Page 7 - FSUOGM Week 17 2021

FSUOGM COMMENTARY FSUOGM

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

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