Former Soviet Gas Transit States: Pushing & Pulling

Gas transit disputes like the ones in 2006 and 2009 between Russia and Ukraine are not likely to happen again anytime soon.

So says Katja Yafimava, a Research Fellow at the Oxford Institute for Energy Studies (OIES), Natural Gas Research Program, who recently authored a book entitled The Transit Dimension of EU Energy Security, which looks at the transit dimension of EU energy security, specifically as it is related to gas transit issues between Russia and transit countries.

“If you look at all the transit countries – Ukraine, Belarus, and Moldova – there is one common factor for all of them: that they’re all transit territories for Russian gas into Europe, Ukraine obviously the most important, and also all of them are purchasers of Russian gas, which they are heavily dependent upon and they don’t really have any gas from elsewhere, with the exception of Ukraine, which was getting some gas from Central Asia.

“This means, on one hand, that those countries are very much interested in maintaining secure transit at high volumes because that’s where they’re getting their transit revenue from and they’re also dependent on Russian gas and obviously want to have a better price for it and have attempted to use their transit status as a negotiating tool to secure better prices and obviously sometimes that worked and sometimes it didn’t,” she continued.

This left Ukraine in a particularly precarious position, according to Ms. Yafimava, who said that Kiev had not achieved much success in its pleas for a lower natural gas price from Moscow.

Of Ukraine, she explained, “They’ve got the Black Sea deal that resulted in a 30% reduction in price in 2010 but still now it’s quite a high price, and they haven’t been able to do much more than that and there is no sign of agreement to create a consortium between Russia and Ukraine with or without European participation to own and manage their transportation network in Ukraine.”

Despite a theoretically more Moscow-friendly government in Kiev, she said there was still no substantial improvement in their gas relationship.

“In many ways the (former Prime Minister) Yulia Tymoshenko government was a pragmatic one. In certain aspects, gas issues were put on a more commercial and less politicized footing during her premiership,” recalled Ms. Yafimava.

(Incidentally, last October Ms. Tymoshenko was sentenced to prison on charges of abuse of office while conducting natural gas negotiations with Russia.)

Did the initiation of pipeline projects like Nord Stream and South Stream indicate that there were irreconcilable differences between Russia and its former gas transit partners, like Ukraine?

“Nord Stream has been planned and projected for quite a long time,” said Katja Yafimava. “It’s a new pipeline that’s been in the works for some time and was certainly viewed as a pipeline to avoid transit issues with Ukraine and Belarus.”

That, she said, was not the first “transit avoidance” pipeline as far as Russia was concerned.

“If you think about Blue Stream, a pipeline going straight across the Black Sea into Turkey, we could consider that the first transit avoidance pipeline, together with Yamal Europe pipeline, which goes across Belarus. When Gazprom built that pipeline, it actually also was a transit avoidance pipeline away from Ukraine, when Belarus was perceived as a reliable transit country. That’s changed, following their dispute in February 2004,” she reported.

The balance had indubitably been changed because of Nord Stream’s share of the gas volume and scalability of the project, and the participation of numerous international energy companies.

“Because it’s total capacity is two streams – 55 bcm – that’s half of the volume that goes via Ukraine, giving shareholders a lot of flexibility in terms of which route to send its gas.”

As for South Stream, she noted that it was a very expensive project.

“Russia’s going to start building it pretty soon and by 2015-16 there’s going to be a string of it, but as far as I understand there hasn’t been a final investment decision on it.

“It’s a very expensive pipeline, it’s very difficult and challenging technologically and there are also issues of whether that much extra capacity will be needed and when it will show returns, considering the gas demand in Europe,” she explained.

“So it’s a very questionable case, but it’s also essentially a pipeline to induce transit dependence simply because the relationship, particularly between Russia and Ukraine, has proved impossible to work out, as all these disputes demonstrated."

Had they been able to build a better relationship with Ukraine as a transit country, South Stream really wouldn’t be necessary, according to Ms. Yafimava, but because Ukraine was perceived as not really reliable, despite the fact that there was a lot of technically free capacity and the possibility of relatively inexpensive upgrades to the Ukrainian transit infrastructure that could be made, because it proved impossible to smooth out relations, all those transit avoidance projects stood a good chance of being built.

“If South Stream is built, Ukraine’s position is really not enviable, because then it would be possible to reduce transit across Ukraine dramatically turning it Ukrainian into a transit route of last resort. With Nord Stream already in position, because the share of volume that could be sent via Ukraine is increasingly via Nord Stream when it’s working at full capacity.”

She said that new gas transit routes had really relieved the pressure and undercut the importance of transit countries such as Ukraine and Belarus.

“Because essentially Gazprom now gets the possibility of choosing via which route to send its gas into Europe. So that was a big problem in the past, but I believe it will be much less of a problem, at least as far as transmission of Russian gas into Europe is concerned,” said Yafimava, who added that it was questionable whether Ukraine would want to find a solution with Gazprom, but the Russian side was exasperated with their relationship over the last 20 years.

Ukraine, she said, could be left out in the cold.

“Ukraine has nowhere else to get its gas from, apart from Russia, for the reasons of price and infrastructure constraints,” Ms. Yafimava explained. “It still has a long term contract with Gazprom until the end of 2019, unless they manage to renegotiate. It’s tough to see where Ukraine could get its gas from and at another price.

“There’s a lot of talk in Ukraine about increasing domestic production, which has proved unsuccessful so far – it’s pretty much flat if not declining. There’s also a lot of talk of constructing an LNG terminal in the Black Sea, but that’s really expensive, requires equity, a regulatory framework, lots of investment. I don’t believe these will materialize in the next 10 years.

“So it’s quite difficult because they’re still very much dependent on Russian gas, but their ability to secure better prices is actually limited much more than it was before – not a great position to be in,” opined Katja Yafimava.