Transit Contract Ends: Who is Guilty and What to Do

No one is guilty that on December 31, 2019 the current transit contract between Naftogaz of Ukraine and Gazprom of Russia ends. As the same time two highly controversial bypassing projects will soon become operational – North Stream-2 and Turkish Stream. That will end an era of the decades long Ukrainian gas transportation business of approximately 90 bcm per year from Russia to Europe and Turkey. Taking into account the hurdles the notorious North Stream-2 is facing the physical transit may not end completely but commencing on January 1, 2020 there will be no more long-term commitments on gas transit through Ukraine. On the one hand this is good news since gas business of Russia in Ukraine has always been a source of corruption and political influence rather than transparent relations between state-owned enterprises. On the other hand, termination of transit does pose a serious risk for Ukraine both in terms of loosing substantial transit fees and ability to purchase gas via physical or virtual reverse from Europe.

The idea to deprive Ukraine from gas transportation business is a part of the Putin’s plan to hurt Ukraine’s economy and diminish the European interest to integrate Ukraine with the West. He succeeded in bringing major European energy companies from Germany, France, Austria and other European states on board of politically motivated North Strean-2 project. Particularly disappointing that Germany and France being two supporters of Ukraine in the Normandy format in Minsk agreements have agreed to build this highly controversial pipeline. It will bring 55 bcm from Russia through the Baltic Sea to Germany bypassing Ukraine, Slovakia and Poland. In its turn Turkey has agreed to build the Turkish Stream pipeline which will bring 32 bcm from Russia to Turkey bypassing Ukraine, Bulgaria and Romania eliminating the existing Trans-Balkan pipeline. The sum of two capacities of 55 bcm and 32 bcm literally equals to all gas transit through Ukraine. That is Putin’s math.

Being alert by the Ukraine’s authorities the European Commission took several steps to help resolve the problem. Germany stated that transit through Ukraine has to be maintained no matter whether North Stream-2 is operational or not. A couple of rounds of trilateral  negotiations (rather should be called discussions) took place without any results. It is clear that such a format is a tricky one: Ukraine simply cannot enter into a new bilateral agreement with Russia, since Russia is an occupying power in Donbass and Crimea. The situation is very tough. Although the perfect solution does exist – to move contracts between European consumers and Gazprom from Western border of Ukraine to its Eastern border and  let them sign a transit contracts with Naftogaz based on the European contract practice. But apparently this is not something to happen before the current set of purchase-deliver contracts expire. So, where is a solution to the problem?

Expert analysis shows that there is a possibility to get Ukraine out of the Russian trap and supply its economy with sufficient amount of natural gas (in addition to increasing domestic production which is a separate story). And to look for such solution the Ukrainian authorities should go not to Brussels or Berlin, but to Sofia and Poland. It is just a matter of reality that Bulgaria will soon become not just a consumer of natural gas but an important transit state. The drying Trans Balkan rout that has been the prime and only source of natural gas in Bulgaria for decades push Bulgarian Government to negotiate with Greece and Turkey on one hand and with Serbia on the other. Interconnectors with south neighbors will supply Bulgaria with LNG from Greece and with Azerbaijani/Russian gas coming through Turkey via TANAP and/or Turkish Stream. Interconnector with Serbia will be sufficient to supply natural gas for Belgrade. But even with transit pipelines from Bulgaria to Romania and Northern Macedonia there is a bigger possibility for Bulgaria to serve as a transit hub. That means to use Trans Balkan rout in reverse mode to pump gas to Southern part of Ukraine. It is crucial for Naftgaz of Ukraine and the Ukrainian Government to express its interest in working with Bulgarian TSO BTG for this project. Recently the delegation from Naftogaz has visited the United States and made a statement about purchase of American LNG. LNG terminals in Greece with transit through Bulgaria and Trans Balkan pipeline in reverse mode could serve this purpose directly or through swap operations.

 As well, there is another opportunity to bring natural gas to Ukraine and that is TANAP pipeline bringing natural gas from Azerbaijan to Turkey and South-Eastern Europe. Socar is willing to work with BTG in using the Bulgarian transportation system to get exit to Romania and Serbia. Similarly if there is a spare capacity and good will the Naftogaz, Socar and BTG could discuss a possibility of supplying additional volumes of gas to Ukraine via Bulgarian section of Trans Balkan pipeline. And there are no problems on a Romanian part further North.

 Similarly a Polish terminal in Świnoujście and possible future extensions of Polish LNG capacity could be a reliable way to supply Ukraine with at least 5-7 bcm of natural gas coming from non-Russian sources (LNG from the United States or Norway). There is a small pipeline between Ukraine and Poland but its  capacity is not of commercial value. At the same time investment plans for Polish-Ukrainian interconnector were shelved by Naftogaz for unknown reasons. Hope to stop North Stream-2 with sanctions from the United States Congress should not prevent Naftogaz from exploring every opportunity to supply Ukraine with natural gas from alternative sources. And that is exactly that should be done urgently. Otherwise winter will come unexpectedly with Putin`s cronies at the Gazprom`s valves. Third gas war might be long and cold.