Global Insight Perspective
Just after 10:00 Moscow time today, Gazprom began pumping gas for delivery to European consumers via Ukraine, ending—at least temporarily—a six-day halt in Russian gas exports via Ukraine that has left Europe in the cold.
Gazprom's "test" shipment of 76.6 mmcm/d of gas is intended to be supplied onward to its customers in the Balkans and Moldova, but with observers now closely watching transit volumes amid the continuing Russia–Ukraine dispute over gas prices and transit, already there is a new fight over responsibility for "technical gas" needed to operate Ukraine's gas transit system (GTS).
Naftogaz Ukrainy, which would have been forced to use some of these transit volumes as technical gas in the absence of a new 2009 supply contract with Gazprom, is reportedly blocking transit due to "unacceptable" conditions under the existing transit agreement, provoking another confrontation and putting Russian gas exports to Europe in jeopardy once again.
Taps Open, but Transit Problem Remains
A second deal signed yesterday by Russian, Ukrainian, and European Union (EU) officials on the deployment of monitors at key gas metering and dispatch stations in Russia and Ukraine has finally brought about an end to the six-day embargo on Russian gas exports to Europe via Ukraine (see "Related Articles"). Russia had declared the original protocol null and void after Ukraine added a declaration to it, but with that added language removed, Russia has reapproved the protocol, and Ukraine has re-signed it. As a result, Russian authorities gave the go-ahead for Gazprom to resume pumping gas via Ukraine to Europe this morning at just after 10:00 Moscow time.
The European Commission welcomed the news, but it is clear that, without a resolution of the bilateral commercial dispute between Gazprom and Naftogaz that triggered this cut-off, Europe's gas imports via Ukraine remain in jeopardy of further disruption. It will take several days for a full resumption of these gas supplies, and Gazprom said that it was initially only sending some 76.6 mmcm/d of gas—62.7 mmcm/d intended for consumers in the Balkans region, and 13.9 mmcm/d for Moldova—via Ukraine as a "test" shipment, compared to its normal volume of 300 mmcm/d.
Naftogaz has confirmed that it had received a request from Gazprom to transit this gas, and initially reported that it was pumping gas to Europe, putting the matter squarely in the hands of the international monitors to ensure that supplies are transported via Ukraine's gas transit system (GTS). Yet, with no new deal in place to supply gas to Ukraine itself, owing to the companies' dispute, this test shipment has already generated a new controversy. Gazprom officials stated their expectation that the full volume of gas pumped into the GTS would exit the other side of Ukraine, and the Russian gas giant clarified this morning that there should be no delay in gas being received in Europe. However, Naftogaz has said repeatedly that it needs some 21 mmcm/d of "technical" gas in order to operate the GTS, including maintaining network pressure and pumping stations. Naftogaz spokesman Valentin Zemlyansky noted that Ukraine is "forced" to take this gas since the company cannot bring gas from its underground storage facilities in the western part of the country for GTS operational needs in the east.
Gazprom spokesman Sergei Kupriyanov once again pointed out yesterday that, "under the existing contract [covering gas transit], the provision of technical gas is the direct responsibility of the transit agent. If Naftogaz Ukrainy cannot provide technical gas from its own resources, it has to buy it and not siphon it off illegally from transit volumes." Hence, Gazprom could accuse Naftogaz of "theft", as it did last week, but this time with confirmation from the international monitors that are now in place. Russia could then promptly use this evidence to blame Ukraine for the gas halt from the past week, but then what?
International Transit Consortium Needed
Gazprom's attempt to prove that Naftogaz has been "stealing" gas will not endear it to Europe if it halts gas exports again—even if Ukraine is seen as the guilty party. It may allow Gazprom to claim the upper hand in negotiations over a new price and supply deal for Ukraine, but could undermine Russia's reputation as a reliable supplier. Another solution, as Kupriyanov mentioned, is for Naftogaz to buy gas that it needs to operate the GTS either from Gazprom or from the intended European customers of the gas.
An altogether different solution—one that might prove more beneficial in the long term and could serve as a greater guarantor of gas transit via Ukraine—is a formation of an international gas transit consortium to manage and operate the GTS. This idea is hardly new— a trilateral agreement between Russia, Ukraine, and Germany was signed in June 2002, but Ukraine's delaying tactics left this for dead—but in the context of the current crisis, a potential consortium is likely to gain in currency. Indeed, it would give Russia added confidence in the stability of its gas exports while giving the EU additional trust in the secure transit and delivery of its contracted Russian gas imports via Ukraine.
Although the Ukrainian government has stridently opposed any proposal that would allow for any erosion of its full state control over the GTS (and thus Ukraine's leverage over Russia's gas exports to Europe, 80% of which currently flow via Ukraine), recent events, together with the still-unresolved Gazprom–Naftogaz dispute, will put heavy pressure on it to reconsider. Actual evidence of Naftogaz's 'stealing' of transit gas will give Gazprom additional negotiating power in arguing that Ukraine should pay a price equal to European netback prices for gas imports, while the EU could itself step up the pressure on Ukraine to relent to allow for a new international GTS consortium, perhaps as part of an EU-brokered Gazprom-Naftogaz gas supply deal and a new gas transit deal to replace the existing agreement.
The make-up of a potential international transit consortium to operate Ukraine's GTS is still very much a matter for discussion, but even Ukraine's opposition politicians have begun to open up to the idea. Former fuel and energy minister Yuriy Boiko, a member of the opposition Party of Regions (PoR), suggested last year that Ukraine ought to consider a partial privatisation of Naftogaz Ukrainy, including the GTS, as a way of putting the cash-strapped state firm on a better financial footing, but any decision to privatise, even partially, Naftogaz or its GTS would require a change to legislation passed in 2007 prohibiting such a move. Still, Ukraine is likely to face additional pressure to make concessions on a new price and supply deal with Gazprom once there is concrete, independent evidence of "gas theft" for technical purposes, and the formation of an international transit consortium involving the EU (and/or European gas firms), Naftogaz, and Gazprom could help to ensure the stability of gas transit via Ukraine into the future.
Outlook and Implications
It remains to be seen how exactly Gazprom uses its added leverage in the bilateral commercial dispute with Naftogaz once it proves the latter's gas "theft". Perhaps knowing that it would be caught out in this regard, Naftogaz appears to have blocked transit altogether after Gazprom resumed gas shipments today, calling the current transit agreement "unacceptable", while reports emerged that independent access to metering stations was being hindered. Ukraine's actions appear to be something of a desperate attempt to avoid being characterised as the guilty party while seeking to force a renegotiation of the existing transit agreement in tandem with any new talks on a bilateral gas supply deal.
Although Gazprom may feel it has the upper hand now, the Russian gas giant's own long-term interests in being seen as a reliable supplier would be best served by the company using this episode to argue its case for charging Ukraine higher prices for its gas supplies. Europe, in the interest of avoiding renewed disruption, may be more sympathetic to Gazprom's argument in view of independent confirmation of Ukraine's gas syphoning (or at least evidence of Ukraine blocking a resumption of gas transit), but any pressure on Ukraine to pay more should be offset with pressure on Gazprom to renegotiate the existing transit deal with Ukraine.
Russia has expressed a willingness to pay more for transit services to Naftogaz, and a deal in principle to eliminate intermediaries in the Russia–Ukraine gas trade has established the parameters of a potential deal to restart gas supplies to Ukraine itself. This is key to ensuring the stability of gas transit via Ukraine to Europe, but higher prices (at least in the short term) for Ukraine's own imported gas supplies could spell additional trouble down the line, particularly if Naftogaz again begins to accumulate arrears. The firm avoided a loss in 2007 only with a US$2-billion subsidy from the government, and Naftogaz only avoided a default at the end of 2008 with the help of additional loans from state banks.
With the Ukrainian economy in a tailspin, there is a strong likelihood that, unless the dynamics of its relationship with Gazprom change dramatically, Naftogaz will rack up further losses on higher gas import prices (and continued regulated domestic gas prices) in 2009. Thus, the state-owned firm will hardly have the spare cash needed to invest in the overdue maintenance and renovation of the GTS to ensure stable deliveries of Russian gas to Europe in the future. A different approach to Ukraine's knee-jerk determination to retain total control of Naftogaz and its GTS is needed; one solution is that international monitors in place now give way to an international consortium to operate and manage the GTS to ensure stable gas transit.
Russia – Ukraine - Europe: 12 January 2009: Europe Remains Hostage to Russia-Ukraine Dispute as Gas Transit Restart Still On Hold
Russia - Ukraine- Europe: 9 January 2009: Resumption of Gas Flows via Ukraine Expected Following Russian Agreement on Deal for Transit Monitors
Russia - Ukraine: 8 January 2009: Ukraine Consents to EU Monitors on Gas Metering Stations; International Pressure Builds for Russian Gas Restart
Russia - Ukraine: 7 January 2009: Why This Could Be the Last Russia–Ukraine Gas Price Dispute
Ukraine - Europe - Russia: 6 January 2009: Gazprom Retaliates Against Alleged Ukrainian Gas Theft by Slashing Exports; European Consumers Feel the Pinch
Ukraine - Europe - Russia: 5 January 2009: Russia, Ukraine Trade Accusations in Gas Dispute as Europe Suffers Supply Shortfalls
Ukraine - Europe - Russia: 2 January 2009: Gazprom Cuts Gas to Ukraine in Absence of New 2009 Price Deal; European Supplies Unaffected
Ukraine - Europe - Russia: 31 December 2008: Naftogaz Claims Arrears to Gazprom Paid Off; Russia, Ukraine Look to Clinch 2009 Gas Price Deal
Ukraine - Russia: 16 December 2008: Debt-for-Equity Deal Could Resolve Ukraine's Gas Woes, Avoid New Gas War with RussiaUkraine - Russia: 21 November 2008: Gas War Revisited? Russia Demands Payment of Ukraine's Gas Debt, Gazprom Threatens Significantly Higher Prices