Ukraine Diversifies Gas Suppliers, Slashes Imports from Gazprom

Publication: Eurasia Daily Monitor Volume: 10 Issue: 129

(Source: Kyiv Post)

Ukraine has recently initiated procurement of natural gas from European suppliers. These volumes are small but growing, correspondingly eroding Gazprom’s market share in Ukraine.

The German Rheinisch-Westfaelisches Elektrizitaetswerk (RWE) is providing the volumes through its subsidiary, RWE Supply & Trading. Some of these gas volumes are undoubtedly of Russian provenance, with RWE using its legal right to re-export them as it sees fit. Part of these volumes may well originate from Western Europe’s spot markets. In both eventualities, these volumes are priced below Gazprom’s sale price to Ukraine, for the simple reason that Gazprom charges far higher prices in Ukraine than it does in Germany or some other European markets. Naftohaz Ukrainy, the state-owned gas importer, signed commercial agreements with RWE in 2012, and following trial-run shipments via Poland last winter, the deliveries are proceeding on a regular basis this year (see EDM, April 1).

Ukraine’s neighbors Hungary and Poland are providing the transit services. Their transmission system operators, Hungarian FGSZ (independent operator unbundled from MOL) and Polish Gaz-System, have made technical agreements to use their pipelines in the reverse mode for delivering these volumes to Ukraine. Prime Ministers Viktor Orban and Mykola Azarov jointly announced on March 28 the start of gas transmission via Hungary to Ukraine. Naftohaz is similarly using its pipelines in the reverse mode for these volumes within Ukraine.

Combined deliveries via Poland and Hungary rose little by little to 263 million cubic meters (mcm) for the month of June, corresponding with 3.2 billion cubic meters (bcm) in annualized terms. Deliveries are expected to reach at least 450 mcm for the month of August, corresponding with some 5.5 bcm in annualized terms. Prices were quoted during the first six months of this year at $380 to $390 per one thousand cubic meters, compared with Gazprom’s $420 to $430 during the same period (see EDM, April 1; Interfax-Ukraine, July 3, 8; Ukrinform, July 9). According to Hungary’s ambassador in Kyiv, Mihaly Bayer, there are no political, technical, or legal barriers to delivering as much gas as requested by Ukraine (Ukrinform, July 9).

Ukraine hopes for a similar arrangement with neighboring Slovakia. The Slovakian gas transit system, operated by Eustream, has a total capacity of at least 90 bcm per year through four parallel lines, designed to operate east-west for Russian gas. But the system is under-utilized, and Ukraine sees a reverse-flow possibility for at least 10 bcm per year to supply Ukraine through one of the four lines. Kyiv, Bratislava, and the office of European Energy Commissioner Guenther Oettinger are holding consultations about a possible solution (Ukrinform, July 3, 5).

On July 3, the heads of state of the Visegrad Four group of countries (Poland, Slovakia, Hungary, Czech Republic) met in Poland together with Ukrainian President Viktor Yanukovych (Visegrad + Ukraine format). The agenda included the signing of a memorandum on inter-connecting the four Visegrad countries through bi-directional pipelines. The heads of state endorsed Ukraine’s efforts to diversify its gas supplies, including by means of reverse-flow from Slovakia (Ukrinform, July 4).

Gazprom professes to believe that Ukraine does not receive physical gas flows through the territories of its western neighbors. According to Gazprom, those supplies involve Russian gas volumes committed for Ukraine’s western neighbors, but are instead being re-sold by those countries (and/or by RWE) to Ukraine before those volumes ever cross Ukraine’s western borders. Gazprom’s CEO Alexei Miller expressed strong suspicions in this regard and warned of possible legal action during Gazprom’s recent annual general meeting (Interfax, June 28). But the reverse gas flows are verified as real in a physical sense, and importers of Russian gas are normally free to trade such volumes to third parties.

The Ukrainian government’s efforts are already undermining Gazprom’s monopoly, trending instead toward diversification of suppliers, introducing elements of a competitive gas market in Ukraine for the first time, and improving Ukraine’s bargaining position vis-à-vis Russia.

In parallel with suppliers’ diversification, Naftohaz is sharply reducing its annual gas purchases from Gazprom. According to Ukraine’s State Statistics Service, those purchases declined from 45 bcm in 2011 to 33 bcm in 2012. Naftohaz plans to procure only 18 bcm from Gazprom in 2013. All this is a far cry from the 52 bcm per year, of which 41.5 bcm per year are subject to take-or-pay clauses, as stipulated in the ten-year agreement signed in 2009. Naftohaz is now disregarding the take-or-pay clauses for the second consecutive year. But Gazprom is not taking legal action, apparently being reluctant to open the 2009 agreement to Ukrainian counter-challenges in arbitration court.

Ukrainian private gas wholesalers connected with the government are picking up some of the import slack from Naftohaz. In accordance with the 2013 gas balance, Ukrainian gas purchases from Gazprom shall amount to 27 bcm—i.e., 9 bcm above Naftohaz’s planned procurement in 2013. The private companies Ostchem of Dmytro Firtash and VETEK of Serhiy Kurchenko are now importing major volumes of Russian gas in their own right. While Gazprom begins losing its supply monopoly in Ukraine, Naftohaz is stepping back from its procurement monopoly (see EDM, March 25, April 1; and Jamestown Foundation Blog, June 26).

Russia will remain the largest gas supplier to Ukraine into the foreseeable future. But the most important net trend is three-fold: First, sharply declining imports of Russian gas into Ukraine (thanks to volume substitution and fuel substitution). Second, unprecedented diversification of external suppliers of gas to Ukraine (thanks to reverse-flows, including re-exported gas of Russian provenance, from EU territory). And third (as a cumulative effect of the first and second trends), Ukraine is now developing some degree of immunity vis-à-vis Russian gas supply disruptions and related forms of pressure.