Slovakia rules itself out of Ukrainian gas transit role

By bne IntelliNews August 27, 2014

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Slovakian gas transit operator Eustream said on August 26 it has no plans to play a management role in Ukraine's gas transit system. The announcement appears to rule out what could have been an ideal candidate for the strategically sensitive role.

Russia's Itar-Tass reported the company will not look to take on the operations of Ukraine's gas pipelines, in which Kyiv wants to sell 49%. The newswire quoted an unnamed Eustream spokesman who said: "No one has asked Eustream to join the joint venture to manage Ukraine's gas transportation system. Our company has not received such proposals."

The comments come as speculation mounts over which companies could play a role in the geopolitically charged operation. Kyiv amended legislation earlier this month opening the way for a third party to take over management of the network from the inefficient and corrupt state gas utility Naftogaz.

On August 18, unnamed sources familiar told Russia's Prime news agency that three Western companies, including US giant Chevron, will bid to manage Ukraine's gas transportation system. However, that would be unlikely to impress Moscow.

Eustream - the main money spinner in Slovak gas group SPP, in which Czech-based energy holding EPH bought 49% and operational control last year - would appear to be a good candidate, even though it's reported to have attracted some suspicion in Brussels and Washington over its role in restricting EU gas deliveries to Ukraine. Alongside Bratislava - which holds 51% of SPP and in June took full ownership of the import business - EPH is thought to have blocked Kyiv's requests to reverse the one of the mainline pipes that carry Russian gas through Ukraine to Europe.

Since PPF Group - the holding company of Czech billionaire Petr Kellner, who has close ties to Russian business groups, namely the St Petersburg oligarch circle surrounding ICT group - sold out of EPH earlier this year, the company is controlled by Slovak financial group J&T. The Slovak opposition has accused Prime Minister Robert Fico and his Smer party of maintaining links to the closely-held investor.

With Russian gas as a tangible means to pressure cash-strapped Ukraine, the EU has been pushing to supply Kyiv with cheaper supplies - albeit the gas is still actually bought from Moscow. Others are sending small volumes by reversing pipeline flows, but Slovakia, which sits on the main line that carries Russian gas through Ukraine to Europe, has the potential to play a pivotal role.

While Poland and Hungary - which began reversed supplies in 2012 - are sending around 6bn cubic metres a year (cm/y) combined, Slovakia has the pipeline capacity to boost that to 36bn cm/y, according to estimates. That would all but cut the threat of another winter spent shivering for the states at the eastern end of the EU, as happened during the Russian-Ukrainian "gas wars" in 2006 and 2009. It would also severely dent Moscow's leverage over Kyiv as it looks to move closer to the EU and out of Russia's orbit.

However, despite years of negotiation, Bratislava refuses to play ball. It claims that reversing one of the four pipelines on the main line would be at odds with its contract with Russia's state-controlled gas exporter Gazprom. It has also slammed Ukraine for its conduct in the "gas wars," when it diverted flows headed west for its own use.

Eustream is instead opening up a disused pipeline, but that offers capacity of just 10bn cm/y. The Ukrainian government said in mid-August that Uktransgaz and Eustream have now begun testing on the route.

Ideal candidate?

Slovakia and Eustream's apparent refusal to discuss running the Ukrainian transit system may not bode well for Kyiv and its role as the transit corridor for 40% of Russian gas headed for the EU. Slovakia is heavily reliant on transit revenues from the route, while Eustream owner EPH has a vociferous appetite for CEE energy assets.

Eustream then could appear an ideal candidate for such sensitive role. While an EU-based company, it has also worked hard to maintain Moscow's trust while relations with the European bloc have nosedived. It also has a very strong interest in keeping Russian gas flowing through Ukraine.

As it argues yet again with Ukraine over Kyiv's gas bill and pricing, Russia is threatening to cut its reliance on its neighbour's gas transit system by building the $15bn South Stream route under the Black Sea and into southern Europe with a hub in Austria. However, it is currently at a standoff with the EU over the project, as Brussels looks both for leverage over Moscow's role in the Ukraine crisis and to prevent expanding the bloc's reliance on Russian energy.

Apart from Ukraine, Slovakia and Eustream look to be the biggest potential losers should South Stream go ahead. They would lose huge transit fees, and unlike most in the neighbourhood, have not been included on the new route.

When EPH bought the 49% stake in SPP from Germany's E.ON and France's GDF Suez, it was suggested that it must have some form of guarantee on Russian gas flows through Slovakia, given that they represent by far the bulk of revenues, and Moscow has been talking about alternative routes for years.

However, similarly to the likes of planned South Stream hosts Bulgaria and Hungary, Slovakia has been amongst the strongest opponents of EU sanctions against Russia. It shocked few then that Slovakia won itself a discount on Russian gas in March. The reported price cut of 10% leaves the country paying around $340 per 1,000 cm, according to estimates - at the lower end of the scale among European states.

Indeed, Russia cut supplies to Ukraine in June, claiming to be owed billions of dollars. A resolution was on the agenda at talks between Ukraine President Poroshenko and Russian peer Vladimir Putin on August 26 in Minsk, but most held out little hope that a deal could be struck. That leaves the situation on tenterhooks as the summer comes to an end.

Those worries have had Bratislava bashing Kyiv for its behaviour in previous years; a stance with which analysts say they have some sympathy. In the kind of short, reassuring statement that has become regular since June, Eustream confirmed on August 26 that the gas flow from Ukraine "is in normal mode."

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