Ukraine Gas Shut-off: Timing a Blessing and a Curse

In light of the announcement 10 days ago that Russia's Gazprom had shut off deliveries of gas to Ukraine, and the Russian side demanding pre-payment from Ukraine's Naftogaz going forward, countries in Central and Southeastern Europe that receive Russian gas via the pipeline running through Ukraine find themselves in a precarious state: even though there's not a gas crisis now in summer, it is difficult to know how well prepared they are if the situation persists until this winter.

“It's a blessing that we are in the middle of the summer and Hungary as well as Ukraine's gas consumption is much much lower than it would have been in the winter,” says Anita Orbán, Ambassador-at-Large for Energy Security, Ministry of Foreign Affairs of Hungary. “It's a curse at the same time that the timing may give us the false perception that we can handle the situation.”

She explains, “If the whole supply of Ukraine is not solved, obviously with the supply cut to Ukraine the time is ticking and it will erupt some time in the fall, whether early or late then it remains to be seen. Thats why a sense of urgency to solve the situation is very important, to prepare for the winter, and will remain despite the fact that on the surface nothing is happening.”

That's why she says the timing is both good and bad, but adds that there is still time to prepare for the winter and also get the spatting sides to the table to hammer out an agreement.

In the short-term, she says, countries in CEE must fill their gas storage facilities, which is what is happening in Hungary, although it is at a low level at the moment. Ms. Orbán reports, “We are now in the middle of the filling up season, so there is still time to fill it. This is an essential tool to prepare for any potential crisis.”

According to her, the region is arguably much better off than at the time of the 2006 and 2009 cut-offs of gas supplies to Ukraine, which left some countries out in the cold. “The question is, were these investments enough, or still short? If the aim is to have a robust internal market, obviously they are short of having that, because we are missing key reverse-flows. Just for Hungary we are missing the Romanian-Hungarian, Croatian-Hungarian and we are still missing other critical regional interconnector infrastructure as well as a lot of policy and regulations which are not in place.”

She recalls that after 2009 countries affected by the gas shut-off reacted in different ways in preparing for potential new supply cuts. “One of Hungary's decisions was to invest in the gas storage system as well as invest into interconnectors. Poland decided on the Świnoujście LNG terminal, investing into a brand new alternative, even though LNG at the moment may be pricier.”

There is now an increasing amount of work going on at the EU level to boost the regional storage situation, in order to come up with a more coordinated approach, she says.

“If you look at countries in south-eastern Europe some don't even have storage, while others have disproportionately high storage compared to their consumption. So one conclusion at the regional and EU levels is that we need to work more closely to coordinate policies towards utilizing existing storage capacities at the regional level,” explains Ms. Orbán.

All of that said, it is very difficult to say whether countries like Hungary have their natural gas needs covered this winter given the multitude of factors involved, like how much gas Ukraine has in their storage.

Before winter, says Ms. Orbán, Ukraine typically has 20 BCM of gas in storage to be able to facilitate winter supplies of natural gas; would Ukraine itself use that gas or send it further on? And, if supplies were cut, any disruptions to gas flows for CEE would depend on the extent of that supply cut. How much gas is being stored in western Europe is also a factor, as is how cold it gets this coming winter.

Those countries would take the greatest hit that have the fewest alternatives to supplies flowing through Ukraine, she says, according to various estimates.

“Hungary is prepared because of its Austrian-Hungarian interconnector, which is of pretty large capacity. In January we will have the Slovak-Hungarian interconnector operational, which has access to the German market.”

In regards to the European Commission's opposition to South Stream in light of the tensions between Russia and Ukraine, Ms. Orbán says that the EC's strategy on the issue was even evident before the Ukraine crisis: “It has been pretty clear: We need to apply the Third Energy Package to South Stream, and Hungary's position has also been very clear – it's among the countries which gave a mandate to the European Commission to negotiate bilaterally between Russia and the Commission the legal framework of how South Stream is built.”

Such negotiations began in January, she says, and the crisis escalated in the meantime.

She continues, “The new situation regarding this is the EC's communication which recommended the suspension of South Stream pipeline which came out in the middle of May.”

It remained to be seen what will happen, she says, following European Council meetings scheduled for 26-27 June.

“The position of all the countries along the route is that it is in their interests to have the South Stream pipeline as a new transit route with the European laws and regulations to be applied.”

These issues are all interrelated, says Ms. Orbán, “because only the energy aspect of the Ukraine crisis has multiple layers. The one on the surface is how much Ukraine will pay for gas and, based on that price, how much is owed to Gazprom.”

She adds that Ukraine's role as a transit country will also be an issue in the future. “If South Stream is built it may lower the transit role of Ukraine.”

For now, Ms. Orbán says that it is a question how much the events in Ukraine will help Europe to finish efforts like the North-South pipeline interconnectors or finalizing the internal market.

In terms of the Southern Corridor, given that the Trans Adriatic Pipeline (TAP) won out over Nabucco, she says Hungary's goal now is to get connected to TAP. “That's why we've announced the Aegean Baltic Corridor Project connecting the Visegrad 4 (V4) countries via Romania and Bulgaria to Greece via existing networks upgrades and interconnectors. This was discussed at a Foreign Ministerial meeting in February.”

To do this, she says, “all the missing links and infrastructure are on the list of the EU's 'Projects of Common Interest' making them eligible for funding and most of these projects are on the list of the European Commission as key missing infrastructure in Europe, so it's crystal clear what needs to be done.

“Via the Southern Corridor it can be Azeri gas, Mediterranean gas... the whole spectrum of Central Asia and Middle East gas to Europe,” says Energy Ambassador Anita Orbán.

Drew Leifheit is Natural Gas Europe's New Media Specialist.