April 12, 2013

Reverse Supply of Gas from Europe to Ukraine: A Sequel That’s Better than the Original

Reuters/Scanpix
A worker turns a valve at the Nesvizhskaya compressor station some 130 km (81 miles) from Minsk January 9, 2009. Ukraine has given verbal agreement for the deployment of international gas transit observers, the chief of the Russian state-controlled gas export monopoly Gazprom, Alexei Miller, said on Friday.
A worker turns a valve at the Nesvizhskaya compressor station some 130 km (81 miles) from Minsk January 9, 2009. Ukraine has given verbal agreement for the deployment of international gas transit observers, the chief of the Russian state-controlled gas export monopoly Gazprom, Alexei Miller, said on Friday.

Sequels of outstanding movies inevitably tend to pale in comparison to the originals. Yet with the “never-ending story” of the Ukraine-Russia gas disputes, however, the plot gets more captivating by the year. On April 4, Coal and Energy Minister of Ukraine Eduard Stavytskyi brought the audience into familiar territory, responding to a Russian promise that there would be no discounts by declaring that Ukraine would simply stop buying gas from its neighbor altogether Stavytskyi affirmed that Ukraine stops completely buying Russian gas:

Sequels of outstanding movies inevitably tend to pale in comparison to the originals. Yet with the “never-ending story” of the Ukraine-Russia gas disputes, however, the plot gets more captivating by the year. On April 4, Coal and Energy Minister of Ukraine Eduard Stavytskyi brought the audience into familiar territory, responding to a Russian promise that there would be no discounts by declaring that Ukraine would simply stop buying gas from its neighbor altogether Stavytskyi affirmed that Ukraine stops completely buying Russian gas:

“We continue not taking [Russian gas]. I will say at the end of April whether we will or will not purchase Russian gas. So far, we do not buy. Currently, we just pump transit. We provide transit to Europe. At the first week of April we have not taken [any] Russian gas to our storages.”
According to the minister, these storage facilities, which contain 8.852 bcm of natural gas, have enough capacity to meet Ukraine’s needs until the beginning of the next winter heating season. Ukrainian officials are trying Russia’s patience again, which finds Kyiv’s strategy of importing natural gas in reverse flow from European states as no more than a technicality and a manipulation. Gazprom CEO Alexei Miller claimed that “there are no de-facto and physical reverse supplies planned, but what is planned is to use Gazprom’s gas through some virtual reverse”. For Russia’s authorities, the Ukrainian strategy is simply a “fraudulent scheme,” by which Russian gas is transported to Europe, registered as deliveries to the EU at the gas metering station, and then immediately reversed back to Ukraine at the spot market price—which is lower, of course, than the price Gazprom charges Ukraine.
For its part, the Ukrainian side dismisses these claims. In fact, reverse gas deliveries to Ukraine are legally registered as imports from European states; therefore, natural gas flows that cross the EU border and immediately reverse direction to Ukraine are in fact imports, and do not violate international law. At a press conference in Kyiv on April 3, Stavytskyi chose a unique analogy to illustrate the market logic behind Ukraine’s position: “In my understanding, when you go into a store to buy food, the person who sells it to you doesn’t need to be interested in who you’re eating it with.” Ukraine has thus already started importing natural gas under a newly-signed contract with German electricity and gas company RWE. According to the agreement Ukraine will import 1.8 bcm of gas per year. Since January 1 to March 17 the intake of natural gas delivered by this “reverse scheme” has already reached 2 million cubic meters. Moreover, it plans to extend its use of the reverse strategy, with such imports possible in the near-term future from both Poland and Hungary.
There is no question that Moscow’s real concern is the fact that Ukraine is buying Russian gas back from Europe at a price of $390 per thousand cubic meters instead of paying Gazprom’s price of $406. Ukraine, as a rational economic actor, is reasonably interested in increasing its consumer surplus and playing by open market rules, while Russia finds more value in pursuing “political profit” instead of economic gain in its gas relationships. In April Russia revealed its plan to revive one more pipeline project bypassing Ukraine, the second line of the Yamal-Europe pipeline connecting Russia with Slovakia and Hungary via Poland. However, Poland has turned a cold shoulder to the plan, rightly labeling it a political instrument.
Simultaneously, Ukraine is going ahead with its alleged “stealing”, reaching groundbreaking agreements on reverse flows with one more European partner. Since April 4, a Hungarian pipeline with the capacity to deliver up to 5 bcm of gas per year became the second European reverse connection for Ukraine, to be soon joined by a Polish reversal that can supply the equivalent of 2 bcm annually. Thus, these so-called “fraudulent schemes” are going to cover around 7 bcm of Ukrainian gas demand annually, significantly increasing its chances of reaching its ambitious target of reducing total Russian imports to 18 bcm in 2013.
While the government’s assertiveness in defending these necessary and realistic projects is to be welcomed, the prospect of a new dramatic sequel to the epic 2000s series of Russo-Ukrainian “gas wars” is not. Accordingly, the Kyiv government should stick to promoting its projects and refrain from its solely theatrical claims that it is somehow not bound to its gas contracts—or come next winter, its domestic audience won’t like the results.

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