If a deal is not in place by Dec. 31 for Russian gas supplies to Ukraine followed by supply disruptions, it will be because political factors have outweighed commercial ones in the Russia-Ukraine gas relationship, the latest report of the Oxford Institute for Energy Studies (OIES) finds.
The Russia-Ukraine Gas Transit Talks: Risks for All Sides report written by OIES experts shows that given the length of time that long-term commercial contracts take to negotiate, it would be improbable, but not impossible for the signing of a contract for Ukrainian gas transit by Dec. 31.
It said that at this stage, it could take only a meeting of the Russian and Ukrainian presidents, covering both gas issues and the military conflict in eastern Ukraine, to bring about a breakthrough.
The transit contract between the parties was established in January 2009. The agreement on the supply of natural gas and the delivery of Russian gas to Europe via Ukraine will expire at the end of 2019 and covers a significant share of Europe's gas demand.
In April 2014, Gazprom increased the gas price for Naftogaz by over 80% within days following the Russian occupation of Crimea and in November 2015, Ukraine stopped natural gas imports from Russia.
The experts detailed what they consider are the two sets of related factors that influence the negotiations. Firstly, commercial issues and secondly political factors relating to Russia's wider disputes with the EU and Ukraine, not only over gas but also over Crimea, the military conflict in eastern Ukraine along with broader geopolitical issues.
"For many years, hopes that gas transit issues would be delinked from these wider problems have disappointed," the OIES said.
The report deduces that if no deal is reached by the end of the year when the long-term agreement between the two countries expires, it will be because of political factors. If, on the other hand, a deal is reached, it will be because commercial issues have been prioritized.
The report focuses on possible gas disruptions from Russia to Ukraine and to Europe and underlined that should disruptions ensue, it would be extremely damaging for the image of Russian gas in Europe. Nonetheless, Russian authorities are still convinced that with a coal and nuclear phase-out in Europe, European customers have no other option other than to keep buying cheap Russian gas.
- Ukraine and Moldova to face most serious security issues
The OIES said in the scenario of failed tripartite negotiations between the EU, Ukraine and Russia followed by gas interruptions, Ukraine and Moldova would be among the countries that would face the most serious security of supply issues.
"In the event of a supply interruption, the main difficulty facing the government and Naftogaz [Ukraine’s state oil and gas company] will be to ensure that gas can be delivered from the storage facilities, mainly in the west, to the main centers of population in the center, east and south of Ukraine. Naftogaz states that the security of supply arrangements in place will ensure uninterrupted supply to all consumers for at least two months from Jan.1, even in the event of a cold winter," it explained.
The report recalled the 2009 incident when supplies were interrupted for two weeks, and in which reverse flows began to supply Ukrainian customers in the center and east of the country from storage facilities in the west.
Naftogaz stated that preparations have been made for a similar reversal in 2020 if necessary, including the upgrading of two compressor stations in the Kiev region.
In 2018, total transit via Ukraine to Europe amounted to 86.8 billion cubic meters (bcm). Ukraine produced around 21 bcm of natural gas last year and consumed 32.3 bcm.
-Gas storage of European countries
Russian gas is delivered to continental Europe via eight interconnection points, of which five are exit points for the Ukrainian transit system.
The effects on each country should interruptions occur have been addressed in the report. It detailed that Austria, Hungary, Italy, Poland, Romania, and Slovakia have enough spare daily withdrawal capacity in their storage to compensate for the loss of net imports received via Ukraine, whereas Bulgaria, Croatia, Greece, North Macedonia, Serbia, and Slovenia do not.
OIES said given that “Russia’s Gazprom is the main supplier of gas to Hungary, Serbia, and Croatia, and has coordinated the substantial additional injections into Hungarian storage to mitigate the effects of an interruption in Ukrainian transit, it is reasonable to assume that gas from Hungarian storage could be used to meet the shortfalls in Serbia and Croatia.”
If this is the case, the report said that Hungarian storage would still be sufficient to meet the needs of those three countries combined. Furthermore, given that Italy has plentiful storage and acts as a transit state for gas deliveries to Slovenia, whose gas demand is a fraction of that of Italy, it is also not unreasonable to expect that gas from Italian storage could be used to meet a shortfall in Slovenia.
Greece, Bulgaria and North Macedonia receive Russian gas via Ukraine using the Trans-Balkan pipeline but Greece is the only country that also receives gas from other sources: Azeri gas via Turkey and LNG.
For Bulgaria, the crucial development is the proposed reversal of the Trans-Balkan to flow from south to north, as part of the launch of the first line of the TurkStream on Jan. 1, 2020. This is dependent on the Bulgarian Transmission System Operator (TSO), Bulgartransgaz, signing an agreement with the Turkish TSO, BOTAS, which to date has not been announced.
On Oct. 28, Bulgartransgaz announced a capacity auction to be held on Nov. 4 for new entry capacity from Turkey to Bulgaria, with new pipeline infrastructure to be launched on Jan. 1, 2020.
"As of Nov. 11, the results of that capacity auction have not yet been announced, although reports suggested that 26 million cubic meters of gas per day would be made available. If this is correct, then flows of this gas into Bulgaria would be sufficient to meet the combined needs of Bulgaria, Greece, and North Macedonia," it said.
- Much lower gas prices
OIES stressed the possibility of not having any interruptions to the Ukrainian transit, or if there is one, it might only last for a few weeks before a new agreement is reached.
"In that case, Europe is likely to end the summer with a substantial amount of gas in storage, especially if first quarter of 2020 brings mild weather, given the historically high levels of storage across Europe. Of the 19 countries whose storage data is reported by the Gas Infrastructure Storage Europe Aggregated Gas Storage Inventory, only Latvia (72%) had storage that was less than 95% full as of Nov. 9, 2019," the report said.
According to the OIES, the result of no transit interruption is therefore likely to result in relatively low hub prices in Europe in the spring of 2020, and even lower prices in summer 2020.
The dynamics of the European summer gas market in 2019, the report said saw the consumption of pipeline supplies and the injection of LNG supplies into storage.
OIES recounted one of its expert’s views that affirmed that if European storage is still relatively full at the start of summer 2020, plentiful LNG supplies on the global market could cause a substantial oversupply and very low European hub prices.
"Such a situation would be exacerbated by a mild winter in the northern hemisphere in 2019-20 (thus reducing gas demand in North America, Europe, and the major Asian LNG markets), subdued LNG demand in South America and the Middle East, a slowdown in growth in demand in the emerging Asian LNG markets, and the continuation of current levels of pipeline supplies into Europe," it said.
OIES said that moving into the third quarter of 2020, if storage is once again completely full, LNG supplies coming into Europe would have nowhere to go, putting further downward pressure on prices.
- Further doubts on gas and declining role of Ukraine
The Oxford experts argue that one significant consequence of a supply interruption would be that, on the European political level, further doubts would be raised about the role of gas in the energy mix.
Experts claim that arguments against reliance on gas would be strengthened. With the newly-elected European Commission due to oversee the drafting of a new decarbonization package, Brussels may opt to further reduce the role of gas in the EU's energy transition.
"As for the transit of Russian gas to European markets, the role of Ukraine will be significantly reduced, if not in 2021-22, then shortly thereafter. Gazprom will seek arrangements under which its own pipelines, including Nord Stream 2 and TurkStream 2, are used as baseload, and Ukraine becomes the route of last resort," the report said.
It added that Ukraine now consumes about 20 bcm of its own gas per year and 10-15 bcm of imports per year, all currently delivered at the western borders.
The report also surmised that another outcome for the talks could be in the resumption of direct imports from Russia.
"These are very unlikely to be on a long-term contract basis as they were prior to 2015, but sales into a traded market. One issue for Gazprom is whether it intends to make such sales at all, especially given the potential for gas bought at entry points on the Russia-Ukraine border to be resold by other parties at Ukraine's western border," it noted.
By Murat Temizer