Image by Samuel Bailey
Russian gas transit via Ukraine to Europe could be stopped in early 2020 if Moscow and Kiev do not resolve their gas dispute by December 31. Although such scenario, announced by Russian President Vladimir Putin on November 14, is very unlikely, Ukraine and European Union already started looking for alternative gas suppliers.
Ukraine and the vast majority of the EU countries are still heavily dependent on Russian gas and oil. A long-term Russia-Ukraine gas transit contract ends on December 31, and at this point it is highly uncertain if it will be renewed by the end of the year. Negotiations between Russian and Ukrainian energy authorities, mediated by the EU, are complicated by a lengthy legal dispute between Russian energy giant Gazprom and Ukrainian Naftogaz. Their disagreements led to a Stockholm arbitration court ruling that Gazprom should pay $2.56 billion to Naftogaz. According to the EU Energy Commissioner Maros Sefcovic, Russia is seeking a “package solution” that should also include a political deal over the results from the Stockholm arbitration, which is something that Ukraine is not ready to discuss.
In other words, Russia threatens to stop supplying gas to Europe via Ukraine if Kiev does not give up demanding from Gazprom to pay $2.56 billion to Naftogaz. Although Russian President recently said that the risk of termination of transit exists, his warnings sound like an empty threat. At this point, Russia has no alternative to Ukraine as a transit country. The Nord Stream 2 project, which should bypass Ukraine, will not be completed before the spring or summer 2020, and it is still uncertain if it will be fully operational, since the United States strongly opposes the project. On the other hand, the TurkSteam pipeline, which is seen as another alternative to Ukraine, currently connects Russia and Turkey, but not the rest of Europe. It is unclear when, and if at all, planned follow-on projects to bring Russian gas from TurkStream into Europe will be implemented.
In the meantime, Ukraine and European Union keep looking for alternatives to Russian energy. Reportedly, this summer Kiev brought 80,000 tonnes of Bakken crude from the US. Also, Germany imported one cargo of the US oil, Italy increased US imports to a monthly record of nearly 700,000 tonnes in June, and countries such as Greece and Croatia have also took several cargoes of the American oil. In addition, Polish authorities announced that they plan to reduce dependency on Russian gas by striking long-term contracts for deliveries of liquefied natural gas from the United States. Poland also bought three cargoes of the US oil this year.
Warsaw, just like Kiev, is looking for a better long-term contract with Russian Gazprom and is threatening to stop buying Russian gas after 2022. If the Kremlin makes concessions to Ukraine, it is expected that Poland, and many other European countries, will also demand significant discounts from Gazprom. On the other hand, the US could easily put pressure on its European allies to reduce imports from Russia, and start buying US energy resources instead, even if that means paying a higher price. Such trade would certainly bring profits to the US, especially to its shale oil and gas industry.
It is worth mentioning that, before the war in the Donbass erupted in 2014, Ukraine had agreements with energy giants Shell and Chevron to explore and tap its shale gas fields in hope to reduce the country’s heavy dependency on Russian gas imports. Ukraine is said to have Europe’s third-largest shale gas reserves, but yet it is still dependent on Russian gas, and it also started importing the US shale oil. It is extremely unlikely that the country, in spite of its natural resources, will achieve energy self-sufficiency. Russia-backed self-proclaimed Donetsk People’s Republic and Lugansk People’s Republic control de jure Ukrainian coal mines in the Donbass region, while Russia itself has full control over potential natural gas deposits in the Black Sea around Crimea, which is de facto part of the Russian Federation. The US, on the other hand, clearly demonstrated its interests in Ukrainian energy potential in 2014 when Hunter Biden, an attorney and the son of then-US vice president Joe Biden, was appointed to the board of directors of Ukraine’s largest private gas producer, Burisma Holdings, which is the company that holds licenses covering the Dnieper-Donets basin in the eastern Ukraine.
The EU also has its own interests in Ukraine’s energy. As a member of the EU’s Energy Community, Ukraine is committed to abide by EU energy regulations. Presently, Ukraine is buying Russian gas not from Moscow directly, but from the EU member Slovakia who also imports it from Russia. In addition, the Ukrainian government recently passed a resolution to separate the country’s 38,000-kilometer gas-pipeline network from state-run oil and gas conglomerate Naftogaz. A new state-owned entity was formed, and it will handle gas transit through Ukraine. It remains to be seen if such maneuver was a step closer to privatization of Naftogaz, and if control over Ukrainian gas and oil sector will have European or American corporations.
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