Getting European Gas to Ukraine

Bottom Line: The EU is hoping to get as many countries on board to transit natural gas to Ukraine, and while Hungary and Poland are already involved, the next in line is Slovakia as the pieces slowly fall into place to reduce Russia's monopoly.

Analysis: Right now, German's RWE Supply & Trading is the European leader in selling gas to Ukraine, but the European Union is hoping to get other European companies, and countries on board. The goal is to re-export natural gas and to employ reverse flow transit. What Brussels is eyeing is the Transgas pipeline that connects Germany to Slovakia, via the Czech Republic. This  pipeline could be adapted for reverse-flow use to get gas to Ukraine. It is already connected up with Slovakia's transit system and could be adapted to flow west-east to Ukraine. It's not a precedent. It was done (again by RWE) in 2009 when Russia cut off the gas flow to Europe. In March 2013, RWE sold its Czech pipeline to a German-Canadian consortium called Net4Gas, operated by Eustream.

Recommendation: The problem with the EU's ambitions here is simply one of economics. This Slovakia tie in centers around an inter-connector at Lanzhot, but the tariffs here for shippers are prohibitively high, and Slovakian authorities and Eustream will have to adjust tariffs if this is to work. As it stands, European shippers are not attracted to selling gas to Ukraine. The reverse gas transit from Hungary and Poland, however, is working, and it's resulting in gas to Ukraine cheaper than Russia's Gazprom can provide it. But it is the Slovakian system that carries the majority of gas that could be reverse-flowed to Ukraine, so this is the one that is critical, and the one that Gazprom will fight to keep from happening.