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Expert: EC is Ukraine’s hybrid ally in talks with Gazprom

11:00, 03 March 2016
7 min. 195 Interview

President of Strategy XXI Center Mykhailo Honchar has predicted in an interview with UNIAN what the upcoming talks with Gazprom be like, explained why the process is delayed in the Stockholm arbitration, and elaborated on the fate of Russia’s gas projects bypassing Ukraine.

In the first days of March, Vice-President of the European Commission for Energy Union Maros Sefcovic paid a visit to Ukraine, having met with President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk. European Commissioner also took part in the International Energy Conference of Adam Smith Institute in Kyiv. The European official, as well as the Ukrainian authorities, voiced a number of statements. UNIAN has asked the president of the Strategy XXI Center, Mykhailo Honchar, to comment on these statements. The also spoke about the mood of the participants to the Energy Forum and the underlined points regarding Ukraine’s energy problems.

One of the most striking statements of Maros Sefcovic was his call on Ukraine to prepare for negotiations with Gazprom, as the Stockholm arbitration will not resolve the dispute between Naftogaz and the Russian monopoly before the end of 2016. What should be expected?

Most likely, a "winter package" will be signed. Without a verdict of the arbitration this year, the next heating season is under certain risks. Therefore it is necessary to prepare a new package of documents for the winter period of 2016-2017. I think everything will happen just as in the previous two seasons.

The European Commission proposes to hold the "gas" talks at the end of the heating season and guarantees its participation...

And the participation of the European Commission will also be traditional – they sort of support us, but with an eye to Gazprom. And Gazprom feels it and starts pressing us even stronger. We shouldn’t expect that the Commission will take an unequivocal position. In this case, the EC is a hybrid ally for us, unfortunately. But this is the reality, and it has to be taken into account.

Prime Minister Arseniy Yatsenyuk predicted that the decision of the Stockholm arbitration will be issued before the end of 2016, and it will be in our favor. Why are the proceedings delayed?

Most likely, the arbitration’s decision on the extension of the proceedings was taken as a result of delays on the part of Gazprom. The European Commission can not affect the operation of the arbitration court. Of course, it has its own procedure, but if one of the parties delays the provision of relevant information, fails to perform certain actions, this puts issuing a verdict on a brake. Gazprom is keen on arbitration proceedings, it has lived through dozens of them in disputes with various European companies. The Russian monopoly is now successfully using gained experience. The time is working for Gazprom. I don’t think that we will undoubtedly see the final decision on our claims even in 2017.

And what will happen if the process is delayed until 2019, when the terms of the contract with Gazprom are over?

We can’t exclude the scenario when the delays will continue to just before the completion of the contract. But it’s irrelevant for the arbitration. The verdict can be handed down even after the contract’s term is over. By the way, any contract indicates that in the event of the completion of its term, commitments by the parties shall be executed in full. The arbitration decision will take into account this condition, no one will escape responsibility. The obligations under this document must be fulfilled in accordance with international law.

Why is Gazprom delaying the proceedings?

In order not to be distracted and to continue to resolve issues related to pipelines bypassing Ukraine, for example, Nord Stream-2. Delays in the arbitration are an additional factor of uncertainty with regard to Ukraine, which Russia and Germany – by the way, we don’t know which of them to a greater extent – are using to justify the need for Nord Stream-2. They demonstrate that there is political instability in Ukraine, that there is not a military aggression, but a military conflict in our country in their interpretation, plus the delays in reforms in the oil and gas sectors. Therefore, it will focus on the need for hedging fuel transit and the implementation of Gazprom’s projects. In this regard, the Russian and German sides are working in synergy.

In your opinion, how should Ukraine and the European Commission act?

At the International Energy Conference, both Maros Sefcovic and representatives of the domestic fuel and energy sectors have addressed this issue. The algorithm of actions, which is being worked out, was voiced quite clearly – the European Commission should decide not in terms, whom it should support, but in terms that its position can’t be as that of the arbitration. The European Commission must proceed from the fact that Ukraine has an Association Agreement with the EU and a membership in the Energy Community, it launched the reform of the gas market, including the launch of a Naftogaz division procedure.

At the same time, Ukraine faces a certain risk - what do we do if we define Ukrtransgaz as a separate company, while Russia and Germany build a Nord Stream-2. In case of transportation of own gas and the imported minimum, Ukrtransgaz is unlikely to work with zero profitability: it will become unprofitable. So, what is next?

But Maros Sefcovic said that the European Commission had not yet made a definite decision on the Nord Stream-2 due to the lack of specific information on the part of Gazprom. He also stressed that Ukraine must remain an important transit country...

The formula voiced by Sefcovic is correct. But more important are the figures – how much we will transit. German Vice-Chancellor Sigmar Gabriel called to build Nord Stream-2, with Ukraine remaining a transit country. But the volume of gas transit will then stay at 30 billion cubic meters.

But this is unacceptable for us. During a meeting with Sefcovic, Poroshenko has once again insisted that Nord Stream-2 should be blocked. Yatsenyuk also spoke about it. They are counting on the European Commission's support in this matter...

I'm talking about the same thing – the project is unacceptable to us. Ukrainian gas transportation system capacity is 140 billion cubic meters. It is designed this way. If there's 30 bcm, the system will become unprofitable. That is, we can say that Ukraine remains a transit country with Nord Stream-2. But what happens then fundamentally changes Europe’s attitude to us.

Another Russian project bypassing Ukraine – Poseidon – added up to Nord Stream-2 recently. What do you think will happen to it?

It did not appear all of a sudden, Gazprom just pulled onto the surface. Poseidon was conceived for the supply of Azerbaijani gas from Greece through the Ionian Sea to the south of Italy, but then it was shelved. The reappearance of the project is Russia’s strategy aimed at disrupting the Trans Adriatic Pipeline project, which EU is trying to implement to transport Azerbaijani gas on route through Greece, Albania, and the Adriatic Sea to Italy.

The Russians will not succeed with the project. But from the point of view of the media, the influence of propaganda, then, of course, it is working now. This is the Gazprom strategy: destruction of competitors, pushing through solely its own interests in relation to the Baltics and the Black Sea. At the same time, the European Commission issues vague statements - we do not influence the process so much, we are a kind of an active extra. Unfortunately.

During a meeting with Maros Sefcovic Yatsenyuk proposed to start the work on the synchronization of energy grids of Ukraine and the European Union. The commissioner only responded with the proposal to share the experience of the Baltic states. But the EU has been working on synchronization of energy grids with the Baltics for over ten years. The EU energy program provides for this process to be completed in 2025. Will Ukraine be able to do it faster?

We won’t do it faster, especially in our situation. We have talked about synchronization before. But it may take ten years or more. The Baltic experience is telling. These countries have been members of the European Union since 2004, and only now they are trying to have their energy systems synchronized with that of the EU. In the Ukrainian case, it’s even more difficult, and the ten-year period would actually be an adequate term. While making the proposal, Yatsenyuk didn’t expect this to happen right away. Obviously, he decided not to call any time-frames, as they would not make most people optimistic, while those familiar with the matter know the real terms very well.

How would Ukraine benefit from synchronizing its energy grid with that of the EU?

The two grids will be able to exchange electric power easily in case of failures and sudden deficit. At the forum it was said that we now have 7 GW of free capacity available for the production of electricity being idle because there is nowhere to put this energy – it is not needed in the domestic market and we can’t export it at such volumes. Only Burshtyn deliveries power abroad. The station works in the mode of an energy island. By the way, it is synchronized with the European energy grid.

We need to synchronize. Then our energy grid will operate at a stable frequency. Now it is not, and no one will buy this energy, so it would it simply unbalance the energy grids of neighboring countries.

Why such a long period of synchronization?

Because it is necessary to complete an enormous amount of work within the power system to bring it into a state that complies with the technical conditions prevailing in the European Union. There is nothing we can’t do here, but it takes time and, of course, a lot of money.

Answering the question whether the European Commission has assessed the possibility of Ukraine become fully independent from Russian gas, Maros Sefcovic did not say anything specific, only giving an example of the EU, which is actively promoting the diversification strategy which our country should follow. And to do this, we need to speed up reforms. Are we doing little in this direction?

Reforms in the energy sector can’t be fast. Brussels believes that we can do everything at a snap of fingers, within six months. Even the developed countries of the EU didn’t have it happen this way. Even the Third Energy Package has been implemented for five years. But, unfortunately, some of our officials fell for and set the relevant deadlines. And now Europe is saying: you set the deadlines, so please, follow them.

For example, Maros Sefcovic said that a developed network code, which is part of the reform, is imperfect, and it needs to be adjusted as soon as possible. But in Poland, such code was amended dozens of times. So, the demands to Ukraine are excessive. We definitely don’t demonstrate any high pace, but the European Union takes out of the brackets the fact that Ukraine is under external aggression. There were only some vague hints at the Forum that they know about our problems, but the reform is above all. And we should not ignore this. So, they demand immediate reforms, shaking packs of euros in their hands as if they are ready to give them to us once the reforms are complete, and on the other hand they are playing with Gazprom, for example, with Nord Stream-2. But if we just go on implementing the EU-type reform, we'll get new problems for ourselves. By the way, the reform of the Ukrainian gas transportation system is already in force today, and its work is even more transparent than in some EU countries.

But if Russia succeeds with Nord Stream-2, then we will face a problem: what are we to do with the people working in our energy grid, what are we to do with the grid itself? We won’t need that many pipes. Even if we conserve them, they will still need to be maintained and secured. Unfortunately, I have an impression following this and a number of other European forums that very few people in the EU understand this, while the decision makers are silent on this matter. They are only ready to solve this problem on paper.

And finally, what about your impression from the current Energy Forum. What was in the main focus?

This conference is telling. In the first place, it was about Ukraine’s problems and what to do to solve them. The Ukrainian side outlines the objective state of affairs, while the Europeans show a template approach, using the algorithm worked out for the EU countries, where everything is different from our reality. In any case, it is a useful exchange of views and evaluations.

In addition, it is clear that in some sectors, there is a real work going on, it is not a zero stage, when everyone is just getting prepared for something. The process has started. No one is satisfied with the pace of the process, but this is today’s reality. If you put a powerful Mercedes engine into some cheap vehicle, it might go faster, but it will most likely break down soon. And this should be taken into account.

Nana Chornaya (UNIAN)

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