New Ukraine gas transit deal must plug looming deficit, advisor

Author: Aura Sabadus

2021/07/22

LONDON (ICIS)--Russia would need to sign a transit contract for at least 40 billion cubic metres annually with Ukraine to plug potential shortfalls linked to the rerouting of flows to Nord Stream 2, a Ukrainian government advisor told ICIS on 22 July.

Aliona Osmolovska, advisor to the Ukrainian energy minister, said the extension of the transit contract by another ten years after 2024 when the current deal expires was imperative because of possible bottlenecks shipping the gas from the Nord Stream corridor to central Europe and Ukraine.

The transit contract extension was proposed by the US and Germany on 21 July as part of a support package offered to Ukraine for likely losses incurred as a result of the Nord Stream 2 project.

Historically, Russia’s Gazprom served its European clients by shipping gas westwards through Ukraine.

Once Nord Stream 2, a 55 bcm/year pipeline corridor linking Russia to Germany’s northern coast via the Baltic Sea is operational, some of the flows as well as those shipped through the existing 55bcm/year Nord Stream 1 would head east via the Opal and Eugal lines.

The gas would then be delivered to Austria, Croatia, Hungary, Italy, Moldova, Poland, Slovakia, Slovenia and ultimately Ukraine, using existing European infrastructure.

Estimated annual demand for Russian gas from these countries based on Gazprom’s figures would be around 72bcm.

If Hungary, the west Balkan countries and Moldova were supplied via the southern TurkStream corridor, also controlled by Russia, regional demand would be 62.3bcm/year.

CAPACITY BOTTLENECKS

Based on these calculations, Osmolovska anticipates capacity constraints could create a supply shortfall of around 10 bcm/year in central and eastern Europe.

These constraints may be linked to two points: the 43.8bcm/year Czech-Slovak Lanzhot interconnector and the German exit capacity of 7.8bcm/year at the German-Austrian Oberkappel border point on the MEGAL pipeline.

Several European gas operators indicated in 2019 they would need additional border capacity.

Sources at the Slovak system operator Eustream said compression at Lanzhot had been expanded in 2020, bringing the exit capacity on the Slovak side of the border to 120 million cubic metres (mcm)/day.

The technical capacity could be raised to 151mcm/day, but Eustream added there were no plans for capacity increase in the short term.

An Austrian source said capacity on their side of the Oberkappel border point could be maximised to 12bcm/year but insisted there may be bottlenecks in southern Germany that could limit capacity.

OGE, the operator of the MEGAL pipeline, did not respond to requests for comment.

SUPPLY DEFICIT

Gazprom may be restricted from making full use of Nord Stream 2 if the pipeline is subject to EU regulations and the operator would be asked to open it up to third party access.

Similar regulations apply to the connecting OPAL pipeline.

In that case, the combined capacity and supply constraints in the Austrian Baumgarten area could lead to a regional shortfall of around 27-35bcm/year, taking into consideration the OPAL constraints, Osmolovska said. If Nord Stream 2 capacity is also limited, this deficit could rise to 46bcm/year.

Osmolovska said the deficit plus another 20 bcm/year required to guarantee balancing flexibility during peak consumption would have to be covered by the extended Ukrainian transit agreement to ensure security of supply.

NEGOTIATIONS

It is unclear whether Gazprom would agree to renew the transit contract with Ukraine at a time of escalating political and military tensions between Kyiv and Moscow over Russia’s annexation of Crimea and ongoing conflict in the Donbas region.

Russian president Vladimir Putin discussed the issue with the German Chancellor Angela Merkel during a phone conversation following the announcement of the Ukraine support package.

However, in 2015, shortly after the launch of the Nord Stream 2 project, senior Gazprom official Alexander Medvedev memorably said: “There won’t be any transit [through Ukraine] in the future. Even if the Sun and the Moon switch places.”

Gazprom declined to comment.

The latest US-German deal insists it would seek to safeguard and increase the capacity for reverse flows to Ukraine. The joint US-German statement notes a special envoy would be appointed to support negotiations no later than 1 September.

Osmolovska said she expected two envoys, one from Germany and the other from the US, to be involved.

She explained that in addition to the transit contract extension, Brussels as well as Ukraine’s European neighbours would also need to work with the Ukrainian gas transmission system operator GTSOU to guarantee firm border capacity.

“We have abundant technical capacity at our borders with all of our EU neighbours. However, we only have 27mcm/day of firm capacity with Slovakia, the rest is interruptible,” she pointed out.

GTSOU said in a statement: “Given that the GTSOU was not a party to the negotiations, we cannot assess the strength of safeguards in the agreement reached by Berlin and Washington. For us, in Ukraine, Nord Stream 2 always was and remains a matter of national security. Now this agreement seems a declaration of further actions without clear description.”

ENTSO-E INTEGRATION

Ukraine will rely on European and US support for guaranteeing Ukraine’s full integration in the EU gas as well as electricity markets, Osmolovska said.

Ukraine is currently on track to synchronise its electricity grid with the European Network for Transmission System Operators of Electricity (ENTSO-E).

The synchronisation is scheduled for 2023 but the country is required to carry out preliminary tests for a week this summer and a week in winter by completely uncoupling its grid from neighbouring countries, including Russia, to which it was connected during Soviet times, and operate in complete isolation.

Osmolovska said there was a risk Russia may seek to sabotage the winter test and deny Ukraine the possibility to recouple temporarily with it, particularly at a time of peak demand. Dealing with this risk requires political support from both the EU and the US, Osmolovska said.

“We seek full integration of our energy markets. The better we are integrated with Europe, the more we are protected [from Russian aggression].”

The United Power System (SO UPS JSC) of Russia did not respond to requests for comment.

EU REGULATIONS

Finally, Osmolovska said Ukraine would urge key European institutions to ensure Nord Stream 2 and all other pipelines used by Gazprom comply with EU legislation.

The Ukrainian transmission route is the only corridor used by Russia that is compliant with EU regulations.

There are additional measures Ukraine would advocate jointly with its EU and US allies, including minimising Europe’s dependence on Gazprom, Osmolovska said. The company accounts for nearly a half of all EU gas imports, controls a number of critical pipelines and underground gas storages++ in the EU, she explained.