“Gazprom” Is Preparing to Block Gas Transit Through Ukraine: What Are Zelensky’s Options?

Zelensky’s team unexpectedly denoted its interests in the gas market.  

As was said in the statement distributed recently, the team of President Vladimir Zelensky “is ready for consultations with the government on decision-making that will provide heat in the houses of Ukrainians in the winter. In order to have enough gas in the heating season, they need to stock up already now when the fuel price is much lower, In addition, it is necessary to have reliable sources of deliveries, especially against the background of the fact that the conditions of gas being supplied from Russia to the EU through Ukraine since January 1st 2020 are still not defined”.

The office of the president also noted that they are counting on “cooperation with the government and the introduction of weighed and timely decisions agreed with the EU, the US, and other partners”. They also assured that “Ukraine guarantees reliable transportation of gas by European rules, but for this purpose it is necessary to create an independent gas transit system operator. This process will be completed in the current year, but not at any cost and not for the benefit of individual political forces,” stated Zelensky’s team.

It should be noted that the statement itself is quite strange. Firstly, until recently Zelensky’s team practically did not comment on gas matters, especially such specific ones as the separation of the gas transit system or transit.

Secondly, formally the president has no special powers for the solution of gas isues – it is the prerogative of Naftogaz and the Cabinet of Ministers.

Thirdly, the statement of Zelensky’s team has many interesting theses – for example, about the urgent creation of an independent gas transit system operator, but at the same time “not at any cost” and “not for the benefit of individual political forces”.

The Ukrainian “Strana” news agency found out what is ciphered in the gas statement of Zelensky, why it appeared in the first place, and what steps may follow after his inauguration.

Gas interest

“To say everything and nothing at the same time,” said the economist Aleksey Kushch, commenting on the statement of Zelensky’s team.

“Empty phrases, attempting to designate our concern”, added the managing partner of the legal group “Trokhimets and Partners” and president of the “Energy Industry Association of Ukraine” Aleksandr Trokhimets.

Neither Zelensky’s press service, nor his energy adviser Andrey Gerus answered the questions of “Strana” in the text of the “gas statement”. And there are a lot of them.

Firstly, what decisions of the Cabinet of Ministers does the team of the new president intend to discuss during “consultations”.

Secondly, what “reliable sources” of gas supply for the heating season are we talking about – will it be former purchases at the European hub via the “Düsseldorf+” formula or will new suppliers be involved? Indeed, during the recent visit of the head of “Naftogaz” Andrey Kobolev to the US, the possibility of importing American liquefied gas was discussed in particular. And taking into account the fact that Igor Kolomoisky, whose protege is said to be Zelensky, according to some media, spoke about Kobolev in a very flattering way and even said that he will recommend to the new president to appoint him as the Prime Minister, the version about the “special powers” of the head of the “Naftogaz” doesn’t look so fantastic.

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And thirdly, the most interesting thing is what plans the new President has for the gas transportation system, which, according to the statement, will be separated from “Naftogaz” by the end of this year.

Experts consider that the very fact that a statement on gas was made right now is not a coincidence at all.

The existing gas transit contract with “Gazprom” expires on January 1st 2020. In February, negotiations on extending it or reaching a new agreement failed, the next round of talks is supposed to take place before the end of May. But, since “Gazprom” and “Naftogaz” are now actually in a state of war, experts doubt that they will be able to reach an agreement.

“Naftogaz” recently complained to the European Commission about “Gazprom”, having accused it of abusing its monopoly position in the market.

This concerns the Nord Stream-2 project, which the Russian Federation is building to bypass Ukraine – through Finland, Sweden, Germany, and Denmark. Its launch will allow Russia to transit gas around Ukraine, and Kiev will lose $3 billion, plus we will be forced to pump an additional 4 billion cubes of gas in order to create the necessary pressure along the pipe.

The complaint of “Naftogaz” is based on the “lack of economic justification” of “Nord Stream-2”.

And later, Kobolev said that “Gazprom” has the technical capability to abandon the use of the Ukrainian gas transit system even if the construction of “Nord Stream-2” will not be completed.

“According to our calculations, the Russian side has the technical capability to next year not use Ukrainian transit even if ‘Nord Stream-2’ will not be constructed. At the same time, it can carry out the minimum volumes of gas supply to European consumers within the existing contract with ‘Gazprom’. The gas supply deficiency in such a situation is about 5 billion cubic meters,” said the head of the “Naftogaz”.

He also noted that “Gazprom” now supplies gas to Europe at an accelerated pace in order to create additional reserves of the resource, which are now at a record high.

“I thus think that these additional reserves are being created in order to cover this deficiency. Therefore, in my opinion, which is shared also by our European partners, the probability that on January 1st 2020 we will receive the complete cessation of transit, like in January 2009, is rather high,” said Kobolev.

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According to Aleksey Kushch, Russia has made it clear more than once that it will negotiate with the new president concerning gas.

“Therefore, most likely, negotiations will be postponed to June-July. At the same time, the Russian Federation will try to transfer this issue from economic to political status and move it from the corporate level to the state level. That’s why it is not surprising that a reaction from Zelensky followed,” said Kushch.

“Formally, the president doesn’t have any special powers in the gas market – neither concerning tariffs, nor concerning transportation or the gas transit system,” noted the senior partner of the lawyer company “Kravets and Partners” Rostislav Kravets.

But, according to the head of special projects at the “Psikheya” scientific and technical center Gennady Ryabtsev, the situation changes if the gas issue goes beyond being an energy security issue and becomes a national security threat.

“This is what is happening now. The pumping of gas to Ukrainian storages is happening extremely slowly – 50 million cubic meters per day, whereas it is necessary to pump 200 million. At such a pace it is clear already now that we will not be able to fill gas storages by the winter, and, taking into account the possible stop of Russian transit already on January 2nd 2020, and the pressure drop along the pipe to zero, we need to buy 4 billion cubic meters more than usual,” explained Ryabtsev to “Strana”.

In such a situation Zelensky can and even is forced to convene the National Security and Defence Council (NSDC) urgently, assures the expert. And the NSDC can already initiate the corresponding appeals to the government or the Verkhovna Rada.

Zelensky’s electorate will be left without gas

According to Ryabtsev, now in Ukraine the prerequisites for an “artificial gas crisis” have been created. Not only is the issue with the transit contract with “Gazprom” suspended in the air, but gas purchases for the winter are still being blocked.

“We need money for purchases, but the financial plan of ‘Naftogaz’ still hasn’t been approved. Moreover, it seems that ‘Naftogaz’ intentionally introduced bullet points that for certain will anger the Prime Minister Groisman – for example, about payments to the top management,” noted the expert.

If last year the management of “Naftogaz” received about 682 million hryvnia, then this year it is already offered to increase this sum almost to 820 million.

If Ukraine nevertheless remains without the transit of Russian gas, then it will be necessary to reverse the gas transit system and thus ensure a supply of the European resource. But for this purpose there is a need to also guarantee a contract with Slovakia, which hasn’t yet been signed.

“There is no financial plan of ‘Naftogaz’ – there are no purchases, there is no contract with Slovakia – there is no reverse. Take a guess who bears all the risks when on January 2nd Russia closes the valve. It is clear that the president will be guilty. Moreover, by that moment, perhaps, both the parliament and the government will be updated and there will be no one to forward complaints to. Plus – the residents of the Eastern and Southern regions of the country will feel the gas problems first. The peculiarities of the Ukrainian gas transit system are such that the main pipe goes to the West from the Northeast. And in order to steer it South, it is necessary to involve stations that are on the non-controlled territories. I.e., the regions that most of all voted for Zelensky will suffer the most,” explained Ryabtsev.

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However, the prospects of receiving gas in reverse – from Slovakia, Hungary, and other countries – is a big issue even regardless of whether “Naftogaz” has a financial plan or not. The matter is that if gas transit through Ukraine is terminated, European consumers, first of all, will use gas that was previously pumped into storages for their own needs. And the remains for sale to Ukraine will be minimal. And thus the prices for it will be astronomical.

The situation is in general extremely complex.

What will happen to the pipe

A separate issue is the gas transit system issue. In the statement made by the team of Zelensky it is specified that the process of creating an independent operator will be completed this year. But, as Ryabtsev considers, currently there aren’t enough conditions for the gas transit system to work in a new format from the beginning of 2020.

According to the third energy package of the EU, which was ratified also by our country, the production, transportation, and sale of gas has to be separated. Therefore “Naftogaz” is obliged to carry out so-called unbundling – to divide the operating units and create separate companies on their foundations. There has to be, in particular, an independent gas transit system operator too.

It is this new operator that can sign a new contract with “Gazprom”. But before this, the new company has to undergo certification on European standards, which will require a lot of time. Plus – the new operator needs to somehow transfer its assets, i.e., this same “pipe”. “There were ideas to transfer the gas transit system to a concession, but a special law on concessions, which Ukraine doesn’t have, is needed for this purpose, and it’s unlikely that the Verkhovna Rada will be able to quickly adopt it,” considers Ryabtsev.

That’s why experts do not believe that a capable independent gas transit system operator will appear in Ukraine by the end of the year. 

And this further complicates the issue of signing a contract with “Gazprom” for the transit and supply of gas after 2020. 

Therefore the situation still looks very serious. And it’s extremely unlikely that the gas “problem 2020” can be solved without signing a new contract with Russia.

And in order to conclude this contract it is necessary to include political prerequisites. Namely – replacing the leadership of “Naftogaz” and the Ukrainian government with those people who can hold productive negotiations with Moscow.  

Lyudmila Ksenz

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