Approaching the point of no return

Kyiv-Moscow-Kyiv – A rather tough Russia-EU meeting will take place on February 24. The permanent representative of the Russian Federation at the EU Vladimir Chizhov even fears that “there will be a very detailed, possibly unpleasant, conversation regarding the third energy package,” since, according to him, “some EU countries chose the toughest version of this package, which causes problems for our energy companies.”

Thus, it would not be quite correct to say that the roundtable on European energy issues held in Moscow on Monday was entirely Gazprom a PR response to Ukraine’s active and even ambitious actions in gas sphere. (Ukraine’s Naftohaz and the American ExxonMobil, with the blessing of the two governments, agreed to cooperate in the exploration and analysis of hydrocarbons deposits on the territory of Ukraine. The focus is on methane in coal deposits, shale gas, gas in dense rock formations and other unconvention energy sources. The building of a new liquefied natural gas terminal in a Black Sea port, a national project announced earlier in Ukraine, can substantially decrease Ukraine’s dependence on gas imports from Russia in the years to come.)

However, one can observe a clear connection in this case. Discussing topical problems of the European energy sector and the Russian-Ukrainian-European relations in this sphere, the Russian side completely discarded European arguments on the advantages of spot price formation for gas and agreed only partly (it seems it simply had to) to discuss the EU’s so-called third energy package, which is expected to come into effect already in March. In addition, it looks like Russia “yielded a point to Europe” because this package is tied to their still problematic entrance to the WTO, which is planned for the next few months, and Russia wouldn’t like to lose this opportunity. Regarding European experts, Gazprom representatives simply overheard their attempts to defend the advantages of the spot market.

The head of Gazprom Aleksei Miller, answering journalists’ questions after the conference, pointed out that regarding the third package, which regulates the access of independent gas producing companies to pipelines, there is a number of questions “requiring a common discussion and clarification of how their mechanisms will work under different circumstances.” It is also possible that Miller still didn’t entirely comply with Russian Prime Minister Vladimir Putin who, according to gazeta.ru, threatened to deprive Gazprom of its monopoly position. “Either you work efficiently,” he said, “or we will have to change the rules and begin amending the legislation.” But maybe Russia’s President Dmitry Medvedev has a different opinion on this issue, and that is why Miller is not hurrying to approve the European package entirely?

Director of the Moscow-based Institute for Energy and Finance Vladimir Feigin immediately supplemented Miller’s words. In his opinion, the problem is that now it is absolutely unclear when all this (the third package — Author) will begin to work. In his opinion, “there will be a few years of an ill-defined situation, when both old and new rules will not work.” He is surprised that the EU agrees to long-term contracts for gas supplies but at the same time believes that long-term transit contracts break market rules. “How can this be combined?” the expert asks and adds that the third package contains “many things which are potentially dangerous if no solutions are found.”

So, Miller “returned” to Brussels again. To sugar his obstinance, he promised Europe to sign a road map for the gas sphere by 2050. Ukrainian journalists were not very interested in the European package theory. It was the process of establishing a joint stock company between Naftohaz and Gazprom that provoked concern. But Miller, as it turned out, is indifferent to this. Answering a question about the plans, he immediately stressed that creating such a JSC “will in no way influence the South Stream pro-ject” (as Miller pointed out, its first thread will be launched in 2015).

The amalgamation of gas monopolists is another matter. In this case Gazprom promises to completely (maximally) load the gas transport capacity of Ukraine what, in his opinion, will increase Ukrainian budget re-venues. Miller supposes that gas will be supplied to Ukraine at Russian internal prices which, as a result of their regulation by the Russian government, “will remain not high, or low, to be more precise.”

Yet it seems the Ukrainian government, even despite the preferences promised in case of establishing the JSC, would not be able to agree to the amalgamation, or more precisely to Gazprom’s takeover of Naftohaz, for political reasons. Thus, your correspondent asked Miller if Gazprom would be ready to revise the formula determining the price for Russian gas supplied to Ukraine if the JSC was created?

Answering this question, Miller gave the example of the amalgamation of French and Belgian gas companies. According to him, for energy companies “this form” is widely spread, and in case of our two countries it is mutually beneficial. He forecast that “the growth of gas production in Ukraine will decrease, and gas consumption will increase. And in middle- and long-term prospects gas supply to Ukraine will increase.” He repeated the thesis about the loading of the Ukrainian gas transport system and predicted that in case of the amalgamation, the amount of gas it transported to Europe could increase from the current 95 billion to 120-125 billion cubic meters; and with some level of financing — for reconstruction and modernization, and especially for compressor stations — even up to 140 billion cubic meters. According to Gazprom’s estimates, by 2020 the demand for gas in Europe may increase by 130-140 cubic meters. Thus, even with both the Nord and South streams, gas will go to Europe through both the territory of Ukraine and the territory of Belarus. And there will be no problem with insufficient loading. “But Ukraine’s movement in the direction of European rules on the gas market,” Miller continued, “creates problems for investing in gas transport facilities, in the reconstitution and modernization of the gas transport system.” Therefore he believes that Gazprom is a much better partner for Ukraine than European companies — if one works based on principles of the third energy package. Therefore, Miller persuades, one should look at the potential economic and social benefits rather than politicized risks. He also referred to the fact that the countries’ participation in the united company will be based on assets, while the participants’ profits will be considerably tilted in favor of Russia. As a result, Miller says, Ukraine will have a big advantage while allocating dividends, and owing to this will get funds for the modernization of its gas transport system. Regarding the formula, it will not be changed if the JSC is established, since Ukraine already has a discount that decreases the gas price by 30 percent. Miller supposes that today Ukraine already approached the point of no return, after which it will be too late to speak about the amalgamation with Gazprom.

The Russian expert Konstantin Simonov, director general of the National Energy Security Foundation, threatened The Day with the risk of another point of no return: in his opinion, Russia’s refusal from the South Stream will become impossible once the first pipeline is laid down. And then, after the completion of this construct, Russia will think about which of the two countries, Ukraine or Belarus, will become the victim of the bypass streams — who will get the empty pipe, so to speak. In Simonov’s opinion, Belarus shouldn’t be afraid of this, since its gas transport system is already Russia’s property. Simonov was extremely indignant when The Day reminded him of an old saying: I give my pipe and wife to no one.