Ukraine, Gazprom and transit issues – Factsheet

Friday, March 20, 2015

CURRENT SITUATION ON GAS TRANSIT VIA UKRAINE:

  • Today, Russian gas to Europe is flowing through Ukraine’s Gas Transit System (GTS) as normal, meeting daily nominations of European clients. There are no interruptions.
  • Gazprom is keen to maintain stable supplies to Europe through Ukraine. However, due to the nature of Ukraine’s GTS, a sufficient amount of gas in Ukraine’s storages in the western part of the country is needed to ensure stable and reliable transit during the high-gas-demand months.
  • Ukraine’s UGS currently hold insufficient levels of gas (7.8bcm excluding buffer gas – March 2015 data), raising doubts over the viability of Ukraine’s GTS to conduct stable and safe gas transit to Europe.  
  • The technical state of Ukrainian GTS is of great concern as most of the pipelines were built in the period from 1960 to 1980 and have not undergone any comprehensive checks and repairs for more than 25 years. The cost of maintaining and upgrading Ukrainian GTS is estimated at $19.5bn.
  • Urgent action is needed to create new and reliable transit routes for Russian gas to reach European customers and eliminate the risks of Ukraine’s GTS.   

 

GAS SWAP: THE WORKINGS OF THE UKRAINIAN GAS SYSTEM:

During winter, the capacity of the Ukrainian system is insufficient to cope with both the immense domestic demand in Ukraine and with transit volumes to Europe. To solve this problem, Gazprom supplies additional volumes to Ukraine. The main branches of the Ukrainian GTS run from the industrial belt in the North East of Ukraine to the Slovak and Hungarian borders in the South West of the country. According to the 2009 gas contract, during summer, when gas demand is low, Naftogaz is obliged to purchase additional gas volumes and to stockpile them in export-oriented underground gas storage facilities, which are located in Western Ukraine, close to EU borders. As gas demand rises in winter, Ukraine uses Russian pipeline gas destined for Europe for its domestic use and compensates Gazprom by sending gas from its storage facilities to Europe.

 

UKRAINE’S GAS TRANSIT CONTRACT:

  • Ukraine has signed a 10-year Europe-bound gas transit contract with Gazprom in 2009. Ukraine has taken responsibility to ensure safe and reliable transit of Russian gas under fair and transparent commercial conditions.
  • To aid Naftogaz with liquidity Ukraine has been prepaid a total of $5.5bn in 2014 to transit Russian gas until January 1, 2015.
  • As of Q2, 2014 the tariff for transit of Russian gas through Ukrainian increased by 10% in line with the 2009 contract which correlates transit charge with the current gas price for Ukraine.  
  • Gazprom announced in January 2015 that after 2019 it does not intend to continue using Ukraine as a transit country as Turkish Stream (63bcm) and Nord Stream (55bcm) will be capable of taking over Russian gas transit tasks fully. The decision was done to increase Russian gas transit security by avoiding unreliable routes.    

RUSSIAN GAS SUPPLY TO UKRAINE

  • The conditions for supplying Ukraine with Russian gas are set out in the 10-year supply contract between Naftogaz and Gazprom signed in 2009. The contract includes oil-linked gas price formula and take-or-pay obligations for gas purchases.
  • It also contains mechanisms to prevent non-compliance, including a clause covering advance payment (or ‘pre-payment’) in the event of lack of payment by Ukraine for the gas received (payment deadline is the 7th day of each following month).
  • Ukraine, right up till August 2013, made regular payments for gas in accordance with the gas pricing formula. However, since then, payments have become irregular, incomplete or missing altogether. Gazprom has repeatedly engaged Ukraine constructively in order to find a solution and even lowered gas price for Kiev for Q1 2014. However, Ukraine continued to fail to pay for gas received.
  • Gazprom, the European Commission and Ukraine held initial trilateral negotiations in May and June 2014 to agree on the way for Ukraine to pay off its massive and growing gas debt and avoid moving to a pre-payment system.
  • In June 2014, the total debt of Naftogaz for Russian gas stood at $5.3 billion. By that time Ukraine took 11.5 bcm of gas from Russia without paying for it.  
  • Gazprom had no other choice but to put a stop to Ukraine’s mounting debt and switch to pre-payment on 16 June 2014. As a result only gas destined to Europe was transiting through Ukraine from that date onwards while supplies to Ukraine were stopped.
  • On 16 June, Gazprom launched a case against Naftogaz in Stockholm Arbitration court for the unpaid debts worth $4.5 billion on gas delivered since 2009. In its turn, Naftogaz claims Gazprom owes it $6.2bn for contracts readjustment since 2010. The hearings are expected to start in February-March 2016, while the ruling is expected at the earliest in June 2016. 
  • Trilateral negotiations continued throughout the summer and autumn of 2014 (seven rounds were held) and only on 30 October 2014 a deal was reached between Russian and Ukrainian and European governments on the ways of restoring gas supplies which in turn reduced risks to EU gas transit.

 

FACTBOX: 30 OCTOBER 2014 AGREEMENT AND THE WINTER OF 2015

The so-called “Winter Package” agreement was signed by Russian Energy Minister Novak, Ukraine Energy Minister Prodan and European Energy Commission Oettinger on 30 October and called Ukraine to pay $3.1 billion in two tranches by the end of the year ($1.45b before the first delivery; and $1.65b by end of 2014) to cover the debts for previous supplies from Gazprom.

As an interim measure, the debt for 11.5bcm of unpaid supplies was covered using the price of $268/tcm (the rest of the debt amount will be decided when Stockholm Arbitrage issues its final ruling on the issue).

It was agreed that Ukraine would be able to buy up to 4bcm of gas in winter from Gazprom (worth ~$1.45bn). The price of gas includes a Russian customs duty discount of $100 according to a formula contained in the gas supply agreement from 2009. The formula parameters were not changed and oil link remains in place.   

The deal covers a period until 31 March 2015, and the pre-payment mechanism for Ukraine’s Russian gas purchases strictly applies, while the contractual "take-or-pay" clause from 2009 contract will not be invoked by Gazprom throughout the deal period.

Implementation:

Ukraine has paid both debt instalments as agreed by the end of 2014 and Gazprom resumed gas supplies to Ukraine on 9 December 2014 based on Naftogaz’s prepayment and nominations.

In December 2014 – March 20, 2015, Ukraine bought 2.2821 bcm of Russian gas and paid $691mn for it (via pre-payment).

Ukraine also signed a supply contract with Norwegian Statoil and other European utilities from Slovakia, Poland and Hungary which supplied the country with marginal reverse flows. Reverse flows are unable to supply Ukraine’s market in full due to the size of the market and the lack of the transit capacity. 

The original 2009 supply contract will once again enter into force on 31 March 2015 unless a new deal is reached with Ukraine on the parameters of the future sales of gas. If no deal is reached serious concerns remain over the stability of EU gas transit in 2015 especially during the second part of the year. 

 

Ukraine, Gazprom and transit facts and figures