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EU Signs Gas Pipeline Deal With Ukraine

The European Union is lending more than $180 million to Ukraine for improving its stretch of a pipeline that ships natural gas from northern Russia to customers in Europe. A second, larger loan for the same project is in the offing.

The Ukrainian government and the European Investment Bank signed the deal on Dec. 1 in Kiev. The second loan, from the European Bank for Reconstruction and Development, is expected to be approved by that institution’s board by Dec. 10.

Both loans carry 2 percent interest, a common lending rate from development banks and a much lower rate than is charged for ordinary market loans. The recipient will be Uktransgaz, which operates the pipeline.

Related: Ukraine-Russia Gas Deal Still Possible Despite Setback

The benefits of modernization are clear, according to Ukrainian Prime Minister Arseniy Yatsenyuk: It would reduce the cost of moving the fuel by 20 percent, and at the same time repair leaks in the pipeline, thereby reducing toxic emissions as well as energy loss.

As part of the modernization program, Uktransgaz will replace nearly 120 kilometers (about 75 miles) of new piping and refurbish two compressor stations in a project that is expected to last about four years.

Yatsenyuk said he hoped the parts needed for the project, particularly the necessary piping, will be bought from Ukrainian companies. “This will additionally contribute to the Ukrainian economy,” he said.

One option, according to the Kiev Post, would be Interpipe, Ukraine’s leading pipe maker. The Russian gas industry once was one of Interpipe’s leading customers, buying up to 44 percent of its products. Now, though, sales have declined due to Russia’s unilateral annexation of Ukraine’s Crimean peninsula and the Russian-backed fighting in eastern Ukraine, leaving Interpipe heavily indebted.

The pipeline in question runs from Urengoy in northern Russia through Pomery about 250 miles east of Moscow to Uzhgorod in western Ukraine on the border with Slovakia. It can carry as much as 142.5 billion cubic meters of gas each year to Europe.

Related: Putin Threatens Gas Reduction To Europe

EU nations get one-third of their gas supplies from Russia, and half of that amount flows through Ukraine. The supply of gas to Europe was interrupted twice before, in 2006 and 2009 because of disputes between Kiev and Moscow, and Europe is leery of depending on Russian gas, even if it’s shipped through a friendly country such as Ukraine.

Russia’s solution is to bypass Ukraine altogether. One option might have been to use the proposed South Stream pipeline, which would have run south of Ukraine. But on Dec. 1, Russian President Vladimir Putin said he was scrapping the project. A second would be to expand the capacity of the North Stream pipeline, which already is shipping gas under the Baltic Sea to Germany.

In announcing the loans, Yatsenyuk pleaded with EU countries not to agree to any alternative to shipping via Ukraine. “Ukraine once again calls on all the European and U.S. partners to invest in the Ukrainian gas transportation system,” he said.

By Andy Tully of Oilprice.com

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