Page 13 - BNE_magazine_02_2020

bne February 2020 Companies & Markets I 13
Russia, Ukraine agree on new five-year transit deal as US slaps sanctions on Nord Stream 2, TurkStream pipelines
Ben Aris in Berlin
Ukraine and Russia have agreed on the principles
of a five-year gas transit deal that still needs to be signed before December 29 just as the first US company suspended construction activities on Nord Stream 2 pipeline after new sanctions were imposed on the project
on December 18.
Ukraine’s Energy Minister Oleksiy Orzhel confirmed that Ukraine and Russia will sign a five-year gas transit contract during a press conference on December 21 in Berlin.
The deal involves the transit of a minimum of 65bn cubic metres of Russian gas flowing through Ukraine’s territory in 2020. The minimum will drop to 40bn cubic metres for each of the subsequent four years.
In addition Russia has reportedly agreed to pay Ukraine’s national gas company $2.9bn that is part of the Stockholm's arbitration court order to Russia’s gas giant Gazprom to pay compensation of $2.6bn to Naftogaz in a judgement at the end of 2018 that the two sides have been wrangling over ever since.
It was significant that the deal was struck in Berlin and comes within two weeks of the first Normandy Four meeting in Paris on December 9 where Russian President Vladimir Putin met not only Ukrainian president Volodymyr Zelenskiy for the first time, but also German Chancellor Angela Merkel and French President Emmanuel Macron, who have stood behind Zelenskiy's efforts to rescue some sort of transit deal.
Ukraine earns about $3bn a year from transiting Russian
gas or about 4% of GPD and as bne IntelliNews reported the authorities hiked transit tariffs on domestic producers four- fold in order to make up a shortfall that would have probably thrown Ukraine’s economy into recession in 2020 as a result.
The deal represents a big victory for Ukraine. Kyiv had been holding out for a 10-year agreement, whereas the Kremlin had offered only a one year deal in its pervious public remarks. Zelenskiy said after the Paris summit that Kyiv was prepared to compromise and suggested a three-year deal, so a five-year is a significant advance.
But Ukraine will also take a hit as the 65bcm guaranteed transit minimum is less than Ukraine flowed this year. Russian sent 87bcm to Europe via Ukraine in 2018 and will send an
estimated 90bcm in 2019, so the flows will be reduced to two thirds of current levels in 2020 and less than half in 2021 to 2025, falling by approximately the amount of capacity that will become available when Nord Stream 2 comes online, which can flow 55bcm a year.
The deal is agreed, but not signed and the final details and mutual claims must be settled before December 29, Executive Officer of Naftogaz of Ukraine Yury Vitrenko said during the press conference.
"We must sign everything before December 29 so that there will be transit from January 1," he said. Vitrenko called it
"a very difficult task," emphasizing that the Ukrainian side will "work hard on this," as cited by Tass.
Vitrenko noted that it was "about new agreements on European principles," the preparation of which involved "international lawyers on both sides."
Naftogaz will also be included in the agreement, he said. Representative of Naftogaz said that separate agreements will be concluded between the Gas Transmission System operator (GTO) of Ukraine and Gazprom, between Naftogaz and Gazprom on organizing gas transportation, as well as between Naftogaz and the GTO of Ukraine.
Ukraine’s Energy Minister Oleksiy Orzhel (left) and Executive Officer of Naftogaz of Ukraine Yury Vitrenko (right) get a new deal from Russia to transit 65bcm via Ukraine in 2020, falling to 40bcm in 2021-2025 and pay the Stockholm $2.9bn award in cash.
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