Gazprom lifts gas transit through Ukraine while Nord Stream closed for repairs

Gazprom lifts gas transit through Ukraine while Nord Stream closed for repairs
By Ben Aris in Berlin August 10, 2016

Russian gas giant Gazprom diverted more gas to customers in Europe through the Druzhba pipeline that runs across Ukraine while the alternative Nord Stream pipeline that runs under the Baltic Sea to German is closed for summer maintenance. However, Ukraine has yet to lay in gas supplies for the winter and that could cause problems later this year. 

The change highlights how important the Ukrainian route built in Soviet days still is to the Russian gas producer. It also comes at a time when the planned Turkish Stream pipeline that runs to Turkey are even the cancelled South Stream that runs through Bulgaria could both be back in play. Both pipelines would replace Ukraine as a route to Gazprom’s main customers in Europe, but there is only enough gas to fill one of the two mooted projects.

Turkish President Recep Tayyip Erdogan was in St Petersburg on August 9 and told journalists in a joint press conference with Russian President Vladimir Putin that Turkish Stream would go ahead and could be completed by 2019. If it does appear, then it would carry 63bn cubic metres (cm) of gas to Europe.

In the meantime Gazprom has applied to Kyiv to increase gas transit through Ukraine 20% to 275m cm per day, but has not yet increased pressure in the pipes, according to Ukrtransgaz, Vedomosti reported.

The planned increase in the transit of gas through Ukraine is due to maintenance works on Nord Stream from August 9-17. Nord Stream is to start operating at full capacity from August 19.

Ukraine remains locked in a dispute with Russia over gas prices agreed in a contract signed by former Ukrainian prime minister Yulia Tymoshenko, which will only expire in 2018. However, following price increases on domestic tariffs forced on Ukraine by the IMF and the dramatic fall in gas prices in the last two years, Ukraine is under a lot less pressure to pay for gas than in the past. The so-called annual gas war that marred the heating season each year is unlikely to resume this year.

"According to the contract, at the border between Ukraine and European countries, Gazprom gets the same amount of gas which it pumped into the pipeline at the Ukraine-Russia border. Therefore, it is the transit country’s obligation to channel the gas and to maintain pressure in the pipeline. Given that Gazprom gave advance notice that transit volumes via Ukraine would increase during the maintenance works at the Nord Stream, we do not expect any tangible consequences," VTB Capital said in a note.

However, VTB still struck a note of caution as most of the storage facilities used to hold gas as the winter approaches were built in Ukraine by the Soviets and are essential to ensure the supply to gas to the rest of Europe in the cold part of the year.

Given the tensions, Ukraine has not been building up gas reserves ahead of winter and VTBC reported that gas volumes in underground storage in Ukrainian for Ukraine’s own use are low: at just 11bn cm, they are 17% and 27% below the levels last year and in 2014, respectively. In the past if Ukraine ran out of its own quota of gas, it has simply helped itself to gas earmarked for Gazprom’s European customers.

The last two winters have gone smoothly, thanks to the warm weather, with 16bn-17bn cm of gas at the country’s storages by the beginning of the heating season.

“We believe Ukraine will have to increase its gas purchases significantly in the autumn to reach a sufficient level to get through the coming winter. That would be supportive for Gazprom as the gas, which is purchased (either from Europe or from Gazprom directly) will likely be sourced from Russia. Otherwise, we see transit risks for the company in the upcoming winter season,” VTBC said.