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FSUOGM PIPELINES & TRANSPORT FSUOGM
tanks in the south of the country to regions in the north.
As of the start of November, Naftogaz had stockpiled almost 20bn cubic metres (bcm) of gas – enough to get through a normal winter. This is about 25% more than the reserves at this time last year. Last year, Ukraine imported about one-third of the 32.3bcm that the country con- sumed. Ukraine also produces circa 20bcm of gas from domestic production. It can also call on its neighbours to the west for help, but if Russia cuts transit via Ukraine it is likely to lead to gas shortages in Western Europe so Ukraine’s neigh- bours may not have any gas to spare to make up for missing supplies.
In August, Ukrtransgaz tested running the Soyuz trunk gas pipeline in reverse west-east mode in preparation for a possible shutdown. The pipeline connects Ukraine’s main reserve tanks to regions on the border. During the last shutdown of Russian gas deliveries flows were reversed but the pumping stations were put under enormous strain and nearly collapsed, which would have caused a major energy crisis in the country.
Gazprom has also been building up reserves in Europe in preparation for a possible show- down. Makogon speculates that Gazprom is preparing for a January 1 cutoff and has the max- imum amount of gas in storage to sell in Europe to buy time to get Nord Stream 2 gas pipeline commissioned and delivering gas to Germany.
Gazprom had hoped to complete the con- struction of the new 55bcm capacity pipeline before the end of this year, but due to Danish objections to the construction of the pipeline in its territorial waters the construction was delayed. Denmark finally gave its permission for the construction to go ahead at the end of Octo- ber, but the delay means Nord Stream 2 won’t be ready before May, say experts – after the transit contract expires.
Talks have been ongoing on signing a new transit deal, but the two sides remain far apart. In October Russian President Vladimir Putin called German Chancellor Angela Merkel and suggested extending the contract but introduced the idea of including the award to Naftogaz by Stockholm’s arbitration court of compensation of $2.6bn in the deal. Although the terms are not clear, it seems the Kremlin is pushing for the payment to be spun out over several years and presumably cash payments will be swapped for Ukraine foregoing transit payments, or some such similar deal. Ukraine has rejected this suggestion out of hand and is bracing itself for the worst.
Without a new 10-year gas transit deal with Russia, the National Bank of Ukraine (NBU)
estimates gas transit will decrease from 90bcm this year, to 50bcm next year and to 30bcm in 2021. Ukraine earns some $3bn a year from the transit fees and the fall in volumes would shave 0.6% off the GDP next year and 0.9% off GDP in 2021.
More talks are slated for next week and Ukrainian Energy Minister Oleksiy Orzhel has again rejected the latest Russian offer for a one- year extension that would include dropping any claim on the arbitration award.
“The offer from Russia is unacceptable - to refuse arbitration and sign an agreement to use the Ukrainian [gas transport system] for only one year,” Orzhel said in an interview on Ukrain- ian TV as cited by UBN.
Orzhel went on to assure viewers that Ukraine was ready and already has sufficient gas in storage to ensure it can power and heat the country throughout the winter. He said that if Russia cuts off the gas on January 1, “Ukraine will not freeze.”
“Today we have record gas reserves in under- ground storage facilities, and, accordingly, coal in warehouses. This means the main thing – Ukraine will not freeze this winter without tran- sit. Even without transit, we will provide energy for every Ukrainian.”
In the meantime, reforms at Naftogaz to make it more compatible with the Euro- pean gas system are ongoing. Naftogaz has gone from being a major burden on the state budget when gas prices were subsidised to becoming the largest single contributor. Naftogaz posted UAH24.7bn ($1bn) of net profit over the first six months of 2019, which is almost twice as much as for the same period of the previous year, the com- pany said in a press release on September 24 that includes a link to its full accounts.
And earlier this month Ukrainian President Volodymyr Zelenskiy signed a decree to unbun- dle the transport and production facilities of the national gas company.
The president also urged the nation’s govern- ment “to complete the procedure for separating natural gas transportation from its production and supply, as well as the creation of an inde- pendent operator of the gas transportation sys- tem of Ukraine by late 2019”. An independent transmission system operator (TSO) is supposed to be created in January 2020.
One of the possible compromises is that Rus- sia sells its gas to European customers and deliv- ers it to the Ukrainian border. The customers then deal directly with the Ukrainian TSO that then sends the gas on to its final destination via Ukraine in a deal where Russia plays no role.™
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