Ukrainian President Volodymyr Zelensky has become a household name in the United States because of ... [+]
The ugly divorce between Russia and Ukraine continues. Things seem to be going better than they were under former president Petro Poroshenko. At least on the natural gas front—which arguably started this entire mess between the sister countries—the two sides seem to be making nice.
Gazprom and Ukraine’s state-owned energy firm Naftogaz have agreed to a five-year transit deal that keeps Ukraine in the market. This is interesting, seeing how Nord Stream II is about to go on line any day now. Russia is flooding the European market with Gazprom natural gas.
Ukraine was always a key supplier of natural gas into southern Europe. But since 2014, when a pro-Russian government was overthrown in favor of a Western-backed one, Russia moved quickly on the natural gas front and made deals with Turkey and Germany to build new, alternative routes.
The move was considered to be a severe blow to Ukraine’s finances. Ukraine is unlikely ever to be the go-to hub for Russian gas, but the deal, announced this weekend, guarantees Naftogaz with at least 40 billion cubic meters of gas per year and payment of legal fees, according to Kommersant, one of Russia’s biggest business dailies.
In order to get this deal, Naftogaz had to agree to stop suing Gazprom in international courts. They still had a claim out against the Russians for around $12 billion. That’s got to be withdrawn for this deal to stand. In turn, Gazprom pays Naftogaz $2.9 billion before the end of the month, as demanded by a Stockholm court in 2017, a tiny portion of what they were initially asking for.
In addition, claims against Gazprom by the Antimonopoly Committee of Ukraine for $7.4 billion also had to be scrapped.
The deal is a win for Gazprom, and a chance for Zelensky and Naftogaz to start over in hopes not to lose its partnership with Russia’s biggest gas company.
Russian President Vladimir Putin talking to Gazprom CEO Alexei Miller. Gazprom is the largest ... [+]
The outcome is a continuation of gas transit, starting January 1, 2020, for five years. Gazprom must commit itself to supply the Ukrainian gas transmission system (GTS) in the amount of 65 billion cubic meters in 2020 and 40 billion cubic meters in the next four years.
According to the deal, first ironed out at the Normandy Four meetings in Paris on December 9 with Angela Merkel and Emmanuel Macron, Gazprom will have to sign two agreements over the next ten days: an inter-operator agreement with the Ukrainian GTS Operator (OGTSU), and a second accord with Naftogaz for booking transit volume.
Nord stream 2 connects Russia to Germany via the Baltic Sea. It is the second of two pipelines, ... [+]
Gazprom initially insisted on a shorter contract that would allow the company to complete the construction of both the Nord Stream-2 and Turkish Stream pipelines.
The volumes of transit through Ukraine correspond to the output of Nord Stream-2 and Turkish Stream at full capacity in 2021. Given these projects, Gazprom will have about 190 billion cubic meters of export pipeline capacity. With Ukraine getting back on line with some vigor, Gazprom has the ability to send over 230 billion cubic meters of gas into Europe, though this would never happen, as pipelines are never loaded at full capacity, at least not for sustainable periods.
Gazprom estimates it will export 200 billion cubic meters of natural gas to Europe next year.
Europe might be even more reliant on Russia for its base-load energy. As it endeavors to go carbon-zero with wind and solar in the years ahead, countries are drastically reducing their fossil-fuel purchases.
In 2022, production will stop at the Groningen gas field in the Netherlands, the tenth-largest natural gas field in the world, due to concerns over earthquakes. They have been reducing capacity for the past several years and are now down to 17 billion cubic meters. In 2014, it was over 42 billion cubic meters.
That creates an additional niche of 15–20 billion cubic meters for Russian gas, unless anyone believes the region’s factories and homes can be powered by windmills and lithium-battery packs in the years ahead. Europe is already negative on nuclear energy.
This new deal is a white flag waved from Kiev and the Zelensky government.
To Russia hawks, it’s a bad move. To Russia doves, it’s about time. Zelenksy can now move on to other issues in the Ukraine-Russia relationship, namely the separatist movement in the Donbas that is largely supported by and financed by Russian interests—either officially sanctioned or by wealthy Russian individuals funding support of pro-Russia separatists.
The transit via Ukraine of 40 billion cubic meters of Gazprom gas per year into Europe is a steady source of funding for the government. Ukraine will no longer be a key pain point for Gazprom, and vice versa. Its role in terms of volumes to Europe will be comparable with that of Turkey.
Gazprom can refuse to continue Ukrainian transit at any time after 2020, simply by increasing the loading of other routes. The Nord Stream 2 and the Turkish Stream are still Ukraine and Naftogaz’s sword of Damocles.
