EGM Comment: Ukraine wastes time trying to stop Nord Stream 2 while its internal politics impede TSO unbundling

31 March 2017 17:02 Source:ICIS

Ukraine’s Naftogaz on 27 March filed a lawsuit against the European Commission requesting annulment of the decision to allow Russia’s Gazprom 90% access to the OPAL pipeline.

This is a new attempt by Ukraine to protect its Russian transit business from competition by blocking Gazprom’s use of Nord Stream and its expansion.

The supply and transit agreement between Gazprom and Naftogaz expires at the end of 2019 and the negotiation of new terms is marred by political acrimony.

The lawsuit, which follows an earlier legal action by Poland, will not succeed in stopping Russia from building Nord Stream 2, although it may delay the process.

And Ukraine will not be able to force Gazprom into doing business on its terms by appealing to the powers that be.

Instead, Naftogaz should stop obstructing market development in Ukraine by decreasing control over transmission system operator Ukrtransgaz, still under its ownership. The recent ousting of Ukrtransgaz’s president Ihor Prokopiv, who was at loggerheads with Naftogaz’s boss Andriy Kobolev, is viewed by industry experts as a setback to market reforms.

It demonstrates that Naftogaz, which financially benefits from Ukrtransgaz’s transit business, is unwilling to loosen its grip over the TSO despite all the talk of unbundling.

Allowing the TSO to run its own business offers a much greater chance for Ukraine to make sure its pipeline system – regarded as national heritage – stays in use. At the moment, Ukrtransgaz’s ridiculously high grid exit fees serve as a barrier to cross-border flows.

The explanation by Naftogaz’s business development director Yuriy Vitrenko that the high fees are necessary due to depreciation of the pipeline defies logic.

Lowering the fees would not only make the market more attractive to foreign suppliers, but also let domestic producers and traders capitalize on the opportunities emerging in southeast Europe after cross-border capacity became available on the Western Line.

In the meantime, Gazprom’s recent pledge to allow gas re-exports in the region (see EGM 15 March 2017) may set market forces in motion in Romania and Bulgaria.

Romania is now set to partially liberalise gas tariffs from 1 April. The production component of the household tariff will be deregulated, but the remaining elements, such as supply, transmission and storage fees, will remain regulated until 2021.

Across the border, Bulgaria was never able to make up its mind on whether to follow the rules of the club it joined after the EU accession, or stay friends with Russia. But after Gazprom’s announcement of its changing strategy, energy regulator EWRC said on 28 March that the Commission should set a deadline for switching Bulgaria’s gas contract between incumbent Bulgargaz and Gazprom from oil-indexed to hub-linked. Bulgaria’s federation of industrial energy consumers BFIEC said that to kick-start liberalisation, Bulgargaz should be compelled to resell its surplus volume to the wider market.

Restructuring its transit business to capitalise on emerging demand for transport capacity will give Ukraine better leverage in talks with Russia than political manoeuvring.

By Katya Zapletnyuk