On January 21, in Brussels, Russia and Ukraine held ministerial-level talks on the transit of Russian natural gas to Europe via Ukraine (TASS, January 22, 2019). The European Commission is chairing this process, and the ministerial meeting just held in Brussels was the second at this level, the first having been held in July 2018. The Commission is a neutral mediator, impartially seeking to apply the European Union’s legislation to the transit of Russian gas via Ukraine to the EU, in the interest of market competition and supply security for Europe. Correspondingly, Ukraine needs the protection of the EU’s legislation against the recurrence of Russian depredations in Ukraine’s natural gas sector, particularly its transit system at this stage.
These negotiations are meant to frame some general terms of transit for Russian gas to Europe after December 31, 2019, on which date the existing Russian-Ukrainian contract will expire. That same date is also Gazprom’s deadline for completion of the bypass pipelines, Nord Stream Two and TurkStream One, which are meant to divert an aggregated 70 billion cubic meters (bcm) annually from the historical Ukrainian transit route into these new maritime pipelines. (The planned TurkStream Two pipeline would divert another 15 bcm annually from the Ukrainian transit route by 2022). The December 31, 2019, double deadline is intended to maximize the pressure on Ukraine to surrender in one way or another: either to lose all transit and the revenue from it, or to accept predatory Russian terms for using Ukrainian pipelines as a residual, backup option. This is how Moscow has framed the discussion until now. However, the situation is beginning to change, and Moscow must adjust its negotiating position accordingly.
Russian President Vladimir Putin declared on January 17 that it may, after all, be “possible to continue the gas transit via Ukraine [to Europe] even after both Nord Streams and TurkStreams are used to their full capacities” (Kommersant, January 21).
The operative meaning, barely hidden in Putin’s statement, is: First, Moscow is hedging against likely delays to the completion of Nord Stream Two past the December 31 deadline, thus necessitating a contract for Ukrainian transit to take effect on January 1, 2020, for an as yet uncertain period of time. And second, Moscow is noticing the still-low but growing odds that Nord Stream Two and the overland branches of TurkStream Two might be further delayed, or altered, or blocked altogether, by the European Commission’s efforts to bring that project under EU market legislation and by the warnings of sanctions by the United States on companies involved in Nord Stream Two.
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In this evolving situation, the European Commission and Ukrainian Naftohaz are starting to plan ahead for continuing transit of potentially high volumes of Russian gas via Ukraine to Europe from 2020 onward. The Commission’s vice president in charge of the Energy Union, Maroš Šef?ovi?, who is chairing the Ukrainian-Russian talks, has submitted an ambitious set of proposals at the January 21 Brussels meeting. These terms implicitly take into account the possibility that Nord Stream Two and the overland branches of TurkStream Two could be delayed by construction problems, altered to comply EU law, or blocked through sanctions.
The Commission’s proposal envisages a transit contract between Gazprom and Naftohaz with the following elements: a) annual gas volumes “consistent with those usually delivered through Ukraine’s transit system,” meaning (apparently as an opening gambit) 60 bcm annually on a ship-or-pay basis and a further 30 bcm optionally; b) contract duration of “ten plus” years (10 years firmly, prolongation optionally) from January 1, 2020 onward; c) compliance with the EU’s legislation that is being implemented in Ukraine, including ownership unbundling (of gas supply from gas transportation); d) EU-standard agreements to be signed on inter-connections between the Ukrainian transit system and those of all neighboring countries (Kommersant, Interfax, Naftohaz press release, January 21, 2019; EurActiv, January 22, 2019).
One major stated purpose of these terms is to make the Ukrainian gas transit system commercially attractive for major European companies, so as to form a consortium with the unbundled Ukrainian transit system, manage it and invest in its upgrade.
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The Brussels meeting brought out the conflicting views of the Russian and Ukrainian sides, respectively. The Russians want to simply prolong the existing transit contract, signed in 2009 on Gazprom’s terms, and expiring at the end of 2019. They insist on ignoring (i.e., rolling back and canceling out) Ukraine’s ongoing implementation of the EU’s gas market legislation. The Ukrainians intend to complete this implementation, and want the transit contract to be signed by Gazprom with the independent transit system operator that is being set up through the unbundling of Naftohaz (Ukrinform, January 18, 22, 2019; Interfax, January 21, 2019; Kommersant, January 22, 2019).
Gazprom’s and Naftohaz’s top managements, as well as Ukrainian Foreign Minister Pavlo Klimkin and Russian Energy Minister Aleksandr Novak, led the two delegations at the Brussels meeting. The Ukrainian side wants the next meeting at this level to be held in March. The Russian side, however, wants to wait until May or June with the next meeting, in the plainly stated hope that Ukraine’s presidential election in March would bring to power a more pliable leadership than the incumbent one in Kyiv.
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President Putin also declared on January 17 that it may, after all, be possible to continue the gas transit via Ukraine to the EU even after both Nord Stream 2 and Turk Stream are used to their full capacities.
The meeting on January 21 between Russia and Ukraine chaired by the European Commission was part of negotiations aimed to ensure ultimately security of gas supplies to the EU and continued use of Ukraine’s gas pipeline to transport Russian gas thus enabling Ukraine to benefit from transit revenue.
To that end, Ukraine with help from the European Commission is seeking a new agreement to replace the existing one which will expire on December 31, 2019 on the basis of transit of 60 bcm annually on a ship-or-pay basis and a further 30 bcm optionally for a duration of at least ten years. That same date is also Gazprom’s deadline for the completion of Nord Stream 2 and Turk Stream, which are meant to divert an aggregated 70 bcm annually from the historical Ukrainian transit route. Russia on the other hand seeks a settlement of the legal issues between Ukraine and Gazprom. Moreover, Russia may not accept shipping a volume of 60 bcm via Ukraine for a period of ten years once Nord Stream 2 and Turk Stream become operational.
Whatever the outcome, Nord Stream 2 and Turk Stream are now unstoppable. However, agreement by Russia to continue shipments of some gas supplies through Ukraine will help de-escalate tension between the two countries, benefit Ukraine’s economy and possibly reduce US opposition to Nord Stream 2.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London