If everyone is for it, who is against?

On June 3 the Russian and Ukrainian Presidents wanted to hear about progress in the talks on the international consortium to control Ukraine’s gas transport system. It was safe to assume that both wanted to know first of all when the third party, Germany, would join the project. Well they should, considering that Federal Chancellor Gerhard SchrЪder discretely reminded everyone before his trip to St. Petersburg that Russian President Vladimir Putin, Ukrainian President Leonid Kuchma, and he had agreed in St. Petersburg last year to support the foundation of an international consortium to modernize and operate the Ukrainian gas transport system.

When asked what was delaying things, Yury Boiko, head of Naftohaz Ukrainy, informed Leonid Kuchma that a draft agreement on cooperation between NU, German Rurhgas AG, and Russian Gazprom had been prepared, with copies sent to Russia and Germany.

Russian Vice Premier Viktor Khristenko apparently had not seen the draft and had no comment. Instead, he stated that the terms of Germany’s accession to the Russo-Ukrainian gas consortium would be defined before October — in other words, before scheduled Russian-German consultations in Yekaterinburg. Mr. Khristenko explained the delay, saying one of three consortium business models had to be selected to determine Germany’s participation. “To determine the best model, it is necessary to decide on investment projects capable of covering the development of the Ukrainian gas transport system,” he said, referring to the work schedule (consultations with the Ukrainian partners in June, Russo-Ukrainian meetings to discuss the gas consortium in July, and consultations with Germany). Vladimir Putin said the Gerhard SchrЪder was patiently waiting for the definition of the terms of Germany’s active participation in the consortium: “Although waiting patiently, we must quickly find an answer to this question.” It was a remark obviously meant to spur Russian officials to action.

Meanwhile, Chancellor SchrЪder, despite the delicate nature of the issue and hopes expressed earlier that the terms of participation, by German firms in the Russo-Ukrainian consortium, will be determined this year, also has to protect his country’s interests. He said that it is necessary to prepare feasibility studies of the joint project this year, so as to demonstrate more clearly the possible contribution of German businesses. Companies in the three countries must first find appropriate forms of cooperation. From this statement it follows that, should the talks on the feasibility of the project last too long, it would be very easy to say that the whole thing is impractical — or let all those companies shoulder the burden of the project which was started primarily for political reasons.

The more so that the first round of talks between Gazprom, Naftohaz Ukrainy, and Ruhrgas AG (early in May) produced no tangible results. All things considered, the German delegation familiarized itself with the stands of Ukraine and Russia — and both are still to come to terms. It was decided to proceed to substantiate three options for the consortium: concessions, operator and transit services. Ruhrgas is prepared to negotiate all three, although German Ambassador Ditmar StЯdemann said in Kyiv that the Ukrainian gas pipelines should be awarded as a concession to the international consortium. Yury Boiko opposed the idea and the Russians seconded it. The negotiators were not satisfied with expert estimates submitted in April, so it was decided to postpone work on the business plan. The Ukrainian and Russian sides agreed that the involvement of Germany at that stage would cause more differences, although the Ukrainian side would have obviously gained additional advantages. Ukraine does not seem in a hurry to take advantage of the situation. This is unfortunate.

The Boston Consulting Group’s recent study of the world gas market promises a twofold demand increase over the next thirty years in Europe; by 2010, the European Union will need some 600 billion m 3 of gas a year, compared to current 450 billion. Russia may well receive between one-third and half the “additional quota.” To do so, the Ukrainian pipeline capacities will have to be greatly expanded. Here the expensive North European pipeline or the one bypassing Ukraine (about which we have been recommended not to worry) could become a formidable contestant... Who can guarantee that Russia has forgot all about that bypass?

Ruhrgas CEO Burkhart Bergman believes that the situation with the Ukrainian-Russian-German gas consortium would receive a fresh start after a trilateral summit. He says that this transport route would give Ruhrgas important guarantees of gas supplies. “For Ukraine, it is important to keep this transit attractive with regard to other alternative routes. For Russia, it is important always to have that consortium handy, so it can deliver large amounts of gas to the West,” he says. He further assumes that whether the project pays off and becomes profitable will largely depend on the talks. “We are at the beginning of the process. Those believing that all the arrangements for the consortium have been made are very wrong,” stresses Herr Bergman.

Another potential consortium participant appeared toward the end of May. Premier Viktor Yanukovych said the Ukrainian side had received proposals from the French company, Gas de France. He added that Ukraine would welcome French partnership. He further stated that Italy is also involved with the project. Moscow would be content to have this consortium with the Ukrainian transit pipelines under control. “Leasing and concessions would be good enough,” believes Russian Ambassador Viktor Chernomyrdin, adding that the consortium will not operate adequately unless in control of the gas transport system.

Gazeta SNG (Russia) comments on differences during the talks, assuming that the process is being slowed down by the Ukrainian side and that this scares away potential investors. Thus, the EBRD is prepared to consider participation in the consortium. Experts believe that the EBRD could act as a lender or become a stockholder, except that the consortium model remains to be adopted. Until it is, any additional members are out of the question, insists the newspaper. The impression is that the Russian side is skillfully working up Ukrainian-German tactical divergences, possibly using contacts in Ukraine’s oil and gas circles.