walter Boltz, a member of the supervisory board at Ukrainian pipeline operator Ukrtransgaz, said that the transit relationship was beneficial to both Russia and Ukraine, but noted that the political tensions made it "extremely challenging" to find a solution.

"They may find a solution by January, or mid-January," he told the conference. "I think a contract will eventually be negotiated, with Ukrainian government involvement, regardless of who is the TSO."

Chairing the session, Jonathan Stern said that if there is no agreement by the year's end then the reputation of gas would suffer further. Two analysts and Kopac later all agreed as they told NGW that while the risk of a brief interruption remains, the will was there for Russian gas flows to continue to cross Ukraine even if the three sides failed to agree terms before then. 

Researcher Svetlana Ikonnikova noted that flows westwards had stopped in the past. Ukraine tried in the 2000s to extract better terms from Gazprom and used interruptions of gas flows to the European Union as leverage, knowing how that would damage Gazprom's reputation as a reliable supplier. But now the situation is different, she said.

Ukraine wants EU support and ultimately to join the EU. Cutting flows would weaken its prospects. Russia, too, wants the gas to flow to its customers, she said.

Danila Bochkarev, a researcher, also told NGW that he thought both sides had too much to lose from disruption and the gas would most likely flow, even if there was no a contract in place.