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Home > Publications > PISM Spotlights > PISM Spotlight: The Future of Russian Gas Transit via Ukraine: EC Tries to Break the Deadlock

PISM Spotlight: The Future of Russian Gas Transit via Ukraine: EC Tries to Break the Deadlock

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23 January 2019
Bartosz Bieliszczuk
no. 6/2019

During the second round of ministerial negotiations on the future of Russian gas transit via Ukraine after 2019, the European Commission (EC) proposed concluding a new transit agreement. The proposal is meant to be a starting point for future negotiations, whose timeline is being hampered by the Russians. However, it seems that the EC’s initiative will not change Russia’s calculations. The Russians hope for concessions from Ukraine and to undermine its credibility in the EU’s eyes. It cannot be ruled out that the Russians want to prolong the negotiations until the end of the year, which will hit Ukraine economically and politically.

At what stage are the negotiations?

Since July 2018, when the first round of the trilateral ministerial negotiations took place, the trilateral talks have not progressed. Gazprom representatives did not take part in either of two technical consultations aimed at discussing, for example, EU laws’ applicability to the Ukrainian gas transmission system (GTS) and its functioning (including tariffs). Gazprom still blocks some Naftogaz reforms that need the Russian company’s consent (since changes in the current transit contract, which includes Gazprom, are needed).

The progress of the negotiations and concluding a new long-term transit agreement (LTA) after the current one expires at the end of 2019 is complicated further by the fact that Vice-President of the EC and Commissioner for the Energy Union Maroš Šefčovič is running for president of Slovakia (in March) and by the end the current EC’s term  (the new Commission should be formed in November). To accelerate the negotiations, the EC has prepared a proposal for a new LTA.

What is the EC’s proposal?

The EC proposes signing a new 10-year LTA that guarantees a minimum transit volume of 60 bcm annually, with the option to increase it to 90 bcm. This would ensure sufficient flow for the technical operation of the GTS. The next round of the negotiations are about to take place in May and Ukraine and Russia should analyse the EC’s proposal by then. The Commission also hopes for a quick revision of the gas directive that would make operations of the Nord Stream 2 (NS2) more transparent. The negotiations of the directive’s final version, which involves the European Parliament, are meant to start before the elections to the EP (in May). The EC’s aim is to focus on the technical aspects of the LTA so the agreement can be reached this year. However, Russia’s stance could hamper the negotiations.

What are Russia’s motives?

Russia aims to limit gas transmission via the GTS to make it unprofitable. It wants to deprive Ukraine of revenue from trans-shipment and money for GTS modernisation. The new LTA would help Ukraine find investors for the GTS and could boost President Petro Poroshenko’s popularity ahead of elections in March. Russia counts on the victory of a politician ready to make concessions to Russia and suggests extending the existing LTA instead of signing a new one (its substance, however, is in conflict with EU law). Because of that, Russia is delaying the negotiations, even though after commissioning NS2, Ukraine’s GTS still will be needed to move gas to Europe. Russia also wants to tie the negotiations of the LTA to Naftogaz’s claims after its victory in arbitration with Gazprom to force the Ukrainians to drop them.

What is Ukraine’s negotiating position?

Ukraine has no means to urge Gazprom to sign the deal. Naftogaz wants to negotiate the LTA in the trilateral format only. The Ukrainian company opposes “package deals” such as including the Naftogaz-Gazprom arbitration award in the talks, as this would undermine Ukraine’s reputation with the EU. Ukraine also cannot refuse Gazprom access to the GTS for short-term supplies after 2019. A politically motivated refusal would lead to conflict not only with Russia but also the EU (and it would support arguments for building gas pipelines omitting Ukraine).

Ukraine has lowered the transit tariffs for the GTS and emphasizes that Gazprom does not guarantee the transparency of fees for NS2. This could be changed by the changes to the gas directive, but they are being blocked by Germany.

What is the future of the trilateral gas talks?

Russia’s stance indicates that the chances for a successful outcome of the talks are low. The Russian tactics could change after the elections in Ukraine and forming of the new EC. If Ukraine continues its reforms and, at the same time, NS2 is not put under the gas directive, this means that a lack of an LTA poses no risk for Gazprom. In that case, the company can be sure it will have access to the GTS after 2019 for short- and mid-term contracts. However, it is an open question what the Russians’ reaction would be to changes in the gas directive.

The deadlock also undermines Germany’s credibility, as this country has strongly supported forging a solution to gas transit via the GTS, hoping that it would weaken criticism of NS2 and its involvement in the pipeline. The lack of progress in the negotiations also shows that Germany has very limited tools for influencing Russia. As a result, it also weakens the effectiveness of the so-called “new policy for Eastern Europe,” proposed by German Minister of Foreign Affairs Heiko Maas.