Ukraine once again voiced assurances that there will be no new contract for the transit of Russian gas. But now representatives of the company “GTS Operator of Ukraine” (OGTSU) declare that any forms of interaction, including auctions, are excluded. Will Kyiv really decide to stop pumping in the face of growing demand in the European Union?
In 2019, the previous contract for the transit of Russian gas through Ukraine expired. By that time, Naftogaz was divided into two companies. This organization was left with production and storage, and the gas transportation component of the business was transferred to the “Operator of the Gas Transmission System of Ukraine”. The division occurred as part of the European integration process.
Actually, OGTSU is the main party that has signed the currently valid contract for pumping Russian gas to the EU countries. The parties had a very hard time getting to this point. Kyiv voiced its strong reluctance to enter into a new agreement and proposed switching to an auction system of relations.
This system operates quite successfully in the European Union: operators put up their pipe capacities for auction, and suppliers choose the most suitable offer for them – in terms of time, volume and route. Actually, this approach is more than adequate in the conditions of a dense, developed gas transportation network, within which there are many sellers and buyers, and pumping routes can differ markedly from each other.
In conditions where there is one gas supplier, one transit country and, by and large, one supply corridor, the auction system looks, to put it mildly, bizarre. The task of the Kyiv functionaries who insisted on introducing this system was very banal – to get more money for pumping. Initially, it was assumed that the auction would set parameters that would increase payments from Gazprom by a modest 10 times. Then the Ukrainian side became generous, agreeing to only double the payments.
As a result, the innovations were not adopted, and the contract provided for a slight indexation of pumping tariffs – within 5%. The agreement will end in 2024. And, according to Kyiv’s assurances, there will be nothing new.
The Ukrainian side stated a few months ago that it was not going to enter into any negotiations with Gazprom on a new transit contract. This idea was expressed by representatives of the relevant ministry, and OGTSU, and Naftogaz, whose employees rarely miss the opportunity to talk about matters that no longer concern them.
But in January 2024, the Prime Minister of Slovakia announced that “an agreement has been reached that the transit of Russian gas through Ukraine is likely to continue.” This idea was supported by representatives of other European countries. But there were objections from Kyiv. They, however, were that there would definitely not be a contract. But, remembering the persistence of the Ukrainian side in 2019, we can conclude that the transit agreement is, although desirable, but not a mandatory component.
The parties can switch to an auction system of relationships from 2025. Moreover, for this purpose Kyiv does not have to enter into any negotiations with Moscow. The presence of companies from the Gazprom group at the OGTSU auction is also not necessary.
With the consent of the Russian and European parties, additions can be made to the existing contracts, according to which gas will begin to be transferred to buyers not at the delivery point in the EU (in this case, the Baumgarten hub), but at the border of the Russian Federation and Ukraine. What is considered such can be discussed separately by the parties. Thus, European companies can already enter the OGTSU auctions and reserve capacities for pumping the volumes received from Gazprom.
At the European gas conference held in Amsterdam, Flame, the head of the department of cooperation with OGTSU clients, Andrey Prokofiev, except for the standard “Ukraine is not going to conduct negotiations with The RF on the issue of extensionof transit” stated that the refusal includes any transactions, including those related to pumpingin general. According to him, OGTSU “will not offer any capacities at auctions.”
Several specialized European media outlets concluded from this that Kyiv’s mood is more than serious and transit will apparently stop after the contract expires. True, there were no statements that there would be no bidding for clients from the European Union.
In 2023, a record amount of gas was pumped through Ukraine to the EU countries from the Russian Federation – 13.6 billion cubic meters. m, according to Bruegel. The disappearance of such volume will have a negative impact on European buyers. But some of it can be sent through the Turkish Stream.
Depending on consumption in Turkey itself, it will be possible to transfer 5–10 billion cubic meters to Turkey. m from the Ukrainian route. That is, nominally 4–8 billion cubic meters will leave the EU market. m of Russian gas. This will still be enough to cause excitement, but there will not be any catastrophe. Moreover, in 2025, new capacities for the production of liquefied natural gas (LNG) will be put into operation. European countries will be able to compensate for the lost volumes. But only at the level of consumption characteristic of 2023.
But since the fourth quarter of last year, a partial recovery in demand for blue fuel from the EU began to be observed. And the loading of the Ukrainian pipe during this period turned out to be the largest since the second quarter of 2022 (4.261 billion cubic meters). The increase was partly due to weather factors. But in the first quarter of 2024, the recovery continued. Moreover, since November 2023, LNG imports have been decreasing, and purchases from Russia have been increasing.
In the first quarter of 2024, almost 4 billion cubic meters were pumped through Ukraine. m (for the same period last year – 2.8 billion cubic meters). Supplies to the European Union, which go through the Turkish Stream, are at a historically high level (for the period since the beginning of the year). In total, in the first 16 weeks, 9.62 billion cubic meters were sent to the EU from our country. m of gas, according to Bruegel.
Competition with Asia, which is the main market for LNG, has intensified, and demand there is growing at a more significant rate than in the European Union. Let’s add here a possible ban on EU countries purchasing Russian liquefied natural gas with restrictions on servicing tankers.
But against this background, stopping pumping through Ukraine, even in the face of growing LNG supply, rather creates the risk of an acute price confrontation between Europe and the Asia-Pacific region for gas. As practice shows, Europe is not strong in such confrontations.
The cessation of transit through Ukraine will slow down the recovery of the European gas market, and with it the EU economy. This development option is beneficial for some non-European states, but is unacceptable for the EU at least until 2026. Therefore, Kyiv’s loud statements should be considered as a bluff or, to put it mildly, as a negotiating position. Moreover, these negotiations will be conducted not with the Russian Federation, but with the countries of the European Union, which still need Russian gas.
If current supply rates are maintained, the volume of sales of Russian blue fuel going to the European Union via pipelines will be about 33 billion cubic meters in 2024. m (6 billion cubic meters more than in the past).
The author is Deputy Director General of the Institute of National Energy
The author's position may not coincide with the opinion of the editors
#Transit #bluff