“Ukrainian question” and Europe’s energy future

Europe will continue to help Ukraine resolve a number of energy problems and make a maximum effort to reach a gas compromise with Russia as soon as possible, Maros Sefcovic, Vice President of the European Commission in charge of Energy Union, said at the International Conference for Reform in Ukraine. This Slovak has been the EU energy commissioner for six months now. It fell upon him to unravel a tangle of energy problems, both external (easing tension in gas relations between Russia and Ukraine) and internal (updating the EU energy strategy). Does updating Europe’s energy strategy and, accordingly, diversifying the sources and routes of energy resource supplies mean that investments in the Ukrainian energy sector will be reduced? What is the main condition for Europe to continue funding modernization of Ukraine’s gas transportation system? How can Ukraine be helped in its gas dispute with Russia? These and other points were in the center of Mr. Sefcovic’s first exclusive interview to a Ukrainian media outlet. In this interview, the respected EU commissioner was as much frank as his office permitted. He found it difficult to answer some questions.

What role does the European Union assign to Ukraine as a gas transit country within the framework of the updated EU energy strategy?

“The problem of energy security is one of the most important priorities for the entire European Union. We are aware of the important role Ukraine is and will be playing in the transit of gas to the EU. So, there are several opportunities for cooperation. For example, the use of your underground gas storages is of interest. This may be a very useful element in a new architecture of Europe’s energy security. As we heard at today’s international conference, there can also be cooperation in the question of energy safety for national and European companies.”

Does the European Union still have plans to modernize Ukraine’s gas transportation system by revitalizing the Southern Gas Corridor project (which envisions extension of the South Caucasus gas pipeline Baku-Tbilisi-Erzurum) and building the TANAP pipeline across Turkey to the EU?

“We are working with a number of international financial organizations (EBRD, WB, EIB) on modernizing the gas transportation system (GTS). In particular, Ukraine and the EBRD concluded an agreement in 2014 on funding the modernization of the Urengoy-Pomary-Uzhhorod segment. As far as I know, the bank has already allotted 300 million euros for this purpose. Ukraine is very important for the EU as a reliable gas transporter, and this is why we are present at this conference. The European Union wants to help Ukraine and is making quite an effort to resume the GTS modernization. As for the Southern Gas Corridor, support for this project is being given as part of the EU’s common energy diversification policy. For this reason, we will be developing the Southern Corridor as well as increasing liquefied gas supplies to Europe. Yet we want Ukraine to go on playing the role of an important transporter of Russian gas to the EU.”

INVESTMENTS IN THE GTS WILL NOT BE REDUCED

Does Europe’s support for the Southern Gas Corridor and TANAP mean reduction of European investments in the modernization of Ukraine’s pipelines?

“No. The projected Southern Corridor is intended to transport gas from the Caspian region [Azerbaijan, Turkmenistan, and perhaps Iraq. – Author]. The project is being funded by a consortium of private investors, in which the British Petroleum (BP) plays a major role [in the TANAP project, BP’s stake accounts for 12 percent and those of BOTAS and SOCAR for 30 and 58 percent, respectively. – Author].”

Urengoy-Pomary-Uzhhorod is the first step. Can Ukraine expect Europe to allot money for GTS modernization before the end of 2015?

“Money is a thorny question. For there are several funding instruments – from the IMF to other financial institutions [EBRD and EIB. – Author]. Whenever we negotiate with the Ukrainian government, we discuss the concrete targets of funding.”

Are there any barriers that hinder the EU from allotting money for these purposes?

“No. But rendering any financial aid for these purposes depends on whether specific conditions have been met, which is the subject of continuous talks with the Cabinet. It is important for us whether or not they are met. Further allocation of money depends on the pace of reforms in the energy sector. We welcome the passage of the law ‘On Gas Market’ by parliament, but it should be implemented as soon as possible. Also of importance will be the adoption of a law on the independent energy sector regulator as well as the way reforms are being carried out in this field in general. The fulfillment of these conditions is necessary for international financial institutions and the EU to help Ukraine financially in the modernization of its GTS. Reforms in the energy sector will be also a powerful signal for all potential foreign investors that Ukraine is a country with the European law and transparent rules of the game and that it is possible to work here.”

EU REVERSE FLOW MAY REACH 20 BILLION CUBIC METERS A YEAR

What do you think is a free energy resource on the EU domestic market to re-export gas to Ukraine? What is the condition for stable reverse-flow supplies?

“Given the market conditions, the EU is prepared to transport as much gas as Ukraine needs. We saw the confirmation of this past winter. I think the same will be done this year. European as well as Norwegian companies are able to supply gas.”

Could you name at least an approximate re-export figure?

“The figures are well known, and they depend on the technical limits of the countries through which this re-export is effected. For example, Slovakia is capable of pumping up to 15 billion cubic meters a year, Hungary about 6 billion, and Poland up to 1.5 billion. This means Europe can, in theory, deliver about 20 billion cubic meters of reverse-flow gas a year to Ukraine. But the real re-export will depend on the gas price, demand in Ukraine, and the country’s ability to pay this price.”

Does the European Commission think that the gas conflict between Ukraine and Russia has been settled because Naftohaz Ukrainy and Gazprom signed a contract on April 1 on the supply of gas in the second quarter?

“The agreements reached between Naftohaz and Gazprom is a good signal. But I would feel much better if we managed to sign a trilateral gas contract for the winter period. The previous agreement of this kind proved to be very effective. I am trying to have Ukraine, Russia, and the EU sign a new gas contract so that the next winter remains without problems. There has already been an expert-level meeting on this question.”

In other words, the gas conflict has not yet been fully resolved?

“I wouldn’t say so. Things are going well, the winter was good, Russia supplied gas in accordance with the signed contracts, Ukraine paid in good time, and there were no conflicts or new problems. The Russian and Ukrainian sides want this system to work in the next winter season, too. But this requires signing a new trilateral contract.”

When are the energy chiefs of Ukraine, Russia, and the EU going to meet to shape this agreement?

“An expert group met a week ago. By the results of this meeting, we have sent to Kyiv and Moscow our vision of a compromise decision. We are waiting for an answer. Then we will organize a meeting on a high political level.”

When can we expect this meeting to take place?

“We expect to receive the answer to our proposals within one or two weeks, then we will study the remarks and proposals from both sides. Maybe, one more expert-level meeting will be needed. I hope we will meet in May or June in Brussels to sign a new trilateral agreement on gas.”

A NEW GAS DEAL ON THE BASIS OF THE “WINTER PACKAGE”

What is the essence of Europe’s main compromise proposal about this deal?

“We want the system of past year’s gas deals to continue. I would like this to last until the Stockholm Arbitrage decision or until the next winter period. It would be better if Ukraine and Russia worked now in the framework of the agreements they reached past winter. This applies to Gazprom’s gas price cut and the compromise on the ‘take or pay’ principle. In other words, it is necessary to draw up a new gas deal, taking into account the positive experience of the implementation of the 2014 ‘winter package.’”

Do the gas agreements reached by Russia and Ukraine have any “safety devices” that could compel Russia to meet the commitments it took?

“Of course, there is an early warning system which says what should be done in such cases. A few problems did come up past winter, but we reacted rapidly: we sent our experts to the Ukrainian control center. The EU is actively working with the Russian and Ukrainian sides in these matters.”

Do you think Ukraine has the right to revise the 2009 contract with Gazprom and what are the chances of success?

“I can’t comment on this. This is now being decided at the Arbitration Institute of the Stockholm Chamber of Commerce.”

But still, with due account of the experience of some European countries that have judicially challenged the conditions of Gazprom contracts, does Ukraine have the right to do so?

“The Stockholm Arbitration is to rule whether there are grounds for revising the contract. So, we must wait for the result.”

The way the Minsk agreements have been observed shows that Russia does not consider international agreements as binding. What will the EU do if Russia breaks the gas agreements with Kyiv?

“This is a hypothetical question, and I wouldn’t like to give a hypothetical answer.”

ON THE EC’S ANTITRUST PROBE AGAINST GAZPROM

Would you confirm or deny the media reports that the EC is going to sue Gazprom for breaching the antitrust law.

“There are preliminary conclusions of the European Commission that Gazprom has imposed territorial restrictions on eight EU member states, which reshapes the EU’s domestic market because these countries will thus have a limited, if any, possibility to participate in gas trade. In the case of five EU members, it is claimed that the current gas prices are unfair. In the case of two EU member states, it is claimed that the purchase of gas was linked to their participation in concrete infrastructural projects. Gazprom has 12 weeks to explain to the EC its involvement in this story. Then we shall see.”

It was reported earlier that the EC had launched an antitrust probe against Gazprom which could eventually face a fine of 10-15 billion dollars. Is it true? If so, what about the results of this probe?

“I know nothing about any previous cases that could result in the fines you are talking about. In all probability, it is about the current antitrust probe. But it involves no fines because we are only at the beginning of the ‘objection to application’ stage. I do not want to ponder on the future of this case. Should Gazprom fail to submit acceptable explanations to the European Commission, this will cause EU Competition Commissioner Margrethe Vestager to make further decisions. The only person who can comment is the EU competition commissioner.”

Do you think Euratom’s permission for Rosatom to supply fuel for two new nuclear power plant reactors in Hungary will strengthen the Kremlin’s energy lobby in Europe?

“As for nuclear fuel supplies, we have some clear-cut procedures, including the provision that all new contracts should be signed by a group of nuclear suppliers. A positive solution of this problem includes realization of the principle of diversification in the EU.”