Why Build When You Can Renovate?
Ukraine is attempting to move forward a proposition that its natural gas transport system, and not the development of the South Stream pipeline project, is the most efficient route to deliver Russian and central Asian gas to Europe.
“We assure the Russians that the "South Stream" is simply not needed. What a waste of money and creating additional environmental problems - and not just environmental - in the Black Sea basin,” commented Ukrainian Foreign Minister Konstantin Grishchenko.
However, Ukraine is in an all-round poor situation when it comes to its relationship with Russia over gas supply.
The country’s gas transit infrastructure requires significant upgrading and investment.
With its economy is in shambles, Ukraine doesn't have the money to modernize its grid and requires outside investment. Recently, Ukraine's President Viktor Yanukovych traveled to Berlin in hopes of persuading Germany to play a key role in the modernization.
Minister Grishchenko's pitch comes as Ukraine and Russia are in discussions over gas supply matters, including renegotiation of the formula used to price gas shipments to Ukraine and the terms of a proposed venture between their respective gas monopolies, Naftogaz Ukrainy and Gazprom.
The gas price paid by Ukraine under the current agreement between the countries is tightening the noose on a gasping economy and Ukraine is pressing Russia for relief.
Russia has said it would drastically reduce its export gas price for Ukraine, if Gazprom were allowed to merge with Naftogaz Ukrayiny. In the case of a merger, “the gas could be delivered to the population of Ukraine … at a price at which gas is delivered to the Russian households,” said Gazprom Chief Executive Officer Alexei Miller.
The difference in pricing is vast. Russian customers pay around $60 for 1,000 cubic meters of gas, while the present price to Ukraine is around $230 per 1,000 cubic meters.
However, it is unlikely that Ukraine's parliamentarians would agree to a merger amongst unequals, as Gazprom dwarfs Naftogaz Ukrayiny as a commercial venture.
Russia’s South Stream project would bypass Ukraine. At present, the Naftogaz distribution system ships about 80 percent of Russia’s gas exports to Europe through its pipelines, so South Stream would significantly impact volumes crossing Ukraine. A Gazprom merger with Naftogaz would give Moscow control of distribution of its gas to Europe.
Foreign Minister Konstantin Grishchenko ‘s proposal suggests that Russia upgrade the Ukrainian pipeline system, thus eliminating the need for South Stream (and for gas to bypass Ukraine).
Gryshchenko admits there is a political component to the negotiations. "There are always compensators for any particular deal in the field of either transportation (or) economic cooperation," he said.
But Grishchenko said Ukraine would not enter into an "unjust and inequitable" agreement with Gazprom.
It’s hard to see how Ukraine will avoid such an outcome; leverage on its side appears to be sorely lacking.