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№ 1 (January 2012)

A More Secure North. Nord Stream Cuts Transit Volumes Through Ukraine, Good News for Europe – Bad News for Ukraine

   Gazprom has finally completed the new export pipeline to Europe called the Nord Stream. It is now obvious that the traditional Russian gas export route to the EU is facing serious competition and the current flow will eventually “shrink”.

By Svetlana Kristalinskaya

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   This major change is also going to be affected by Gazprom’s agreement to buy 100 percent of Beltransgaz and possible Turkey’s refusal to prolong one of the contracts for purchasing Russian gas. Russia is ready to build the third line of the Nord Stream pipeline as well as the South Stream, but European politicians are not very enthusiastic about this perspective trying not to step up dependency on Russian gas. Ukraine, however, is not losing hope to lure Russia to continue its’ gas supplies through Ukrainian territory.

Russia Has Reduced Dependency on Ukraine

   The Nord Stream project has been debated for a long time but eventually Line 1 with the capacity of 27, 5 billion cubic meters of the twin pipeline was completed within a short period of time of just a year and a half. The project originated almost 15 years ago at the time when Rem Vyakhirev was the CEO of Gazprom. Even back then the project was seen and promoted as a way to reduce dependency on transit countries. Today, approximately 70-80 percent of Russian gas is being exported through Ukraine. In the past decades Russian –Ukrainian relations were constantly changing depending on political changes in Ukraine and gas was often used as a “political weapon”.

   The transit crisis in January 2009, as it is clear from the distant perspective, was profitable for Russia. European consumers experienced firsthand what it was like when gas supplies were cut off and stopped objecting Nord Stream construction. The project got the status of TEN (Trans-European Nets) from EU Commission as well as obtained all necessary ecological permissions.

   During the years when Nord Stream project was yet under consideration Gazprom was negotiating with Ukraine the possibilities of co-management of the country’s gas transmission system (GTS).  Simultaneously yet persistently Gazprom is implementing South Stream pipe-line construction on the bottom of the Black sea which is also bypassing Ukraine. Currently 100-110 billion cubic meters are being transmitted through the Ukrainian territory, while the total export to non-CIS countries amounts to 140-150 billion cubic meters. Till the very last moment Gazprom didn’t disclose the information on the amount of gas redirected from the Ukrainian pipeline but confirmed the fact that European demand for gas was considerably growing.

   Nevertheless in 2011 Gazprom overestimated Europe’s market size or the prices reasonable for the European market. Thus, in spring the initial forecast for 2011 export demand estimated at 151 billion cubic meters was increased to 155 billion cubic meters, and then after the accident at Japanese Nuclear Power Station “Fukusima-1” and the civil war in Libya raised up to 158 billion cubic meters. But in November Gazprom’s top management announced that the export plan had to come back to the original estimation of 151 billion cubic meters.

   Currently the amount of gas fed through the Nord Stream equals approximately 8-9 billion cubes per year. The day Nord Stream was launched, Alexander Medvedev, Gazprom’s BOD Vice-Chairman, confirmed that once Nord Stream gets its ultimate annual capacity of 55 billion cubic meters. It is going to transport 22 billion cubic meters of gas in compliance with the new contracts and approximately 30 billions cubic meters according to the old contracts. He also stated that no export transit would be redirected from the Belorussian export route.  It means that Ukrainian gas transmission network (GTS) will lose at least 30 billion cubic meters if European market does not show more demand.

   Nevertheless, Mikhail Korchemkin, the owner of East European Gas Analysis (USA) believes that Ukraine’s income reduction might be less significant. “The fact is once the load of a pipeline is not full, any owners are sure to increase transit rates.  It’s a usual practice in the gas industry with no politics involved,” he said.  It is important to mention that during the last “gas war” in January 2009 Ukraine did not manage to include into the contract with Gazprom a provision that would regulate the situation where Russia is obliged to pay if gas is not transmitted.  Therefore, no penalties can be claimed to Gazprom if some of gas transit is redirected from Ukraine to other routes.  Ukraine only managed to get a prepayment for the future gas transit, which can be easily prolonged by Gazprom by simply crediting Naftogaz Ukraine. Alexander Medvedev claimed that Nord Stream transmission costs are lower than those of other operating routes.  It might be the reason why the pipeline construction will pay off (counting the loan interest calculation) only in 50 years, as Gazprom’s СEO spokesman Sergei Kupriyanov admitted.  According to Gazprom’s estimates modernization of aging Ukrainian gas transmission system if implemented would cost $3,5 billion. Gazprom is holding 51 percent in the Nord Stream construction consortium so it’s much more reasonable for the company to pay transport costs to itself and not to invest into Ukrainian economy. Besides, Gazprom will not depend on political changes in Ukraine and any other power play in the local government.  
Gazprom Secures Reliability of Belarus Transit Route

 Ukraine’s interests were also severely undermined by Russia’s agreement with Belarus to increase its shares in Beltransgas, where Russia currently owns 100 percent. It means Gazprom is getting total control on Belorussian gas transit corridor. The current capacity of Yamal – Europe pipeline through Belarus is 33 billion cubic meters per year. Considering that 20-21 billion cubic meters goes to Belarus’ domestic gas consumption, the transit capacity amounts to approximately 12 billion cubic meters of gas per year. This system is a continuation of a much bigger gas transit system that starts at Yamal Peninsula but is yet under construction.  Once this stage is completed the center of Russian gas industry will be relocated to the Yamal peninsula. It is expected that in 4-5 years the first Yamal field Bovanenkovo will produce up to 115 billion cubic meters per year. It’s highly possible that it would be easier to expand the Yamal-Europe pipeline, rather than distribute new gas and thus increase transit capacity of the Ukrainian route. It is clear, that this gas transportation corridor has a sideline to Nord Stream, but the Shtockman field project should also be taken into consideration. This huge area has no other option for gas transportation other than through Nord Stream. According to Mikhail Korchemkin of East European Gas Analysis, the Russian government is consistent in the intention to launch Shtockman, although its economic efficiency is doubtful. “Bovanenkovo field will be launched on time, while Shtockman’s launch is questionable. Shtockman’s launch would be economically reasonable in 2020-2025. But the Russian government takes it as a political project, therefore it can be launched regardless of its commercial efficiency,” he said.

   Valery Yazev, the Vice-Speaker of Russian State Duma, partially agreed with this point of view by saying that “exploration of Shtockman gas field at any cost is not in the interests of either the Russian State or the Russian people.”
 Another direction for Yamal gas distribution will be to the south through the South Stream pipeline. This year the project got new foreign shareholders, that means higher chances for its implementation. Ukraine fully realizes that the situation is very serious and made Russia a forthcoming proposal: to build the South Stream pipeline on its territory. This means that Yamal gas will have to be transported through the territory of Russia, however it would provide an extra gas supply to southern and central regions of the country.

Turkey Cancels Gas Deal

   The third factor to lower transit of Russian gas through Ukraine, in the upcoming year, is Turkey’s refusal to prolong one of the contracts for Russian gas supplies, the one that goes through Ukraine. Russia uses two gas supply routes to Turkey: the Blue Stream pipeline going along the bottom of the Black Sea and the western route, which uses a transit corridor through Ukraine and Bulgaria. The latter is employed to supply gas under two contracts, for 8 billion cubic meters per year and 6 billion cubic meters per year respectively. Recently Turkey’s state company Botas has rejected the second contract. Gazprom declared that the company was already negotiating new contracts for the same amounts with some smaller private Turkish companies. It’s worth mentioning that last year Turkey purchased only 10 billion cubic meters that is supplied through this direction, which means that the rest of 2 billion cubic meters was a surplus to requirements. According to predictions for this year, Turkey is planning to reduce gas supplies but not considerably. Western route covers the needs of a multimillion Istanbul area, but technically, the Blue Stream pipeline that is half idle cannot satisfy all the demands (only 8 billion cubic meters were supplied through Blue Stream last year with the full capacity of 16 billion cubic meters a year). At the same time, Turkey has a LNG import terminal on the the Sea of Marmara coast with the capacity of 6 billion cubic meters per year. It turns out that frequently LNG is cheaper than a pipeline gas.

Hopes are Running High for European Market Demand for Gas

   “Gazprom’s guaranteed volume of European export for 2020–2025 will be 158 billion cubic meters per year. Subtracting all the supplies going via Nord Stream, South Stream, Blue Stream and on top of that export flow  to Finland, we only have the amount of 18-20 billion cubic meters left transited through Belarus and Ukraine,” Korchemkin pointed out. Thus, if Gazprom manages to fulfill all the plans, Ukraine can only hope for the growing European market demand under the condition that Gazprom will still dominate this market.

   As Russian President Dmitry Medvedev said at the official launch of the Nord Stream pipeline, Russia expects European Union to overcome current economic difficulties and increase the demand for gas up to 200 billion cubic meters by the year 2020. Germany’s Chancellor Angela Merkel, who was previously opposed the construction of the third line of Nord Stream, now swept Russia a curtsey, asking Guenter Ottinger, European Commissioner for Energy, to clear out European Union’s energy policy to its partners. This message is dedicated to the Third Energy Package waiting to become the matter for “critical discussions”. Merkel’s words sounded encouraging especially after police searched offices of the European companies buying Russian gas, as well as regular public statements of Russian executives regarding the above document, which can cast a doubt on pipeline infrastructure construction. Alexander Medvedev, CEO of Gazprom Export, said: “I tend to think these are not mere words. We brought to attention many times that Third Energy Package is far from being ideal both for a seller and a customer if to look at the contracts already signed.”

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