31 December 2019: Will gas stop flowing?

File photo. Computer boards display zero figures of gas transfer rate at the control room in the biggest heating plant east of Skopje, 8 January 2009., when the gas crisis broke. [Georgi Licovski/EPA/EFE]

This article is part of our special report Ukraine gas transit: What’s at stake.

The clock is ticking. The long-term gas transit contract between Russia and Ukraine expires on 31 December. Chances that the two sides could reach a comprehensive agreement before this date are slim. EURACTIV looks behind the scenes of the dispute.

Ukraine is a key transit route for Russian gas to reach Europe. A current deal between the two post-Soviet countries regulating gas transit expires at the end of the year. Time is running out to hammer out an agreement, with relations tense since Moscow annexed Crimea from Ukraine in 2014.

Ukraine has been earning $3 billion a year from transit taxes and would like to preserve as much of this income as possible. Moreover, the country has invested massively in its gas transport system and has made it profitable and in conformity with EU rules.

In the meantime, Russia is stepping up two big pipeline projects circumventing Ukraine: Nord Stream 2, bringing gas to Germany under the Baltic Sea, and Turkish Stream, which will ship gas under the Black Sea. The latter will tap into Balkan Stream, continuing on to Bulgaria, Serbia, Hungary and Austria.

In recent years, Gazprom’s tactics in gas transportation have been to load the existing pipelines bypassing Ukraine to maximum capacity, while the Ukrainian corridor was used to respond to demand fluctuations.

Conversely, Ukraine stopped buying gas from Russia since 2015. Imports are carried out by reverse flow from European countries. There are currently three reverse routes, the main route is the Slovak one (capacity of nearly 15 bcm/y).

Russia likes to make the sarcastic remark that gas from reverse flows is also Russian gas. Ukraine retorts that it is cheaper than the gas Gazprom sells to Naftogaz.

In the winter, Ukraine uses gas from its huge underground gas storages (UGS), which have a huge potential also for clients in Western Europe.

There are a number of obstacles to a comprehensive new deal, such as the political row between Kyiv and Moscow, a pro-Russian insurgency in eastern Ukraine, and litigation between Russian gas supplier Gazprom and Ukraine energy company Naftogaz.

EU-mediated Russia-Ukraine gas talks in deadlock

Russia and Ukraine need a sense of urgency in their talks on gas transit for Europe, the European Union’s energy chief said after the latest round in Brussels on Monday (28 October) failed to yield progress.

The attempt by the previous European Commission to mediate in so-called “trilateral gas talks” has failed. Ukraine and Russia have continued lately on a bilateral track. The issue was also discussed in Paris on 9 December between Presidents Volodymyr Zelenskiy and Vladimir Putin.

Commission Vice-President Maroš Šefčovič, who mediated in the trilateral talks, has said that the Commission proposed that Russia and Ukraine conclude a transit contract of at least 10 years with a minimum 40-60 bcm/year ship-or-pay clause and the possibility to ship additional flexible volumes – between 20 and 30 bcm/year.

In comparison, in the last couple of years, more than 80 bcm/y were piped annually via the territory of Ukraine. Ukraine’s maximum capacity is more than 140 bcm/y.

The chances to reach an agreement in time to avoid a disruption are slim, not only because of the complexity of the talks, which involve contested payments under litigation, but also due to the interest of the Russian side to see the gas prices grow in the context of uncertainty. Gas storages in the EU are full like never before.

Can Nord Stream 2 and Turkish Stream replace the Ukrainian transit?

Gazprom had such an ambition, but for various reasons, Nord Stream 2, with a planned capacity of 55 bcm/y, is late and will not be operational before mid-2020. Moreover, the project, as well as Turkish Stream, is likely to suffer from US sanctions.

US readies sanctions against Nord Stream 2 and Turkish Stream

The US House and Senate agreed on Monday (9 December) a defence bill that would force Donald Trump’s administration to impose sanctions on companies involved in the Russian-sponsored gas pipelines Nord Stream 2 and Turkish Stream.

The first pipe of Turkish Stream, with a capacity of 15 bcm/y, is designed for the Turkish market. Regarding the continuation of Turkish Stream into Bulgarian territory, under the name of Balkan Stream, the laying of the pipes is still ongoing.

Gas flowing via the second offshore pipe of Turkish Stream (also 15 bcm/y) is aimed at supplying Bulgaria, Serbia and Hungary, before the excess gas reaching the Baumgarten gas hub near Vienna (the same hub which used to receive gas transited via Ukraine).

At this stage, it is impossible to predict when the supplies via the Black Sea will reach Baumgarten and compensate for the missing Ukraine-transited supplies.

It appears therefore that Russia was unable to attain its goal: to be ready to supply the same amount of gas to clients in Europe by the two alternative pipelines, just in time when the long-term gas transit contract with Ukraine expires.

Moreover, even if and when Nord Stream 2 and Balkan Stream are operational, there will still be a need to transit gas via Ukraine. Skolkovo energy centre, a Russian think tank, estimates this need at 40 bcm/y, while the Commission has put the figure at 60 bcm. Even at official level Russia seems to accept that some transit via Ukraine will remain.

Is a remake of the 2009 gas crisis possible?

Unlike in the winter of 2008-2009 when gas across Ukraine stopped flowing, leaving several EU countries in the cold (at least 11 people reportedly died, 10 of them in Poland), in 2019, the EU is much better equipped to face such a challenge.

Reportedly, gas storages in member countries have never been as full as now. However, it should be clear that in the absence of an agreement, in the morning of 1 January, gas will stop flowing from Russia into Ukraine. In such a case, the consequences will be less heavy, but still important.

Simon Schulte, head of gas markets, Institute of Energy Economics (EWI) at the University of Cologne, warns that a three-month disruption would have serious implications on gas prices. Prices will go up everywhere, but the countries in South-Eastern Europe are likely to be the most affected. [See report]

Ukraine’s transit has so far stabilised prices in the EU during demand peaks, as well as during maintenance of Nord Stream and of Yamal pipelines (once a year for each of them). The Ukrainian gas transmission system, being very flexible, has no such interruptions.

The biggest potential impact is on spot prices, which would jump in the event of a cutoff. Depending on the length of the disruption, gas flows also could be redirected and European demand for LNG could spike.

Borissov: There will be no interruption

Asked by EURACTIV on 13 December what will happen when the long-term gas transit deal between Russia and Ukraine expires on 31 December in the absence of agreement, Bulgarian Prime Minister Boyko Borissov was optimistic.

“The transit of gas via Ukraine will not stop”, he said, adding that he had expressed the same view on the occasion of his recent meeting with Donald Trump in the White House, and at the EU summit the previous night.

“Those dependent on the production of gas are the gas exporters. They are dependent on our money, on those invoices they are sending us and which we are paying. Will they renounce this? They won’t. Actually the opposite is true: more and more companies are trying to bring gas”, he said, alluding at the US LNG.

Bulgaria has already imported LNG from the US, reportedly at prices lower than those the country pays for Russian pipeline gas.

It is widely assumed that Russian authorities should know that it is not in their country’s interest to harm its image of a reliable gas supplier. However, with Russia entangled in so much power play in Europe and elsewhere, its leaders’ decisions are really hard to predict.

[Edited by Zoran Radosavljevic]

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