Ukraine, Russia, EC gas transit talks fail to bring results

Author: Aura Sabadus

2019/10/28

BUCHAREST (ICIS)--The European Commission has urged Ukraine and Russia to step up bilateral discussions in the upcoming weeks following “disappointing” trilateral talks over the future of Russian transit to Europe on Monday.

Speaking shortly after discussions concluded in Brussels, Maros Sefcovic, vice-president for Energy Union, said parties failed to agree on key issues linked to the signing of a long-term agreement for the transit of Russian gas to Europe via Ukraine, once the existing contract expires on 31 December 2019.

Sefcovic said he had hoped the two parties and the European Commission, as a mediator, would arrive at a common understanding regarding the volume of transit gas, the duration of the contract and the signing of an interconnection agreement that would cover both long and short-term transit.

However, he added: “Unfortunately, I have to say I am disappointed by today’s outcome and I say this very openly. […] I understood that for Russia it is very important to find a solution to the Stockholm arbitration with Ukraine.”

Ukraine and Russia are involved in an $11bn arbitration lawsuit that would compensate Ukraine for the loss of transit as well as an enforcement claim by Naftogaz for $2.56bn against Russia’s Gazprom.

Last year, the Stockholm Arbitration Tribunal ordered Gazprom to make a net payment of $2.56bn to Naftogaz for underdelivered transit gas, which Naftogaz is currently fighting to recoup (see separate story).

In a statement to the press, Naftogaz said: “The Russian side has not yet submitted any official proposals to resolve the outstanding issues.

“It is impossible to talk about any “package solutions to all problems”, including the issue of Gazprom’s debt settlement by the Stockholm arbitration. We look forward to the next communication.”

Naftogaz echoed the commission’s position regarding the need to sign a long-term transit contract for a period of 10 years, with a walkaway clause after five years.

The volumes should be between 40-60billion cubic metres per year, with an additional flexibility of 20-30bcm/year.

Sefcovic said the parties would now have to discuss at bilateral level before a new round of trilateral talks is set in November.

NO PLAN B

Ukraine is battling to secure a long-term transit contract to ensure a steady stream of revenue. Under the existing transit contract which expires on 31 December 2019, Ukraine has been raking in some $3bn annually, or just over 2% of its GDP.

Earlier in October, Klaus-Dieter Borchardt, deputy director at the directorate general of energy, said the commission was excluding a plan B during trilateral talks with Ukraine and Russia, as it considered that it was in the interest of the EU, Ukraine and Russia to sign an long-term transit agreement.

In order to clinch a long-term agreement, Ukraine needs to satisfy both the commission and Russia that it complies with EU rules.

This means it needs to set up an independent, certified transmission system operator and ensure that capacity is booked under EU rules.

Transmission tariffs would also have to be set according to a methodology aligned with the EU’s network. The certification deadline is 17 December 2019.

UNBUNDLING

Last month the Ukrainian government agreed to unbundle the grid operator based on the independent system operator model (ISO).

Up until now the transmission operation and assets had been placed by the state under the umbrella of Naftogaz.

The new grid operator – Gas TSO of Ukraine – filed an application for certification to the regulator NERC earlier in October. The Energy Community Secretariat, a body that helps non-EU member states align energy legislation with the bloc, has been working against the clock to examine the documents and ensure the operator’s compliance with EU regulations including the Third Energy Package and the network code on interoperability.

Once the unbundling and certification are conducted, NERC would have to take a certification decision that effectively acknowledges the process.

TARIFFS

On the other hand, Ukraine also needs to publish its transmission tariffs and calculate them at a level where they are not only attractive for Gazprom or any other company looking to transit gas, but also competitive enough to allow the TSO to recover costs.

The methodology for the calculation of the tariff has been discussed throughout the summer and NERC still needs to approve it.

NERC PROBLEMS

Even though the Energy Community, the government and Gas TSO of Ukraine may have been working against the clock to abide by tight deadlines, their efforts may be thwarted by the fact that two board members of NERC left their positions earlier in October.

This means that the NERC board may not find the necessary quorum to ensure that critical regulations are passed.

SHORT-TERM TRANSIT

Although Russia is pressing to divert volumes currently transited via Ukraine to its own Nord Stream 2 and TurkStream projects, it may be hard-pressed to do so as the projects are unlikely to be commissioned the day after the expiry of the contract.

Even so, Russia may be unlikely to book annual capacity because the deadline for capacity booking under EU rules has expired.

It may opt to book monthly or daily capacity, instead, but tariffs for short-term capacity may be more expensive.

A market source close to discussions said failing that, Gazprom may opt to withdraw gas from storages across Europe, noting that the large volumes which had been injected throughout the past months may help to tide it and other companies over in case of a longer cold spell.