Ukraine looks to Slovakia to help reduce Russian gas leverage

By bne IntelliNews March 27, 2014

bne -

Talks to resurrect a long-mooted plan to pipe gas from other parts of the EU to Ukraine via Slovakia - and thus reduce Russia's leverage over the interim administration in Kyiv - are finally underway. However, the noises surrounding the meetings are not universally positive.

Ukrainian gas pipeline operator Ukrtransgas met with Slovak counterpart Eustream in Brussels to discuss technical aspects about reversing the flow of gas through Slovakia's pipeline, European Commission spokeswoman Sabine Berger and Eustream spokesman Vahram Chuguryan told Bloomberg on March 26. The route is currently used to ship Russian gas to Europe, although the idea of reversing it has been doing the rounds for some time.

The EU representative sought to highlight the positive. "It was a constructive meeting with the objective to accelerate the installation of physical reverse flow at the Slovakian-Ukrainian border," Berger said in an emailed message. "Some further technical work is needed which will be carried out during the next two to three weeks."

However, similar to its stance on the sanctions the EU is placing on Russia, Slovakia sounded more circumspect. Prime Minister Robert Fico said his government does not have the money to sponsor the project, and insisted Brussels would have to pay, reports Euronews. "I think that Ukraine should not get gas for free," said Fico. "Nobody can accept a situation when Ukraine does not pay for the transit of gas. It would be necessary to build a gas flow monitoring station, which would cost around €20m."


Ukraine has long been looking for ways to reduce its dependence on Russian gas, in a bid to reduce Moscow's leverage over it. The fuel that would be sent to Ukraine via Slovakia will still originate in Russia, but has been imported by other EU states that pay Gazprom a lower price than Ukraine, such as Germany. For Gazprom, Ukraine is a captive market so charges considerably more than it does other EU states, which can source their gas from elsewhere. Moscow frowns on the practice, though its gas for other EU states can be re-exported to Kyiv, shipped via "reversed" pipelines that usually send gas from Russia to Europe.

Ukraine began importing some limited volumes via Poland and Hungary last year. However, talks over opening a larger capacity link with Slovakia faded as Moscow put a gas price discount on the table in return for former prime minister Viktor Yanukovych's refusal to sign off on a free trade and association pact with the EU. Since he was deposed, Russia has said it will raise gas prices to $400-500 per 1,000 cubic metres. At the same time, since the annexation of Crimea, Kyiv risks losing a $100 discount that is linked to Russia's lease of the Sevastopol navy base.

With Ukraine carrying the bulk of Russian gas exports to Europe, the price of its own imports has long been a central issue in Kyiv, whose interim government is scrambling to secure western aid to stave off economic meltdown. One the one hand, many of Ukraine's major power brokers - political and business - are reported to have made their fortunes from the murky gas trade that takes place at the Ukrainian-Russian border. On the other, Kyiv has long bought off the population by subsidizing the cost of gas to consumers.

That practice delayed international aid to Ukraine during Yanukovych's regime, and has helped bring state finances to their knees. With the International Monetary Fund expected to unveil a $15bn loan imminently, the new government said on March 26 it will raise domestic gas prices by 50%.

Andriy Kobolyev, the new head of national gas company Naftogaz - the previous incumbent was led away last week in handcuffs - said on March 26 that in the best case scenario it will add UAH80bn (€5.2bn) to the government's deficit this year, making international aid more urgent. "A 50% hike in household gas prices and 40% for distributors would likely cut this deficit by maybe one quarter," suggests Tim Ash at Standard Bank, "but it would still leave a pretty big shortfall."

Help on the way?

The gas price hike is also presumably the least the IMF would accept. Ukrainian officials say they expect an announcement on a loan on March 27, with $15bn-20bn the figure doing the rounds. "That seems plausible as the EU is pledging around €20bn until 2020," write analysts at Commerzbank, "of which a large portion would come from the EBRD/EIB in cash, which together with the IMF funds would add to around $30bn-35bn in cash over the coming years, more than enough in our view to calm markets."

Still, Kyiv needs to achieve greater independence from Russian gas if it is to avoid catastrophe. Ukrainian Energy Minister Yuri Prodan said on March 25 that the country has the capacity to import up to 12bn cm of gas through the Slovak pipeline, and a further 7.2bn cm from Poland and Hungary. Acting Prime Minister Arseniy Yatsenyuk claimed on March 26 that Ukraine could import as much as 25bn cm from the EU, and that the price would be $100 cheaper than buying from Gazprom. The price of EU gas is expected to be around $400 per 1,000 cubic meters, according to analysts.

Ash calls Yatsenyuk's claim "not very realistic to be frank." Pointing out that from whichever direction it approaches Ukraine, it's still Russian gas. He suggests EU supplies could total 7bn cm "at best" in 2014. Ukraine consumes 52bn-54bn cm annually. It produces 22bn cm domestically, and imports 28-30bn cm from Russia at present.

However, domestic production is likely to fall this year, due not only to the interruptions caused by the crisis, but also the annexation of Crimea. With it went Chernomorneftegaz, the offshore exploring arm of Naftogaz, which was nationalized by the Crimean parliament. The pennisula's absorption by Russia also puts many of Ukraine's offshore reserves beyond its reach.

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