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Ukraine, EU hold natural gas roundtable boycotted by Russia

07 May 2013 19:16:39 | esgm

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EU representatives and Ukrainian officials held a roundtable discussion on Friday to discuss the future of the transit country's natural gas market. A Russian delegation, however, was absent.

Ukraine has been actively seeking to diversify its sources of supply while it is in danger of losing its transit business as Russia diverts flows via the Nord Stream pipeline.

The roundtable in Brussels was attended by representatives of the European Commission, Ukrainian incumbent Naftogaz, banks, parties representing the gas industry, and the Slovak system operator, Eustream.

Russia, however, declined to send any representatives to the meeting. Gazprom would not comment on it when contacted on Tuesday by ICIS.

However, Gazprom representative Sergey Kupiyanov had said on 24 April that the Russian company was planning to clamp down on the "opaque" paper transactions in which Ukraine has been involved.

"If [Gazprom's] transit gas is being used for virtual reverse, it is a direct violation and those involved will be held accountable," Kupriyanov said.

"We are convinced that serious European companies will not participate in dodgy gas transactions with Ukraine using Gazprom gas that does not belong to Naftogaz."

Long-term strategy

EU documents shed little light on the tangible results of the roundtable meeting, which recognised that, if Ukraine wants to expand from being simply a transit country to become a gas trading and storage hub, it will have to develop an effective long-term strategy for the use of its transmission and storage assets.

The roundtable also recognised that Ukraine needs to implement a transparent and stable legal and regulatory framework in line with its Energy Community commitments if it is to move its gas sector forward.

It was agreed at the meeting that a priority is to ensure bidirectional physical flows and virtual reverse flows at Ukraine's borders, with the emphasis placed on facilitating flows between the Ukrainian and Slovak transmission system operators.

Reversed flow options

Until now, Ukraine has managed to take reverse flows of gas from Germany-based gas supplier RWE via Poland at Drozdowicze and via Hungary at Beregdaroc,. Arranging reverse flow at Vel'lke Kapusany on the Slovak-Ukrainian border is likely to be a more complicated matter, however.

The system points at Drozdowicze and Beregdaroc are essentially small border crossings to which Gazprom sends modest gas volumes through Ukraine for their respective countries' incumbents. There are no other parties operating at the two points and reversing gas flow - both physical and virtual - is a matter confined to the local parties.

But that is not the case at Vel'ke Kapusany. It is the delivery point for numerous Gazprom contracts with many European shippers. It is also the location for numerous title-transfer operations all requiring the involvement of at least three parties - Eustream, Gazprom and the relevant European shipper - so the Russian company would need to give at least tacit agreement to any virtual reverse flow operations at that border point.

Meanwhile, with respect to the possibility of physical reverse flow between Ukraine and Slovakia, there are five pipelines at Vel'ke Kapusany, all of them interconnected, which ICIS understands cannot be reversed without investment in pipeline infrastructure.

Indeed, Eustream conducted an open season at the end of last year regarding physical reverse flow, at the end of which it reported no market interest at all.

Naftogaz reform

Gazprom and Ukraine have, however, been discussing the formation of a consortium to refurbish and operate the dilapidated Ukrainian transit system.

Current Ukrainian legislation bans the sale of state-owned gas pipelines in the country, while Gazprom is unwilling to make an investment in the refurbishment of a system it does not control.

At the end of April, however, Ukrainian deputy prime minister Yuriy Boyko suggested that, if the Ukrainian government receives a guarantee of gas transit volumes, a 50/50 joint venture could be established to operate the Ukrainian gas network currently managed by Naftogaz subsidiary Ukrtransgaz (see ESGM 29 April 2013). Elizabeth Stonor

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