Ukraine Has 16 Days Left to Do a Gas Transit Deal With Russia

Time has almost run out for Russia and Ukraine to strike a new gas transit deal before the previous one expires. The two sides only have 16 days left until December 13 before it becomes impossible to reach a new agreement ahead of the expiration of the contract on January 1, 2020.

“If there is no long-term contract by December 13, under the EU rules it is not possible to start from January 1. Then there has to be interment contract,” Naftogaz executive director Yuriy Vitrenko told bne IntelliNews on the sidelines of a meeting in Berlin on November 26. “Under the EU rules you have to book the long-term orders in advance. The regular and operator are already moving the deadline as far as they can but they can’t extend it beyond December 13.”

That is taking it right down to the wire. There are two chances to agree a new deal: at the trilateral meetings between the EU, Ukraine and Russia in the first week of December; and in Paris on December 9 where Ukrainian President Volodymyr Zelenskiy will meet Russian President Vladimir Putin in a Normandy Four meeting, the first time the two men will meet face to face.

“If there is an agreement in Paris then it is still possible to have a new transit agreement, but there will only be a few days in which to work out the details,” Vitrenko told bne IntelliNews.

The meeting in Paris is shaping up to be a historic one. The Naftogaz team were in Berlin in the hopes of pushing Germany to back up its position and stand up to Russia, which is happy to run out the clock on the transit contract.

Ukraine’s ambassador to Germany Andriy Melnyk pointed out that in the past Merkel has said that Nord Stream 2 cannot become operational without a guarantee for gas transit via Ukraine from the Russian side. However, the two issues have not been explicitly linked in the negotiations with Russia.

The Ukrainian side are holding out for a strong statement by German Chancellor Angela Merkel and want her to present Putin with an ultimatum: the Nord Stream 2 maybe ready in May but it will not be allowed to become operational until there is a guaranteed deal ensuring gas transits Ukraine as well.

“Our German colleagues say we have their full support and I believe there is time and opportunity for a statement like this from Chancellor Merkel before the Paris meeting,” Melnyk said during the summit.

There is also an opportunity to broker such a deal at the trilateral meeting that will happen a few days before the Paris Normandy Four meeting.

“The European Commission (EC) has been trying to broker this deal for a long-term contract, as for Europe it also means reliability of transit in the future. It’s important for the long-term stability for everyone,” says Litvinenko.

“I was less confident before this meeting,” Litvinenko said. “But listening to the Ukrainian ambassador and our German colleagues maybe [a strong statement by Germany] is possible.”

One of the sticking points is that Russia has now linked the Stockholm’s arbitration court award from last year and an order to pay the compensation of $2.6bn to Naftogaz to the transit deal.

Putin called Merkel earlier in November to suggest that if Naftogaz were drop its claim on this award then a new transit deal could be agreed and with advantageous gas prices.

Naftogaz has rejected the deal out of hand, although the delegation to Berlin suggested the Germans were supportive of the idea and were urging the Ukrainian team to thrash out a deal.

One compromise that was put on the table on November 25 by Vitrenko was that Naftogaz would accept the $3bn (the bill now including interest payments) in the form of gas rather than cash.

“There is a possibility of not taking $3bn in cash, but as swaps for gas. We would accept payment from Gazprom in the form of gas,” Litvinenko told bne IntelliNews. “We proposed this in a letter sent last week to Gazprom but there has been no reply yet.”

Payment in kind would actually suit Naftogaz, as it solves the problem of supplying the east of the country with gas from the storage facilities in the west of the country.

“There are some 50,000 customers in the east of the country that are not connected to the Ukraine grid but to the Russian grid, and we may have some problems with supplying them,” Litvinenko said. “In the past we discount the volumes taken by our people and add it to the transit volumes. If there is no transit then there is no way to account for these volumes.”

In the meantime Naftogaz has built up sufficient reserves to get through the winter with no imports of gas and has invested into the domestic pipeline system so that flows can be reversed and stored gas in the west sent to cities and towns in the east of the country, although the reverse-flow system has not been tested yet.

The only trial of a reversed flow was done in 2009, when Russia cut off supplies and the system was put into reverse for 20 days. It nearly broke the equipment but since then Naftogaz has invested in upgrades.

“There is supposed to be a technical consultation with Gazprom on Friday, November 29. Hope to they will update us on this idea,” says Litvinenko.

And Naftogaz has also suggested that paying for the debts with gas could also be used as a temporary measure if the transit deal is not renewed.

“We have also outlined an option in the event of no deal whereby we could continue to take gas and count the value of it out of the money they owe us from Stockholm but as an interim measure and not part of a long-term solution to the problems,” said Litvinenko. “They suggested plan B was not compliant with EU law but they suggested swaps that would allow flows of gas to Ukraine and even to Europe without a long-term deal on so-called contingency basis.”

Time is on Gazprom’s side. It can happily run out the clock on the transit deal and use the chaos to cut a short-term transit deal with Ukraine while it continues to develop alternative export routes that will eventually allow it to exclude Ukraine permenantly. 

Source: bne IntelliNews