The Reconstruction of 3 Russian Gas Pipelines Will Turn Two-Thirds of Ukraine’s Gas Transit System Into Scrap Metal

Russia’s Gazprom has started to dismantle pipes in the direction of Ukraine for two reasons – asset optimisation and manoeuvring against EU pretensions. Aleksey Belogoryev, Deputy Director for Energy at the Institute of Energy and Finance, told “Economy Today” about this.

Gazprom has started dismantling pipes going to Ukraine, and Kiev can do nothing about it. This was said by the head of the operator of Ukraine’s gas transport system Sergey Makogon. He regarded the actions of the Russian holding company as an intention to “destroy even the theoretical possibility of gas transit through Ukraine in the future”. Makogon noted that if Russia can complete the Nord Stream-2 and start using it in accordance with plans, the Ukrainian gas transit system will remain completely without transit.

At the same time, the head of the operator company stated: Russia could sell gas on the border with Ukraine, and in this case it would be possible to negotiate with European companies, but Gazprom is categorically opposed to such contracts. And now, according to Makogon, it is only about reducing the pipeline’s capacity in the western direction.

“Russia does not hide that it started dismantling the linear part of the gas pipeline to Ukraine a few years ago – the work is being carried out in the border region in the south of Russia,” notes Belogoryev. “As we know, at the end of 2019, Moscow and Kiev signed a new gas transit contract for the next five years – until 2024. It implies a significant reduction in the volume of gas pumping via the Ukrainian route in comparison with what it was previously. This means that the pipeline capacity on Russian territory has become excessive.

And one of the reasons that Gazprom is dismantling part of the pipes is to reduce operating costs – there is no point in maintaining the huge infrastructure of the pipeline if less than half of its potential is being used. This is quite an economically reasonable step, and Kiev is right – it cannot influence this process. The Russian company has been saying for the past few years that the Ukrainian route will become a spare and additional one after the introduction of the Nord Stream-2 . But this is only one of the reasons for dismantling it.”

Europe’s pretensions were nipped in the bud

In the last days of December 2019, Russia and Ukraine, after long negotiations, nevertheless signed a new contract for the transit of gas to Europe. Kiev insisted that the agreements cover a ten-year period, while Moscow spoke of the need for a maximum of a one-year contract. The Ukrainian side tried to oblige the Russian Federation to pump about 100-120 billion cubic meters of gas annually on its territory, while the Russian side demanded not to specify the volume of pumping at all. The negotiations were mediated by Brussels.

As a result, a contract was signed for five years, according to which this year the Russian Federation is obliged to pump 65 billion cubic meters through Ukraine, and in the next four years – 40 billion. In Ukraine, the decision was considered a compromise, but for Russia it was unexpectedly convenient. After all, US sanctions stopped the construction of Nord Stream-2 at the end of 2019, and the completion of work is expected by the end of 2020. In May Poland refused to renew the contract with the Russian Federation and lost huge revenues – these volumes are pumped by Gazprom through Ukraine.

“The second reason why the Russian holding company is dismantling the pipeline to Ukraine is the political element. The European Commission has long stated that Moscow is obliged to preserve Ukrainian transit even if there are new modern bypass pipelines. It will indeed remain at the same minimum level of 20-30 billion cubic meters. If the EU or Kiev try to say something, they will get a completely truthful answer about the technical impossibility of increasing pumping volumes.

Russia is reconstructing its system, or rather three gas pipelines – ‘Urengoy-Pomary-Uzhgorod’, ‘Progress’, and ‘Soyuz’. In the end, one of them will remain – most likely, the first two will be joined together, since it is convenient technically and logistically. As a result, the resulting pipeline will carry about 30 billion cubic meters of gas to Slovakia annually. Accordingly, Ukraine will also get so much transit. It will lose serious money in the form of lost income, and Kiev will have to accept this,” emphasises Belogoryev.

Prospects of the Ukrainian gas transit system

Makogon hastened to assure that we are not talking about a complete cessation of gas transit through Ukraine – Kiev expects that Russia will still pump 20-30 billion cubic meters of gas a year via the Ukrainian route after 2024. For comparison, in recent years, Gazprom sold 80-95 billion cubic meters to Europe via this route. Accordingly, Ukraine’s revenue for transit deliveries, which it received from Russia three decades after the collapse of the USSR, will also fall manyfold.

Ukraine has not officially bought gas from Russia since 2015 – this was a political decision announced by former President Petro Poroshenko. Instead, the country passed gas through its territory from Russia to Europe, after which it purchased it from Slovakia or Poland with extra charges for delivery. The country’s budget spent a lot of money on these intermediary schemes, “feeding” its neighbours from the European Union.

“The huge Ukrainian gas transportation system, inherited by the country from the USSR, is waiting for reconstruction – after reducing the volume of pumping to 30 billion cubic meters per year, it will become unprofitable to maintain it. A significant part will have to be dismantled, and the rest will have to be rebuilt. The problem lies in the fact that transit supplies are tied to the delivery of gas to many regions of Ukraine, which can potentially remain without gas. But with proper engineering and investment, the problem can be solved.

As you know, the current President Vladimir Zelensky went to the election with a promise to increase domestic production, so that its gas was enough for the needs of Ukraine. Instead, its production continues to stagnate – the trends of recent years have not changed. Ukraine produces 19-21 billion cubic meters per year – no more than two-thirds of the required volume. It’s possible to change the situation, but this requires significant investment, and there is no queue of those who want to give money to Kiev.

In addition, to solve such a difficult task, Ukraine needs the latest technologies in the field of gas production – the country does not have them, as well as money to purchase them. So Ukraine’s gas prospects are not optimistic: with the loss of a significant part of transit, the country will produce less of its gas and import more. And a number of regions may be left without energy if by 2024 Kiev does not radically rebuild the internal supply system”, concludes Aleksey Belogoryev.

Maksim But

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