Ukraine loses battle to transport gas to Europe

Russia minimizes gas transit through Ukraine. Photo: AFP

Once all Russian transit pipelines are operational, transit through Ukraine will be reduced to a minimum. Meanwhile, green fuel has already passed through Turkish Stream. Accordingly, its new branches and the opening of Nord Stream 2 will be what comes next.

Experts say that while Ukraine's Naftogaz is playing political games, Ukraine's gas transportation system has almost collapsed, and there will soon be nothing left to sustain the network.

Why did Ukraine end up in this situation, and can Kiev find a way out?

Reduce to a minimum

In 2020, the amount of Russian gas transported to Europe, transiting through the Ukrainian system, fell by more than a third, to 55.8 billion cubic meters of gas. This is the lowest figure in the past 30 years. Previously, the amount of gas transiting through Ukraine reached a rate of no less than 90 billion cubic meters of gas every year. Sergei Makogon - CEO of the Ukrainian Gas Transport Network (GTS) emphasized that, even during the 2014 crisis, 62 billion USD was paid for gas transit fees, despite "all efforts by Gazprom (Russia) to reduce gas supplies to the EU". The recent collapse is a record.

The "Kazachya" compressor station, part of the gas pipeline system to ensure gas supplies to the Turkish Stream. Photo: Ria Novosti

Ukraine was supposed to collect $65 billion in transit fees, but in reality it did not meet that. This is explained by several reasons. The signing of the agreement with Gazprom was late in the first quarter, and especially in January and February, Russian gas exports were distributed without transit through Ukraine.

In addition, a warm winter, along with tightening measures to prevent and control the Covid-19 epidemic, has caused a sharp decrease in gas demand in Europe and Asia. Meanwhile, transit fees in Ukraine are the most expensive, and of course it will be the last choice.

Experts work at the gas distribution center of the Nord Stream 2 gas pipeline in Lubmin, Germany. Photo: Ria Novosti

Ukraine is not holding out.

The situation has not improved much in 2021. In February, pumping rates fell by a quarter compared to January. Once the Turkish Stream pipeline in Serbia and Bulgaria is completed, Ukraine will lose another 10 to 12 billion cubic meters of gas per year.

Gazprom has been sending gas to Serbia, Bosnia and Herzegovina via the new route - Turkish Stream, and then continuing through Bulgaria's national gas transit system to Serbia, Bosnia and Herzegovina.

And this is just the beginning. Yuri Korolchuk, co-founder of the Institute for Energy Strategy, warns that Kiev has lost the battle for transit markets. Once all the Russian pipelines are operational, there will be very little pumping through Ukraine.

"Countries such as Hungary and the Balkan region (Albania, Bosnia and Herzegovina, Kosovo, Bulgaria, Croatia, Montenegro, Greece, Macedonia, Serbia, Türkiye) will soon get gas from reverse gas pipelines connecting Central-Eastern Europe with Turkish Stream," Mr. Korolchuk explained.

The most important thing for Kiev right now is to prevent the operation of Nord Stream 2. Although, as Mr. Korolchuk emphasized, given Ukraine's position, it simply makes no sense.

“What happened with the gas transit is entirely Naftogaz’s fault, because they followed the political path, instead of trying to influence the construction of the Turkish Stream, where gas was pumped not so long ago,” Korochuk analyzed.

Russian gas preparation and transportation complex. Photo: Ria Novosti

Pump or pay

In the following years, the loss of gas transit positions did not threaten Ukraine with any particular troubles, since the contract signed with Gazprom was valid until 2024 on the principle of "pump or pay".

Sergei Pikin, head of Russia's Energy Development Fund, said that due to the pandemic, more than 10 billion cubic meters of gas were pumped less than expected. But taking into account the "pump or pay" norm, Gazprom has paid more than $2.5 billion.

The minimum contract for 40 billion cubic meters of gas is valid for another four years. However, further down the line, when a pipeline with a total capacity of 55 billion cubic meters of gas per year is put into operation, the outlook is very pessimistic for Ukraine.

"In general, Gazprom has only three customers who have to transport green fuel through Ukraine: Moldova, Romania and Hungary. Natural gas consumption in Moldova is relatively small - about 1 billion cubic meters of gas per year," - said the director of the Russian Energy Development Fund.

Backup system

After the contract with Gazprom expires, Ukraine's GTS will become a backup system with a maximum capacity of 20 billion cubic meters of gas per year. But transit fee revenues have allowed Kiev to keep the GTS running for now.

"Ukraine then needs to either maintain it and switch to buying liquefied natural gas, which is more expensive than pipeline gas; or negotiate with Gazprom on Ukraine's policy," said Leonid Khazanov, an independent industry expert.

According to Yuri Korolchuk, co-founder of the Institute for Energy Strategy, the only option to increase transport is for EU gas consumption to rise from 450 to 500 billion cubic meters. This would give Ukraine the opportunity to pump at least 30 billion cubic meters of gas. "But the question is whether Russia wants to increase production or will prefer supplies of liquefied fuels, which it is actively increasing. That is, one way or another, Kiev is out of the game," Korolchuk said.

Russian experts also point out that even if the transit is kept for a while longer for political reasons, Ukraine as an intermediary has no future. Meanwhile, the European market is changing rapidly. As a last resort, Russia will arrange to supply LNG or even hydrogen fuel to Europe.