Ukraine gas market should focus on three goals to build on success - ERU

Author: Aura Sabadus

2020/09/29

BUCHAREST (ICIS)--Ukraine will have to focus on three key projects as it seeks to expand its interconnections with neighbouring countries and take advantage of regional LNG opportunities, the managing partner of one of Ukraine’s top private importing companies said.

Speaking to ICIS, Yaroslav Mudryy said the domestic gas sector had beaten all expectations in the way it transformed from a non-existent market five years ago to one that now boasts active competition, transparent pricing and is attracting numerous foreign companies.

However, to build on its success, Ukraine will not only have to retain its predictability and abide by the highest European rules, but also focus on three concrete objectives.

THREE GOALS

Firstly, Ukraine would need to guarantee firm exit capacity from Hungary to ensure smooth access to LNG imports via the Croatian terminal.

Currently, there is physical interruptible capacity of 20 million cubic metres/day and up to 92mcm/day of virtual capacity.

The Ukrainian gas transmission system operator GTSO would be keen to offer firm capacity and may work with its Hungarian counterpart FGSZ to finance it themselves, GTSO told ICIS.

A second important step for Ukraine and the region would be for GTSO to sign an interconnection agreement with Romanian grid operator, Transgaz, for the Mediesu Aurit interconnector.

The border point links the two countries directly and would allow Romanian companies to inject gas in Ukrainian storages as well as tap volumes sourced in central Europe and imported via Ukraine.

ERU was the first Ukraine-based company to test spot gas export to Romania, but it did so via the Trans-Balkan pipeline which crosses Moldova.

Mudryy said that by signing an interconnection agreement for the Mediesu Aurit point, which connects northern Romania to southern Ukraine, companies in both countries would ship gas without additional transmission costs via Moldova.

Thirdly, Ukraine should continue offering short-haul to companies which are interested in injecting gas in domestic storages, noting that the service - which was introduced by GTSO earlier this year - has helped Ukraine to attract record interest from foreign companies. Since the beginning of the year, some five billion cubic metres (bcm) of gas were short-hauled into Ukraine, with 2bcm imported just in August.

The three objectives would help Ukraine to expand its connections with regional markets in central Europe as well as in south-east Europe, he said.

Apart from testing natural gas exports to Romania, ERU also pioneered other deals such as becoming the first Ukrainian company to import gas sourced as US LNG via Poland last year or gas imported in reverse flow from Greece via the Trans-Balkan line this summer.

NEW CORRIDORS

Mudryy said the more recent Greek import was not related to LNG, noting that the company’s intention was to import gas sourced on the Greek VTP and shipped in reverse flow via the Trans-Balkan line.

“This new gas transmission corridor Greece-Romania-Ukraine gives us an opportunity to become a part of the European Three Seas Initiative, developing the vertical direction of fuel transfer. Traditionally, gas and oil are exported from the East to the West, but our partners are interested in a new, unconventional approach, especially with the opening of the opportunity to import LNG to Europe, and we help them in this,” he said.

Mudryy said the Trans-Balkan corridor, which had been historically used to transit Russian gas from Ukraine to Greece and Turkey via Moldova, Romania and Bulgaria, was full opportunities, but also rife with barriers.

The Russian transit was diverted to the new TurkStream corridor linking Russia to Turkey via the Black Sea at the beginning of the year, which meant that countries along the route were expected to sign individual interconnection agreements.

However, he said such documents were still missing at certain borders such as between Bulgaria and Turkey, which meant that the corridor was not fully usable.

Both Greece and Turkey are major LNG importers and could become regional gas exporters, including to Ukraine.

Currently ERU is planning to sign transportation agreements through Bulgaria and get ready for new flows, Mudryy said.

The managing partner pointed out that there were also difficulties linked to the Ukrainian market. He said the domestic market was still focused on short-term trading, primarily month ahead, which meant that it was difficult plan longer-term LNG deliveries.

“Plus, at the moment due to the situation on the global LNG market Ukraine is not the best destination from an economic standpoint. Having said this, we are in constant discussions with our partner [Polish incumbent] PGNIG regarding additional deliveries of LNG and hope it can happen again soon.”

GROWING TRUST

Speaking about the long-term prospects of the Ukrainian gas sector, Mudryy said the market was already inspiring trust from European and US partners, noting that its growing role as a storage hub and increasing integration with the region through corridors such as the Trans-Balkan line would also enhance that position.

He pointed out that thanks to growing international trust, ERU has been able to increase its 20-year political risk insurance from the US’ International Development Finance Corporation, a federal institution, from $38m to $100m.

“It is a strong signal of support from the US Government for the development of the Ukrainian gas market and the creation of the new independent transmission system operator in particular; [the] insurance allows us and our financing partners to mitigate country risk which lowers costs of funds as one of the key component for success on the Ukrainian market and allows us to significantly increase traded volumes as well as usage of Ukrainian storage,” he said.