Page 57 - bne_May 2021_20210501

bne May 2021 Eastern Europe I 57
the state-owned gas behemoth is the only company allowed to export gas.
This set-up is one of the foreign policy tools the Kremlin uses to manage relations with its neighbours in the Commonwealth of Independent States (CIS). Good relations come with cheap gas prices;
in the noughties Belarus used to pay a quarter of the price Ukraine was charged and still enjoys preferential rates today.
Despite Ukraine’s massive overcapacity, Russia has decided to build Nord Stream 2 with a capacity of 55 bcm that will, if completed, allow Gazprom to cut Ukraine out of the transit loop completely; 55 bcm is exactly the amount that Ukraine transited to Europe last year.
While Ukraine has cut its own imports of Russian gas to zero it has been lobbying hard to keep the transit business, which is worth some $3bn a year in transit fees. There are two arguments in play: the political and the economic.
The political argument is straightforward: the two countries
are effectively at war, Ukraine has repeatedly sued Gazprom in court
and claimed (successfully) that it was underpaid. Russia says the gas is its own and can do what it likes with it.
The economic argument is a little more complicated.
“We spend UAH200bn a year on maintenance and will invest about $1.5bn over the next 10 years. Nord Stream 2 costs $12bn to build, so the two projects are incomparable,” says Makogon.
Moreover, Nord Stream 2 is a single pipeline, whereas Ukraine has massive redundancy with its multiple pipelines over its territory. Makogon points out that in 40 years of operation it has never had to halt gas deliveries due to accidents or maintenance, whereas Nord Stream
1, the already functional pipeline, had to turn off supplies last summer for a week while it carried out repair works.
“And there are no compressor stations along Nord Stream 2; only one at the
start of the pipeline. If something goes wrong then that will shut down the deliveries. The Ukraine system has none of these problems. We provide a lot more flexible alternative,” says Makogon.
If Ukraine is cut out of the delivery loop Makogon says it won’t maintain its system as some kind of back-up in case the Russian system breaks.
“We can’t just wait. We have to spend continuously on maintenance. We employ 11,000 people. We will downsize and take care of our own needs as a country,” says Makogon. “It means Europe will lose the flexibility that Ukraine offers. It will become fully dependent on Russia.
Ukraine has been frustrated by Germany’s refusal to block the pipeline’s construction, which it insists is a
purely economic project. Nord Stream
2 maybe less flexible and carries a higher exposure to outages caused by accidents, but it is probably cheaper to use and it runs directly between Russia and Germany, eliminating the political risks from a transit.
German Chancellor Angela Merkel has suggested a compromise where Russia sends most of its gas via Nord Stream 2 but agrees to also send part of its gas deliveries via Ukraine’s Druzhba pipelines, which ironically means “friendship” in Russian.
Makogon is convinced that if Nord Stream 2 is completed then the transit business will simply come to an end.
“The main goal for Russia is to cut Ukraine out of the transit completely. Since Turk Stream II came online [that passes to Ukraine’s south] Ukraine has lost 20 bcm in transit business, as gas that used to go to Romania, Greece via Ukraine now all go via Turk Stream
I and II,” says Makogon. “Gazprom will probably find a way to cancel the contract. It definitely won’t prolong it.”
Another solution that has been suggested is that Ukraine make use of its massive storage capacity as a business. In the run-up to the new transit deal in
2019 the consensus was no deal would be done so all of Ukraine, Russia and EU members stored as much gas as they could to ensure uninterrupted energy supplies over the winter of 2019-2020.
The Soviets built huge storage capacity in Ukraine as part of its business of selling gas to Europe. Today these tanks are filled in the summer to ensure delivery to Europe in the winter – something else that Nord Stream 2 cannot offer. But Makogon says that storage has limited appeal.
“The problem is storage is cheap. The cost is in transport. It is not economically viable to send gas from Germany via Slovakia to store in Ukraine, only to send it back again when it gets cold,” says Makogon.
European demand
In the long term one of the key questions is what will happen to European demand for the relatively clean source of fuel that gas is. Will it go up or down?
Demand for energy in Europe is
clearly on the rise, but then so are the alternative sources of energy. In the 1970s Ukraine supplied 80% of Europe’s energy needs, but since then energy supplies have diversified and the share of Russian gas in the mix has fallen to about 35% today.
The advent of renewable energy and the new EU green deal that aims to make Europe carbon neutral by 2050
is moving the goal posts. At the same time, US LNG production has expanded rapidly and it is already the biggest supplier of LNG to Europe. Even Russia has big plans for LNG.
Makogon believes that over the long term demand for gas will fall, thus eating further into the transit business.
“Demand for gas will go down over the medium to long term. In some markets like Poland it will continue to rise as they need to replace their coal-fired power stations with something cleaner but in the long term demand will fall and so there is no need for Nord Stream 2,” says Makogon. “If Europe expects to use less gas then why commit to Nord Stream 2 for the next 40 years?”
www.bne.eu