Ukraine invites EU, Russia to co-manage its pipelines

Ukrainian Prime Minister Mykola Azarov has called for establishing an international consortium consisting of Ukraine, Russia and the European Union to modernise and manage the Ukrainian natural gas transport system.

Azarov said in comments published in a German daily last weekend that the Ukrainian government had proposed transferring control of the gas transport system to a trilateral consortium. He writes that such an arrangement would "ensure its transparent and fair administration and be engaged in its modernisation, which will cost €4.5 billion."

The amount looks huge for Ukraine, which finds it difficult to secure international financing. An IMF mission that worked in Kyiv in March 2011 could not recommend to the IMF executive board that it approve a new tranche for Ukraine. The IMF had expected Ukraine to approve pension reform and phase out its policy of subsidising gas for households.

Azarov added that gas disputes between Ukraine and Russia in recent years show that the two countries need to establish a gas transportation consortium. A pricing dispute between Moscow and Kyiv in the winter of 2008-2009 left large parts of Europe in the cold and scrambling to find supplies.

Commission waits for details

Asked to comment on the proposed consortium, Marlene Holzner, spokesperson to Energy Commissioner Günther Oettinger, said that the idea “has been around for some years”, but no specific proposals had been presented.

“The EU has consistently emphasised that it is up to Ukraine to decide how to manage its gas transmission system and should Ukraine and other parties be willing to move in the direction of a consortium, including the EU gas industry, the European Commission is ready to play a facilitating role, provided that the application of EU and international law, including as enshrined in the Energy Community Treaty, is guaranteed,” she said.

Holzner added that the EU executive continues to offer a trilateral dialogue on energy, notably on the transmission system, with Ukraine and Russia

Message to Gazprom

Azarov’s proposal appeared to convey the message that instead of building such a costly project such as South Stream, the main aim of which is to bring Russian gas to Western Europe by skirting Ukraine (see background), Moscow should cooperate with Kyiv.

A consortium backing the Gazprom-led South Stream pipeline is reportedly expecting to make a final investment decision within months. But the European Commission says this may be premature, as no one has seen feasibility studies or environmental impact assessments on South Stream.

“The recent extreme cold has demonstrated that neither Nord Stream nor South Stream has or can have reliable gas storage facilities, the reserves of which could be used in periods of low temperatures. Ukraine has such storage facilities," he said in the Frankfurter Allgemeine Zeitung, widely quoted by Ukrainian news organisations.

Azarov said, after modernisation, the capacity of Ukraine’s gas transport system would grow by about 30%.

Ukraine, which depends heavily on gas imports from Russia, has long wanted to revise a 2009 deal with Moscow which it argues set an exorbitant price for the fuel.

Under the controversial 2009 deal under the former Prime Minister Yulia Tymoshenko, Kyiv is paying $425 (€340) per thousand cubic metres. Ukraine sees a fairer price at $250 (€200).

In order to get a discount, Moscow has made it clear that Ukraine must either let Russian energy giant Gazprom take over its pipelines – which carry Russian gas to Europe – or join a Russia-led Customs Union, a post-Soviet trade bloc.

Kyiv sees its pipelines as a strategic asset and has long sought a free trade deal with the European Union. It has so far refused both trade-offs.

However, the high price of gas is a heavy burden on the state budget and the economy, and is one of the main headaches for President Viktor Yanukovich's government as it prepares for a parliamentary election on 28 October.

Background

South Stream is a planned natural gas pipeline running across the Black Sea to Bulgaria, with one branch going to Greece and Italy, and another one to Romania, Serbia, Hungary, Slovenia and Austria.

Russia recently announced that it would more than double its planned capacity from 31 billion cubic metres per year (bcm/y) to 63 bcm/y.

South Stream's website says the pipeline is "aimed at strengthening European energy security" by eliminating transit through Ukraine, as "another real step toward executing the Gazprom strategy to diversify the Russian natural gas supply routes."

Further Reading