Ukraine gas TSO ambitious vision linked to Russian pipelines outcome, CEO

Author: Aura Sabadus

2020/10/09

LONDON (ICIS)--The Ukrainian gas transmission system operator GTSO has approved its strategy for the upcoming five years, with investment plans amounting to hundreds of millions of dollars.

However, much will depend on the completion of two controversial Russian-led pipeline projects and a global trend towards decarbonisation, the CEO of GTSO told ICIS in an interview.

Sergiy Makogon said the company was currently working on 40 projects, most of them focusing on internal transformation, organisational design and optimisation of business process.

It also plans to invest some $1.5billion over the next ten years mainly in compressor stations and turning its transmission infrastructure, Europe’s most powerful, into an efficient network.

Nevertheless, the biggest challenge remains in setting priorities because much depends on collateral developments beyond GTSO’s powers of decision.

A real challenge is linked to Russia’s plans to complete Nord Stream 2 and the TurkStream-Balkan Stream corridor, both of which would wipe out any transit via Ukraine and divert it to different routes, he said.

NORD STREAM, TURKSTREAM

Although Nord Stream 2, a 55bcm/year pipeline which links Russia to Germany via the Baltic Sea is nearly complete, there is a tangible risk that the US may inflict further sanctions in its upcoming National Defence Authorisation Act (NDAA). US sanctions could hinder the completion of the €9.5bn project.

Similarly, Russia’s ambitions to ship gas to central Europe via the recently completed TurkStream 2 and its Bulgarian extension, Balkan Stream, could be shattered by the same US sanctions.

However, if both projects were to be successfully completed and brought online, the Ukrainian network, which has a capacity of 145bcm/year and could single-handedly transit 80% of Europe’s gas needs would have to be mothballed.

Even so, Makogon points out that despite Russia’s eagerness to divert transit to the new corridors, there are many risks.

He notes that Russia’s existing Nord Stream 1 pipeline had been prone to malfunctions, taking significant time to ramp back up.

He also says that TurkStream 2, the pipeline which now feeds the Balkan region after diverting volumes that had been traditionally shipped via the Trans-Balkan line and Ukraine, remains well underused.

For example, total Russian gas exports to Bulgaria, Greece and the Republic of North Macedonia amounted to 55TWh in the first nine months of 2019, but dropped 24% to 42TWh over the same period this year.

As new sources of natural gas are entering southeast Europe, either of Caspian origin imported via the southern gas corridor or the Black Sea gas produced in the offshore sections of Romania and Turkey or, as LNG sourced in Turkey and Greece, Makogon says the Trans-Balkan pipeline remains the most reliable transmission corridor.

This is because at 20bcm/year it is a powerful pipeline which thanks to recent upgrades can guarantee bidirectional flows fully integrating the region to include Ukraine, Moldova, Romania, Bulgaria, Turkey, Greece and the Republic of North Macedonia.

An Ukrainian company has already imported small volumes of gas from Greece into Ukraine and Makogon says there is already evidence that 1.5bcm could be exported with immediate effect along the same direction annually.

With further minor investments, the capacity could be raised to its near technical capacity of 20bcm/year, he said.

THE MOLDOVAN PARTNER

In fact, Ukraine and neighbouring Moldova have been working closely not only to ensure that Ukrainian and regional companies can ship gas along this route, but also for Moldovan companies to export volume into Ukrainian storages.

Some 12 companies hold transmission contracts with Moldova and the country’s incumbent Moldovagaz said exports to Ukraine already started on 1 October.

Makogon explained the two countries could explore a concept laid out by the Agency for the Cooperation of Energy Regulators (ACER) which recommends a “satellite market” approach.

Under the concept, the Moldovan gas market area, known as the ‘satellite’, does not maintain/establish its own gas hub, but co-uses the Ukrainian VTP/hub, also known as the ‘feeder market area,’ Makogon said.

The Moldovan market would retain an independent balancing system and the implementation of the concept is entirely the choice of the satellite, avoiding to impact the market organisation or operation of the feeder.

Makogon said: “The feeder has a positive influence though, benefiting from an increase in traded market liquidity. Thus, in the short-term, we will offer traders from Moldova to use Ukrainian commercial and technical infrastructure to get easy access to alternative sources of gas.

However, everything depends on the liberalisation of the Moldovan gas market. As of now, the only trader from Moldova registered in our systems is Moldovagas – the national incumbent.”

As Moldova is following in Ukraine’s footsteps, making important progress in aligning with EU rules such as starting cross-border capacity auctions, Makogon is keen to renew efforts in persuading neighbouring EU states Romania and Slovakia to apply EU rules on their borders with Ukraine.

Ukraine shares two interconnection points (IP) with Slovakia – Budince and Velke Kapusany – and no less than five interconnection points with Romania.

ONE MORE PUSH: ROMANIA AND SLOVAKIA

Both Slovak border points are covered by interconnection agreements with Ukraine, but GTSO has been pushing hard to persuade its Slovak counterpart and the local regulator, URSO, to merge the two and establish a virtual interconnection point (VIP).

GTSO says such a move would grant customers flexibility and help the TSO save technological gas and cut emissions.

Establishing such a VIP would in fact mean applying EU rules on the border, which Slovak stakeholders argue are not mandatory as far as they are concerned since Ukraine is not an EU state.

A similar position has also been adopted by the Romanian gas TSO, Transgaz, and the regulator ANRE.

Ukraine and Romania only hold one interconnection agreement for the Orlovka-Isaccea 1 IP on the Trans-Balkan pipeline.

However, Makogon is keen to expand these to the remaining three Isaccea IPs as well as to the Tekovo-Mediesu Aurit border point, some 700km away, which links northern Romania to southern Ukraine.

He has renewed his call on Romanian stakeholders to see merit in applying EU rules on the border with Ukraine and sign further interconnection agreements.

Makogon says the Tekovo-Mediesu Aurit border point would grant Romanian companies immediate and cheap access to Ukrainian storages as well as to central European hubs.

Makogon says the last ten months since GTSO was unbundled from the incumbent Naftogaz and established as an independent entity have proven fruitful as the company introduced numerous products such as short-haul or VIPs on borders with Poland and Hungary.

However, he stressed that the company’s success and that of the Ukrainian gas market as a whole would depend on their continued commitment to applying EU rules and aligning with good governance practices outlined by the Organisation for Economic Cooperation and Development (OECD).

These would be the only real safeguards against the threat of political intrusion, he said.