Ukrainian and Russian gas companies have hammered out a complex series of agreements that will see Russian natural gas supplies continue to be delivered to Europe via Ukrainian pipelines. The eleventh-hour deals mean that the Ukraine will receive around $7 billion in transit payments over the next 5 years.
As the agreements were signed after arbitration talks in Vienna, Austria, late on Monday, Ukraine’s President Volodymyr Zelensky said that the contracts would ensure Ukrainian “energy security and well-being,” while letting “Europe know that we won’t fail it when it comes to energy security.”
The deal came just one day before existing transit contracts were due to expire on Dec. 31—a scenario that could have led to Ukraine cutting off a substantial portion of Russian gas deliveries to Europe, or to Russia cutting off gas supplies to Ukraine, a country heavily dependent on Russian gas for home heating and industrial processes.
Russia currently delivers gas to Europe via major pipelines that run through Ukraine and Belarus (the Yamal and Brotherhood pipelines) and directly to Germany under the Baltic Sea (the Nord Stream 1 pipeline).
Naftogaz Learning From the History Books
Gazprom CEO Alexey Miller said he believed the agreements “restored the balance of interests between the parties,” and that “Gazprom has shown again that it’s a responsible supplier and a reliable partner.”In an interview with the Kyiv Post, however, Naftogaz CEO Andriy Kobolyev said that, “In order to reach the deal, it was very important to take into account the lessons of 2009.”
Kobolyev said that Naftogaz had been preparing for the negotiations for some time, including ensuring that Ukraine’s gas storage systems were filled to the tune of “21 bcm—even more.”
He added that if no agreement had been reached, “Ukraine will survive. We would not be begging for gas as was in 2009.”
During a dispute over gas supplies and transit fees between the Ukraine and Russia 11 years ago, gas supplies to the Ukraine were cut off for most of January. Against this backdrop, Kobolyev said that he welcomed U.S. sanctions on the Nord Stream 2 pipeline as well as signals that Germany would not make Nord Stream 2 operational until the Ukraine-Russia agreement had been reached.
He went further, saying, “If you ask me what is the best way for Ukraine to secure a long and proper deal with Gazprom, it’s the absence of Nord Stream 2.”
He also cast doubt on whether the pipeline could be completed if American sanctions remained in place—which he agreed would be “very good news for Ukraine.”
Kobolyev said that he tries to explain to his U.S. and European counterparts just how critical gas is in terms of Ukrainian national security. “Gas is one of the best protectors for Ukraine as a country. As long as critically big gas flows, gas volumes are flowing through Ukraine, the likelihood of full-scale military invasion [by Russia] remains quite low.”
Sanctions Take Effect
Mere weeks away from the completion of Nord Stream 2, Allseas, a Swiss-Dutch specialist in offshore pipe-laying, suspended their work on the project due to the sanctions. Nord Stream 1 (completed in 2011) and Nord Stream 2 each have a capacity of 55 bcm, giving a potential total of 110 bcm of gas that could be transported directly from Russia to Germany—without passing through a transit country.Allseas was laying the pipeline using two vessels—Pioneering Spirit and Solitaire—and was expected to lay 96 percent of all the pipes needed for Nord Stream 2.
Russia’s Alternative Pipelines
Unfortunately for Ukraine, such alternative gas pipeline projects are decreasing Russian reliance on Ukraine’s pipelines, and weakening its position in future price negotiations. Russia’s Turkstream project has seen a gas pipeline laid under the Black Sea from Russia’s Krasnodar region to Turkey and on to Europe, and is set for completion in early 2020. Turkstream will carry approximately 31.5 bcm of gas.Nord Stream 2, the second alternative, is believed by the Trump administration to make Europe overly reliant on Russian gas, while weakening Ukraine’s position at the bargaining table.
German Chancellor Angela Merkel, however, said the Vienna agreement was a “good and important signal to guarantee the security of our European gas supply.”
According to Die Welt, however, Eastern European states are also concerned about the plans for Nord Stream 2, as it would make Germany the main distributor of Russian gas in Western Europe, while the status of Poland and Ukraine—as transit countries for gas supplies—would be weakened.