Ukrainian Gas Transit : A New Approach for a New EU Commissioner

The 60bn m³/yr, 10-year Ukrainian gas transit contract as offered by the out-going EU energy commissioner has little if any chance of being implemented. The Russian buyer of Ukrainian transit services, Gazprom, could, once the interconnection agreement is signed, nominate volumes on a short-term basis without the need of a long-term contract. So, the designated energy commissioner Kadri Simson will need to take a fresh look at this problem.

She needs to come up with a solution that benefits Europe, Russia and Ukraine. So instead, the total 600bn m³ transit fee could be recovered differently. I believe that a contract stating that Russia is entitled to ship or pay 600bn m³ over a 20-year contract has a better chance of suiting Gazprom. It would allow Gazprom to benefit from increased flexibility and to use Ukraine transit higher from Jan 2020 until / if Nord Stream 2 is fully used. And beyond, if EU gas demand grows. After 600bn m³ of transit the contract may be renegotiated.

On top of the volumetric fee, a minimum annual fee should be included to guarantee Ukraine some minimum revenue. Russia could prefer a shorter time frame like a fixed, non-renegotiable 60bn m³/yr five-year contract while Ukraine might prefer the old EU proposal hoping for higher revenues, but both have to be more flexible in the present energy transition period, just like everyone else. Such a contract could effectively benefit all parties:

• Ukraine and the EU can claim that the Ukrainian transit is to be extended for an additional 20 years while Russia could also claim victory as stating that this is “only a 30bn m³/yr contract”
• Europe has better security of supply at no extra cost.
• Ukraine can plan to adapt its gas grid for the future.
• Gazprom has time to finish TurkStream onshore section 2 (and perhaps Nord Stream 2).
• Gazprom has added flexibility to mitigate any supply shortfall from competitors.
• And January 1, 2020 passes uneventully, which would be good for future EU energy mix and avoid far-reaching geopolitical consequences…

The difficulty will then be in the pricing of the service and the minimum annual fee. The unbundling of Naftogaz will help experts to access the true cost of transit. Gazprom and the new Gas Transmission System Operator of Ukraine will have to sit down and iron out any difficulties. And smart lawyers can come with many different options to solve the pricing equation once the concept has been agreed on a political level.

So once the interconnection agreement is finally signed, the new energy commissioner should put this innovative solution on the table. If signed this should bring her many positive points:

• A success in one of the trickiest and high profile challenges where gas is concerned, showing straight away that she is in the driving seat and able to deliver;
• No worries about day-to-day security of supply, leaving this task to the industry, allowing her to concentrate on the drafting and implementation of the European Green Deal while focusing on the broader definition of the solidarity concept provided by the European Court of Justice after the recent Opal decision[1];
• No time wasted on useless winter packages that have proven not to be an efficient way to use EU taxpayers’ money, allowing her to focus on delivering on her mandate on gas[2];
• A policy signal that gas is needed for the next 20 years, leaving the market to provide the cheapest molecules as this industry needs to move away from a rent seeking to an economically driven business. 

Thierry Bros

14 October 2019

Advisory Board Member, Natural Gas World