Gazprom shuns Ukraine capacity as questions rise over its market strategy

Aura Sabadus


LONDON (ICIS)–Russia’s Gazprom chose not to book additional transmission capacity via Ukraine on Tuesday, results of an auction on the RBP platform showed, although European hub prices are at some of the highest levels since 2018.

As front-month gas prices were pushing above the €26.00/MWh mark in week 20, the Ukrainian gas transmission system operator GTSO offered record interruptible capacity of 63.7million cubic metres (mcm)/day at the Sudzha border with Russia for June. GTSO had offered similar interruptible capacity for May.

Gazprom decided not to book any on both occasions, opting to use the 72mcm/day under its long-term 40billion cubic metre(bcm)/year contract plus another 15mcm/day of firm capacity.

Meanwhile, the Russian producer has been ramping up flows via its other routes – Nord Stream 1 and Yamal – where combined exports are hovering around 240mcm/day, the highest level since 2014.

While Nord Stream 1 flows average 165mcm/day, higher than the nameplate capacity, 64mcm/day of capacity lies idle in Ukraine.

As European demand for storage injection is high and record carbon prices have threatened to drive coal-to-gas switching, market sources have been asking why Gazprom was not taking advantage of Ukraine’s large transmission system to ramp up exports to Europe.

Some market sources in Ukraine and neighbouring EU countries suggested Gazprom was withholding shipping gas through Ukraine to reinforce the message that Europe needs Nord Stream 2, a rival project which has prompted heated debate and whose completion is still uncertain.

The Ukrainian gas grid operator GTSO said Gazprom’s behaviour should be investigated by the EU’s antitrust agencies.

In response, some sources were pointing out that Gazprom may have changed its market strategy, opting for value rather market share in Europe.

Others noted that the Ukrainian route was more expensive and did not make sense from a commercial point of view to Gazprom.

ICIS has assessed the claims against three factors – Russia’s cost to ship gas, the availability of Russian reserves and politics – to understand what Gazprom’s priorities and challenges in Europe are.


An ICIS analysis found that based on an average June ’21 price on the benchmark TTF hub of €24.80/MWh ($8.86/MMBTu), Gazprom’s current margins would be anywhere between $4.00-$5.00/MMBtu.

According to Vitaly Yermakov, senior research fellow at the Oxford Institute for Energy Studies (OIES), Gazprom’s total cost of supply, including production and transportation in Russia, a 30% export tax and transit fees via undersea or European transit countries would be under $4.00/MMBTu.

Variations in Gazprom’s margins would be dictated by the cost of transmission through Ukraine, the Yamal corridor or Nord Stream 1.

According to an OIES study authored by Yermakov in 2020, the whole-route transmission cost for via Nord Stream 1 in 2019 was $20.5/thousand cubic metres (kcm) ($0.571/MMBtu adjusted for 2021), that of Yamal including the Belarussian and Polish sections would amount to $17.20/kcm ($0.428/MMBtu) and that of Ukraine to $31.70/kcm ($0.86/MMBtu).


Ukrainian market sources insisted Russia’s cost of transit via Ukraine could not be compared with other countries. This is because when Ukraine negotiated the five-year transmission contract with Russia in 2019, the incumbent Naftogaz agreed to withdraw a $12bn claim against Gazprom for underuse of the country’s transmission system.

“By agreeing to pay a relatively higher tariff, Gazprom also protected itself from additional claims from the Ukrainian side for the transit over the period 2009-2019,” a source close to Naftogaz said.

GTSO said in a statement to ICIS that its tariffs were set by the regulator NERC and took in consideration costs that had to be recovered.

The operator said if Gazprom wanted to secure capacity when the current transmission contract expires at the end of 2024, the greater the booked volume the lower per-unit cost it would be able to offer.


Considering Gazprom’s margins for May were higher than in recent months, the company may have been incentivised to book additional short-term capacity to satisfy European demand.

The cost to book additional capacity in Ukraine is the same for firm and interruptible capacity, $0.45/MMBTu. Even if Gazprom were to book additional capacity on top of what it has already secured via its long-term contract, its margins would still be attractive.

However, Yermakov pointed out that physical constraint may have prevented extra bookings.

“First, the production assets in Nadym-Pur-Taz (NPT), the super-giant gas fields that have been producing since the Soviet times and have been the source of gas for the central corridor of Russia’s gas transportation system were in irreversible decline. It is this route that eventually brings gas to Russia-Ukraine border, and this flow is declining.”

Yermakov said there would be new gas developments in NPT but this would be wet gas that required processing.

Russia’s plan is to assign a dedicated capacity in the central corridor to wet gas that is then going to be re-routed north towards a new gas processing plant in Ust-Luga, where construction was announced on 21 May and which is due to be completed in 2024.

This will further decrease the flow of gas through the central corridor towards Ukraine, he added, with the central corridor also used to feed the domestic market.

A second European trader said Russia itself needed to inject gas in storage after a particularly cold winter.


Several sources in Ukraine and EU markets said the main reason Gazprom bypassed Ukraine was because it was keen to press ahead with the completion of the rival Nord Stream 2, insisting Russia was making a political statement against Ukraine.

GTSO said Russia was deliberately avoiding Ukraine in order to persuade European partners of the need to complete Nord Stream 2.

“Nord Stream 1 and 2 are political projects and therefore it is difficult to assess them on a cost-reflective basis,” the operator said.

“The two pipelines would not function under the rules laid under the EU’s third energy package, whereas we implemented them,” it added.

Yermakov said Russia did not want to punish Ukraine.

“There are strong economic reasons not to increase transit through Ukraine. If prices keep growing in Europe there would be additional upside but this is not something stable.

“[…]Gazprom’s message to Europe seems to be: ‘If you want more energy security, you would need Nord Stream 2.”

Gazprom did not respond to requests for comment.

Additional reporting by Arlind Neziri


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