Gas reverse flow from Slovakia to Ukraine

An obvious thing to agree on?

Tomasz Chłoń
17 March 2014

In the current situation, gas reverse flow from Slovakia to Ukraine may seem like an obvious thing to agree on. Slovakia remembers the 2009 crisis when it was on the brink of a gas “black out” as it was dependent solely on the gas delivered from Ukraine. A hard lesson learned, now for Kyiv as well.

It is clear that the Ukrainian government has its hands full with other immediate challenges. But it should quickly finalize negotiations with Slovak companies to guarantee a normal commercial operation of the reverse. It is good that prime ministers Fico and Jacenyuk met in Brussels last week and discussed this bilaterally.

 

The context and the facts

In 2013, Ukraine used 50.4 billion m3 of gas (an 8.1% drop compared to 2012), of which it extracted 21 billion m3 on its own (an increase of 4%).

Ukraine imported 25.8 billion m3 from Russia and 2.1 billion from the European Union (890 million m3 from Germany, 614 million from Hungary, 534 million from Austria and 93 million from Poland).

Imports from Poland and Hungary have little significance due to the limited capacity of gas pipelines, namely 4.5 million m3 and 5 million per day respectively, which make up nearly 3.5 billion m3 per year if used to the maximum. Only launching deliveries from Slovakia allows a genuine diversification – up to 30 billion m3 per year.

In 2013, the price of Russian gas for Ukraine oscillated at the level of 400 US dollars per thousand m3, while the price of gas from the EU was around 370-390 dollars. After receiving a discount (making the price 268.5 dollars) in the first quarter of this year, Ukraine stopped reverse deliveries.

An additional problem in the case of Crimea’s annexation is the possible breaking of the “fleet for gas” deal from 2010, which gives Ukraine a discount of 100 dollars. In which case the price of Russian gas would be close to 500 dollars per thousand m3.

On 4 March this year, during a meeting with the Russian prime minister Dmitry Medvedev, the head of Gazprom Alexey Miller said that as of April, the Russian company would no longer give Ukraine the current discount on gas. As justification, Miller said that their Ukrainian partners are not fulfilling the commitments which were established upon signing the agreement relating to the discount.

Also on 4 March, the Russian National Energy Security Fund published a report which stressed that during the years 2008-2013, despite keeping Russian exports at a stable level, transit through the territory of Ukraine diminished by 33 billion m3 (28%), meaning a 1.2 billion dollar loss for Naftogaz. If Russia succeeded in lifting restrictions (arising from the EU’s 3rd Energy Package) on using the OPAL pipeline, then it would be possible to limit the transit by another 15 billion m3, diminishing Russia’s dependency on transit through Ukraine to less than 50%. It seems that it did not succeed.

 

Russian propaganda

It is worth being reminded of one more issue which sheds new light on the “generosity” of President Putin vis-a-vis Ukraine last year. On 8 October, President Putin said that Gazprom would sell gas to Ukrainian underground stores for 260 dollars per thousand m3, while the price for the fourth quarter according to the current contract oscillates around 380-390 dollars (the Ukrainian side says it is close to 410 dollars).

In reality, the Russian offer amounts to mostly propaganda and is not particularly generous. The discount does not apply to the entirety of the gas deliveries, but only the part that is meant for warehouses. Reserves in Ukrainian underground stores must reach up to 20 billion m3 in order to ensure smoothness of Russian deliveries during periods of vicious frosts, when gas consumption goes up.

This year, the Ukrainian Ministry of Energy and Coal Industry stated that Gazprom should be the one to make gas reserves in stores by paying for storing the resource. In such a situation, it would be a more profitable solution for the Russian company to sell the resource at a discounted price.

Raising prices could be an incentive to renew reverse deliveries from Poland and Hungary, and for a new team to start negotiations with Slovakia on the matter of signing an agreement allowing deliveries from there.

According to Joaquin Almunia, the European Commissioner for Competition, the Commission intends to officially charge Gazprom for monopolistic practices in Central Europe, which could help Ukraine solve the problem with Slovakia.

Gazprom has refused meanwhile to give Ukrtransgaz information relating to clients in Slovakia, without which it is impossible to use the pipeline by the Ukrainian operator. Reverse deliveries from Slovakia are the only way of ensuring genuine diversification of gas deliveries to Ukraine.

Moreover, during negotiations between RWE and Gazprom related to lowering the price of gas for the German company, Gazprom agreed to certain concessions on the condition that RWE renounces re-exporting the Russian resource.

All of this puts the Slovak government in a not a particularly easy position given Slovakia’s business relations with Russia. In reality, however, Slovakian companies are bound by the EU’s third energy package which makes the reverse impossible to deny without legal consequences.

The reverse deal can be concluded and operational (and expanded thereafter) within weeks. There’s the will to do it of both governments, support (also financial) from the European Commission, and the immediate need. Let’s hope that the time in Kyiv will not be wasted.

 

Tomasz Chłoń is a Polish diplomat currently serving as ambassador to Slovakia. In 2000-2003, he was Poland’s NATO Political Committee member, steering body of the NATO-Ukraine Commission.

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