Suspension of Russian gas transit via Ukraine highly likely / News / News agency Inforos
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Suspension of Russian gas transit via Ukraine highly likely

Negotiations on cooperation prospects between Gazprom and Naftogaz have reached a deadlock

Suspension of Russian gas transit via Ukraine highly likely

During the recent weeks, the risks have only increased that the transit of Russian gas via the territory of Ukraine will be halted starting January 1, 2020. The Naftogaz of Ukraine company has chosen the line of building up claims against Gazprom. And the Russian concern insists on writing off all the reciprocal claims and turning over a new leaf in cooperation starting January.

On November 18, PJSC Gazprom sent a formal proposal to Naftogaz (the document is also addressed to Ukrainian Energy Minister Oleksiy Orzhel and Deputy Chairman of the European Commission Maros Sefcovic) as to prolong the existing contract or establish a new one on gas transit through the territory of Ukraine for the period of one year. The fundamental term for further cooperation is the mutual remission of international arbitration claims by Gazprom and Naftogaz and the termination of all the ongoing court proceedings. The Russian giant also considers it necessary to invalidate the decision by Ukraine's Antimonopoly Committee on an "abuse" fine against Gazprom. Plus the withdrawal of Naftogaz's motion to initiate a European Commission investigation into the activities of Gazprom.

However, head of the Ukrainian Energy Ministry Oleksiy Orzhel publicly defeated the Russian side's offer, referring to it as "unacceptable". "In case we sign a long-term contract, we are able to search for compromises with Gazprom," the official concluded.

Gazprom has no desire to withdraw from the long-term transit document, since from 2020 it has every reason to hurry in loading alternative gas transportation routes – Nord Stream 2 and Turkish Stream. In order not to slow down the payback cycle of these projects, one needs to rush into driving up to their rated capacity. If maintaining to pump significant volumes through the Natural Gas Transmission System of Ukraine, as insisted by Naftogaz, a certain standstill of Gazprom's new infrastructure will follow. Which looks absurd through a business prism and from the perspective of all the shareholders.

It is not for the first time that the Ukrainian transit issue draws attention of Russian President Vladimir Putin. During his visit to Brazil for the BRICS summit, the November 14 final press conference saw him once again offering Ukraine a considerable gas discount (25 per cent) in relation to reverse schemes when returning to direct Russian blue-sky fuel purchases, reminding the audience that it makes sense to completely abandon reciprocal claims.

The Naftogaz leadership shut their ears to the leader of Russia, responding that he (Vladimir Putin) was imperfectly informed. The Ukrainian holding group believes that the 25 per cent discount is an obvious figure due to the lack of transit leverage, when compared to the price of Gazprom's pipe gas in the European Union countries. In addition, the discount does not allegedly compensate for legal claims against Gazprom (even though logic suggests that a substantial gas discount in exchange for zeroing out the claims is an appealing offer). We are talking about $2.56 billion, which, as you know, Naftogaz obtained by courtesy of the Stockholm Arbitration. But Gazprom has challenged this claim and keeps waiting for a resolution.

Although the Russian giant fears injunctive remedies in a lawsuit filed by Naftogaz on the part of European supervision. It even preferred to cancel the planned three-billion-euro Eurobond placement – Naftogaz could have benefited from the situation, if it entailed a blocking of Gazprom proceeds by European regulators.

The polarity of stances taken by Russia and Ukraine on the gas issue is getting increasingly obvious. The European Commission remains neutral as a mediator. And, in fact, it cannot actively influence the stalemate. Only permanent calls for a negotiated compromise between Gazprom and Naftogaz are the mediator's entire toolbox. Against this background, rumors are sometimes born and exaggerated. For example, on November 19, Naftogaz refuted information on the European Commission's (EC) recommendations that Ukraine directly purchase natural gas from Russia starting 2020.

A number of factors are encouraging the so-called "gas war", including underground gas storage in Europe packed to the rafters and forecasts of a likely mild winter in the region. And LNG receiving terminals in the EU retain their potential to accept more liquefied fuel being in surplus in the global market due to the slowdown in China's economy. Moreover, early winter may already witness the launch of the Turkish Stream – the "southern" gas transportation bypass of Ukraine.  There are also forecasts for the commissioning of the transbaltic Nord Stream-2 pipeline in early 2020.

Hence the European Commission's temperance in terms of calling for an urgent solution to the issue of Ukrainian gas transit from Russia after 2020. There is a precise understanding that the Europeans can do without the Natural gas transmission system of Ukraine during this heating season. And the probable attempts of the EC to politicize the situation in this context will look frankly biased.

The date of a new Russia-EU-Ukraine ministerial gas meeting has yet to be fixed.

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