To reduce its dependence on Gazprom’s supply monopoly, Ukraine has recently initiated the procurement of natural gas from European gas-trading companies. RWE (Rheinisch-Westfaelisches Elektrizitaetswerk, Germany’s second-largest energy conglomerate) has become the first major European company to deliver gas to Ukraine (see EDM, April 1).
The European Commission encourages this incipient trend, recognizing its growth potential. Hungary and Poland provide transit service by using their gas transit systems in reverse, from European Union territory to Ukraine. But the Hungarian and Polish systems have only limited spare capacities for reverse use. Slovakia’s transit system has larger spare capacities available for reverse use to supply Ukraine, but Slovakia has declined thus far (see below).
Ongoing deliveries to Ukraine involve a mix of gas volumes that RWE procures from Gazprom in the first place and also from European spot markets. From both of those sources, prices are significantly lower than the extortionate price charged by Gazprom to Ukraine. Market prices in Europe (with Gazprom’s prices factored in) have averaged some $370–$380 per one thousand cubic meters during 2012 and in 2013 thus far. For its part, Gazprom is charging on average some $420 per one thousand cubic meters of gas to Ukraine.
In this situation, RWE—and, potentially, other European companies—can sell gas to Ukraine at prices above the European average, but still below Gazprom’s sale price to Ukraine. Thus, both Ukraine and the European supplier win from this trade. Furthermore, in this way, RWE or other European gas traders can profitably dispose of Russian gas volumes that they must buy under take-or-pay obligations even as European gas demand slumps. As long as these factors (price differentials, take-or-pay servitudes, European downturn) persist, Ukraine holds considerable market potential for European gas-trading companies (Nicu Popescu, “Ukraine’s Gas Loop,” EU Institute for Security Studies [ISS, Paris], July 2013; Sme [Bratislava], August 8).
The Hungarian and Polish operators, FGSZ (Natural Gas Transmission, unbundled subsidiary of MOL) and Gaz-System, are adapting their transmission pipelines and inter-connection points at the border to handle reverse-flows, west-east. However, due to capacity limitations, gas deliveries to Ukraine were reported at only 900 million cubic meters during the first half of 2013, far below forecasts or targets (see EDM, July 15; Interfax-Ukraine, August 2).
Slovakia’s gas transit system with its vast capacity is not yet adapted to handle reverse flows from EU territory to Ukraine. The Slovakian system has a total capacity of some 100 billion cubic meters (bcm) per year through four parallel lines, designed to operate east-west for Russian gas to the EU. This system, operated by Eustream, is a direct physical continuation of Ukraine’s transit pipelines. Dubbed the “European gas highway,” the Slovakian system carries the lion’s share of Russian gas from Ukraine to the Baumgarten terminal near Vienna. Recently, Eustream joined the Central European Gas Hub at Baumgarten as a minority shareholder (www.eustream.sk).
Gazprom is using this transit corridor for ever-decreasing flow levels. Just from 2011 to 2012, Russian gas deliveries to the EU via Slovakia declined from 74 bcm. to 56.5 bcm, year-on-year (ICIS Herren, August 2). The declining use is partly a consequence of the Kremlin’s policy to shift gas export volumes from Ukraine’s transit pipelines into bypass pipelines. Slovakia’s transit system is a collateral casualty in terms of under-utilization by Gazprom.
Ukraine sees a reverse-flow possibility for at least 10 bcm per year to supply Ukraine through one of Slovakia’s four lines. The European Commission encourages Slovakia’s government and Eustream to enable this solution. The heads of state of the Visegrad Four group of countries (Poland, Czech Republic, Hungary, Slovakia), at their summit last month endorsed Ukraine’s efforts to diversify its gas supplies, including by means of reverse flow via Slovakia (Gazeta.pl, July 3).
Slovakia’s government and Eustream consider the possibility of linking Slovakia and Ukraine by means of a dedicated inter-connector pipeline, only seven kilometers in length, immune to Gazprom interference. The new link would apparently be co-located with the Velke Kapusany compressor station and inter-connection point on the Slovakian-Ukrainian border. Velke Kapusany, ranked as the most powerful compressor station on the European Union’s territory, is the starting point of the Eustream-operated “European gas highway.”
Eustream held an “open season” last year (2012) for the proposed Slovakia-Ukraine inter-connector—that is, it invited European gas shippers to express interest in the inter-connector by booking capacities in it in advance. At that time, the open season was reported to have elicited insufficient interest among gas shippers (www.eustream.sk, accessed August 9).
Meanwhile, the market continues to change in ways that favor gas deliveries from Europe to Ukraine. Not only RWE, but other European companies also are saddled with surplus volumes of Russian gas, which they sometimes must sell on spot markets at a loss. It could be sold in Ukraine on terms more advantageous to seller and buyer alike.