Ukraine Gas Transit Talks Leave Questions: Update

(Adds comments from EC, details throughout)

Ukraine gas transit talks between Ukraine and Russia and the European Commission in Brussels September 19 were productive but inconclusive, Naftogaz Ukrainy said in a statement at the close of business that day. Further talks are planned for next month.

The three sides had discussed terms and conditions for using the transit capacity of Ukraine's gas transmission system (GTS) after the expiration of the current contract between Naftogaz and Gazprom. They met after a lengthy hiatus caused by presidential elections in Slovakia – in which the energy union commissioner Maros Sefcovic was a contender – and in Ukraine. 

As well as Sefcovic, the two countries' energy ministers and the two companies' CEOs were present; and also the Ukrainian energy regulator and the head of Ukraine's gas transport business. Sefcovic said the Ukrainian energy regulator gave a "clear explanation how EU legislation would be transposed, what it would mean for the tariff setting according to EU methodology under a future contract."

Ukraine owns the national pipeline network and is keen to see it used as fully as possible, to bring in revenues. But its biggest customer by far is Russian state Gazprom, which is building alternative routes to deliver its gas to Europe and Turkey. And the ten-year transit agreement ends at midnight December 31, putting pressure on the sides to reach an agreement.

Naftogaz said the Russian side was showing more willingness to accept the modern regulatory framework for gas transmission via the Ukrainian system than it had before. Earlier September 19, Naftogaz said a government resolution would see Naftogaz' transmission business separated from trade and supply, in a new unbundling attempt later this year. That would see the European network codes that govern capacity being the means for setting the tariffs, replacing the present dollars/m³/km system. Sefcovic said that Gazprom, as a major seller of gas in the EU, had experience of pipeline regulations and tariffs.

The Ukrainian pipeline operator, for now still part of Naftogaz, handed over a draft interconnection agreement and a draft standard transmission agreement to the Russian side. Naftogaz, for its part, provided the Russian counterparts with a road map for the completion of the TSO unbundling, it said.

The parties also outlined the issues where no common position has been reached so far and agreed to continue the discussion in October. There were no further details. Still uncertain is the amount of gas that Gazprom will need to send through Ukraine, and for how long: Nord Stream 2 is waiting for Denmark to approve a route through its exclusive economic zone. Time is running out if Gazprom is to complete the pipeline, pressure it up and commission it, in time for January 1.

Sefcovic said that "concerning the duration of a future contract, volumes and the tariffs setting, we have had convergence of minds. We need an agreement on all three elements, as they are interlinked. The volumes are key for the tariffs setting. The duration of a future contract is important for investment into the Ukrainian transit system. For Ukraine, well-functioning transit with volumes for EU consumers is the most important issue. Russia puts emphasis on direct sales to Ukrainian consumers. These issues are to be discussed." On the positive side, he said, European storage is 96% full.

And Gazprom still owes Ukraine money following a lengthy court case at the Stockholm commercial court. CEO Alexei Miller said that the judgment, that obliged it to pay Naftogaz several billion dollars, was asymmetrical as the fundamental market changes that had allowed Ukraine to fall short on its take or pay gas purchase contract did not also allow Gazprom to send less gas through Ukraine for which it had to still pay as if it had.