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23 August 2017
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Honchar: Naftogaz may receive a political directive to give way to Gazprom

In September, Naftogaz plans to sign an agreement with Russia’s Gazprom on gas supplies in winter period. Mykhailo Honchar, president of Strategy XXI Center told in an interview with UNIAN about the possible pitfalls in the negotiations, the economically justified price of gas, and also elaborated on how to act in case of implementation of the Russian North Stream-2 project.

Honchar: Europe can give up on Ukraine in order not to irritate Gazprom / Photo from UNIAN
Honchar: Europe can give up on Ukraine in order not to irritate Gazprom / Photo from UNIAN

Russian Energy Minister Alexander Novak said that the negotiations between the European Commission (EC) and Russia in Vienna on September 11 resulted in agreeing on a package of winter gas contract for Ukraine. Is there a risk that this agreement will not be positive for our country?

This risk certainly exists. As I have said many times, the EC is Ukraine’s hybrid ally. When the EC meets with us, it tries to show that it supports us, but when it meets with the Russians, it has a completely different agenda. Therefore, the risk certainly exists.

What shoud Kyiv do in this situation?

I think the Naftogaz team is ready to defend the position of demanding a commercially attractive, economically justified price of gas. But there is another thing: Naftogaz may receive a political directive from the Presidential Administration to agree to all Gazprom’s offers.

What do you mean by the word "directive"?

This directive lies in a framework, not related to energy resources. For example, Gazprom and the Kremlin have been spinning the information that Ukraine could disrupt gas transit to Europe this winter, thus provoking anziety among the European consumers. This is quite an old story. Still, not wishing to delve into the essence of the problem and acknowledge the fact that Russia is using energy as just another component of the war against Ukraine, the EC is ready to agree to anything that Gazprom offers, as long as the Russian gas monopoly is not irritated. Even at the cost of the Ukrainian side, the EC is willing to provide for a comfortable and smooth heating season in Europe.

But we do have the EU’s support. The EU allocates a loan for Ukraine to pump gas into its underground storage facilities: the European Bank for Reconstruction and Development gives $300 million, and the International Finance Corporation – another $200 million...

This is precisely one of the pitfalls you were talking about. As for the $500 million for the purchase of 2 billion cubic meters of gas. Simple calculation shows that the price of gas for Ukraine will be around $250 per thousand cubic meters. That is, the price is in line with what Gazprom offered at the talks in July. Although, the Russian monopoly stipulated that this price was without any discount.

Deputy Chairman of the Board of Gazprom Aleksandr Medvedev said that the average target price within the company's entire contract portfolio for the 2015-2016 winter period is EUR 195.9 per thousand cubic meters. And this price is lower than that offered to Ukraine...

The price of gas named in euros is fully consistent with the indicative level of the average export price determined by Russia’s Ministry of Economic Development for this year - $222 per thousand cubic meters. This is the average price, so it might be higher for someone, and for others it can be lower. However, Ukraine is located at the proximal end of Gazprom’s export pipeline, so it should have gotten the price lower than the average. On the contrary, we see a higher price, which is unjustified from an economic perspective. Meanwhile, the EC is ready to turn a blind eye, even overpay a little, getting money from the pockets of the European taxpayer, as long as everything is smooth.

But the European money come as a loan, so it will have to be returned at the expense of Ukrainian taxpayers. The question is, why should we go for it? The position of Naftogaz was clear even back in the summer, when Gazprom proposed a higher price. At the time, Naftogaz rightly refused to buy Russian gas. Now the situation repeats itself, but Gazprom has mobilized the European bureaucracy. Gazprom wants the Europeans to press on us, so that we get an inflated price yet again. That is to say, Gazprom seems to be close to getting what it wants.

So, a directive to Naftogaz from the Presidential Administration – is this what you mean when you say “press”?

Yes. In direct negotiations the parties faced the economically motivated position of Naftogaz, which was difficult to argue against. Gazprom has begun to put pressure on the political level. The issue of energy security and gas supplies in winter was addressed during a meeting of Poroshenko, Merkel and Hollande [President of Ukraine Petro Poroshenko, French President Francois Hollande and German Chancellor Angela Merkel met in Berlin on August 24]. I think that is when the so-called wishes were voiced. Just as we used to break our necks to please Moscow, now we do the same for Brussels, Berlin and Paris.

It was earlier agreed that the EC would first meet for gas talks with Ukraine, then with Russia, and only then will the talks be held on a tripartite level. Besides, the  U.S. officials also attended our meeting with the EC. They have earliere repeatedly expressed their absolute support for Kyiv. Could the United States put some pressure so that our country got an economically reasonable price?

The U.S. could only participate as an observer, nothing more. The position of Obama’s administration regarding Ukraine is clear. It sticks to the point everything is happening in Europe, so it is the Europeans who must address these issues. But there is also the possibility that there are certain agreements of a wider format, in which the main thing is avoiding unnecessary turbulence. The price of gas, unbearable to Ukraine, is ridiculously small for both Americans and Europeans, so they are ready to neglect it. Everything will depend on how tough our stance will be in the final round of negotiations – the position of Naftogaz and the Energy Ministry. I am personaly confident in Naftogaz, but I have doubts about the Ministry. It all depends on the orders it will get.

Another important point: Gazprom insists that it must be an exclusive seller of gas aimed at our storages (2 bcm). This does not go in line wth the Ukrainian legislation. What should be done in this situation?

*** The media reported that during the talks in Vienna on September 11, Russian Energy Minister Alexander Novak and Vice-President of the EC Maros Sefcovic agreed on the basic principles of the tripartite gas protocol. In particular, the EC ensured that in the near future, Ukraine will allocate $500 million for pumping 2 bcm of gas into the underground storage facilities, and these funds are to be directly transferred to Gazprom, who will be selling this gas.

By paying Gazprom, we are paying the aggressor. We have a choice. According to Ukrainian legislation, we can import from Russia no more than 50% of the total volume of gas that we purchase abroad. That is, we must divide the European $500 million by two  and purchase gas from European suppliers and from Gazprom. Conditions of Gazprom on the exclusivity of purchase is unacceptable. We must insist on it. I think if our side remains firm, then the Gazprom’s price formula of $250 without discounts will also fail. They must provide a discount of $30-40 given current oil prices. Then we will see Gazprom’s average export price, which we can actually agree to.

Russian Prime Minister Dmitry Medvedev recently reiterated that the gas price for Ukraine at $247 per thousand cubic meters is final and privileged as Russia refused from part of the export duty. Is there any hope for the price to be reduced?

It’s a fact that Gazprom is not willing to lower the price. Everything will depend on how Naftogaz and our Energy Ministry defend their position. $247 is higher than Gazprom’s average export price. Of course, we count on the support of the European side, but it has been playing a double game. Naturally, no one wants any failures in gas supplies. The current situation - the result of a serious mistake. It is not a today’s mistake. It was made by Yanukovych, who once agreed to buy additional gas to maintain transit. Basically, it created grounds for Ukraine to be “exploited” in the future. The transit contract between Gazprom and Naftogaz does not oblige Ukraine to commercially contribute to the transit of Russian gas. Naftogaz should only provide technical support for transit. That is, we are not obliged to purchase additional gas to minimize the risks of a winter period. It is Gazprom that has to pump the gas in our storages and pay ridiculous money for storing it. Or, if the European side is anxious about the winter period,  it should give instructions to certain companies to set up reserves in our storages. But the European companies are not willing to do it.

Why is that?

They have their own reserves. Besides, they are well aware that full liability under the contracts rests with Gazprom. Moreover, the contracts do not have a third party - Naftogaz or Ukrtransgaz. In case of breach of contract, they will lay claims to Gazprom. Then Gazprom will put the blame on Ukraine, but on what grounds? We are not a party to bilateral contracts between Gazprom and its European customers. That is, de jure, it would be very difficult to claim anything from the Ukrainian side.

Why did nothing happen back in 2009, why did Gazprom not sue when it accused us of disrupting the transit? Because the claims were unfounded. By the way, the question is why the European companies did not sue Gazprom, although they threatened to at the time? Because there is also an under-the-table format of relations. Now this format simply does not work for us, but it still applies to the Europeans’s relations with Gazprom.

Can we attribute this under-the-table format to the situation with the expansion of Gazprom’s Nord Stream, which was already agreed with foreign companies? Ukrainian Prime Minister Arseniy Yatsenyuk has criticized the agreement, calling it unfair to Ukraine, as well as Slovakia has, as it would be excluded from the supply chain to the EU and thus suffer billion dollar losses...

*** On September 4 Gazprom signed a shareholders agreement for joint project company, within the framework of the Eastern Economic Forum. The company will deal with the construction of the Nord Stream-2 pipeline. Beside Gazprom, among the shareholders of the New European Pipeline AG joint project company are E.On, Shell, OMV, BASF/Wintershall, and Engie (former GdF Suez). Gazprom will hold 51% of shares; E.On, Shell, OMV and BASF/Wintershall - 10% each; Engie - 9%. The North Stream-2 project involves the construction of two gas pipeline strings with a total capacity of 55 bcm of gas annually from the Russian coast through the Baltic Sea to the German coast, bypassing Ukraine and Slovakia.

Let's divide the concept of Europe as it is non-uniform. Besides, Gazprom has traditionally used its agents of  influence - the European partner companies. They have long-standing business relationship, both formal and informal. Nord Stream-2 was suggested to Europe exactly through these companies. Gazprom, that is, Russia in general, knew perfectly well that it would be extremely difficult to find support at the government level. For example, Austria and Germany might have supported the project, but in the case of the British-Dutch Shell, that is, with the Great Britain and the Netherlands, it would have been more difficult. The EC is unlikely to support this project, in contrast to the Nord Stream -1, which was approved at the level of a particular instrument - "Russia – EU Energy Dialogue." By the way, Russia has cheated at the time, it tricked the Europeans. The project has been tied to the Shtokman gas field. If you look at where the Shtokman is located, and where Germany is, everything looks quite logical. But then the Russians rebound the project to a group of Sakhalin and Yamal gas fields. It was pure manipulation. Therefore, knowing that at the Nord Stream-2 would not see any support at the government level, they went for sealing the deal through partner companies. But the signing of agreements with the European companies does not mean that the project was approved at the highest European level. What Russia is counting for is that the governments will not interfere with the matters of business entities. Actually, the statement by the German government officiall just a day after the signing proved this point. He said that what has happened is just the relationship between the companies. That is, the project was virtually approved at a government level. Then comes the level of the EC, which is expected to say: “It is our risk, but the governments support the companies, the rest is beyond our mandate.” Gazprom expects that the EC, in its usual manner, will simply turn a blind eye. So, this is a serious test for the EC. Strictly speaking, this is a test for the very existence of the EU in terms of energy.

So, Russia uses European weaknesses. Now the Russians tell the Chinese that, if they do not want the Power of Siberia project, Moscow couldn’t care less because they will negotiate with the Germans. If the Turks push with some conditions unfavorable to Gazprom regarding the Turkish Stream, Russia will threaten to build just one string of the pipeline. What about the Bulgarians? “Look, you bristled, and now you lost the South Stream,” Russians will say. All roads in Europe lead to Germany, and Russia is showing that it is will decide on everything in direct negotiating with the Germans, including on the fate of the other countries.

That is, now we have what Sikorski (Poland’s Minister of Foreign Affairs) predicted ten years ago: "North Stream-1 – is like a Molotov-Ribbentrop Pact.” However, the final signatures are not yet put under the agreement on the Nord Stream-2, but the hand with a pen is already raised. If the signing takes place, we can say that Russia and Germany divided Europe again, only in terms of energy for now. Germany is Europe’s largest consumer of gas, primarily Russian gas. It has been obvious for quite a while that Russia was trying to cut down the Ukrainian-Slovak gas route.

What should Ukraine and Slovakia do?

A joint and firm position must be developed. If a positive decision on the Nord Stream-2 is taken, we will be forced, just for starters, without waiting for its implementation, to stop the transit service of the gas streams which the participating companies operate, as their actions are damaging to Ukraine and Slovakia.

Especially since the European taxpayers' money is already coming for the reconstruction of the Ukrainian gas transport system. EBRD allocated a loan for these purposes, the work is underway, so the scandal is inevitable.

Moreover, throughout the year we need to equip our eastern border with Russia with gas-measuring stations and announce that will only serve the transit flows of those companies who will accept gas solely on the Ukrainian-Russian border. We will have to stop servicing the remaining companies, which will ignore this principle. This should be our position. And then the negotiations will certainly follow.

There is a very acute issue of pumping gas into our underground storage facilities. Ukraine is behind schedule - there are already 15 bcm, while Russia insists on 19 bcm. Having succumbed to panic bloated by Russia, Europe agreed with this figures. But the government has repeatedly stated that Ukraine will go through the heating period comfortably even with 16 bcm of gas. Could you explain this?

No one knows how cold this winter will be. Of course, it is better to have more gas in our reserves. If everyone is so worried about the winter season, then Gazprom has to go for a compromise and sell gas for $200 instead of $250. Then we will pump it in storages. But Gazprom is not willing to do so. Then the question arises, what we need extra gas for, considering that it is overpriced. Besides, our gas consumption has significantly reduced. Of course, there is a risk at the peak of consumption if the temperature falls dramatically. And if this happens simultaneously in the EU, Ukraine, and the European part of Russia, then Gazprom will be of absolutely no help to anyone. The winter of 2012 is a good example. From late January to early February Gazprom failed to secure gas supplies. With this in mind, we should build our position for the negotiations.

Nana Chornaya (UNIAN)

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