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Ukraine still needs to be a transit country – interview with Sergiy Makogon, CEO of GTSOU

Sergiy Makogon will be one of the speakers of the Budapest LNG Summit, to be held on 6 December 2021.

Amidst soaring energy prices and the shortage of natural gas supplies, Ukraine’s storage capacity offers additional security to European customers. All divisions and facilities of the Gas Transmission System Operator of Ukraine (GTSOU) are ready to operate in the autumn-winter period of 2021/2022. An important reassurance both for Ukraine itself and neighbouring countries.

CEENERGYNEWS spoke with Sergiy Makogon, CEO of GTSOU about the role played by gas storage, the impact of Nord Stream 2 on regional energy security and the importance of interconnectors to diversify the sources of supply.

“Gas storages are very important for the security of supply because we can provide the additional flexibility that is necessary for the Gas TSO to inject gas very quickly into the infrastructure,” Mr Makogon begins.

He explains that currently, Ukraine can count on 30,95 billion cubic metres (bcm) of storage capacity while the maximum that can be injected into the system is around 250 million cubic metres (mcm) per day.

“Ukraine’s gas infrastructure was built during the Soviet time, to supply gas to the European market,” Mr Makogon recalls. “This business model is still useful and could be used even now especially because Ukraine only needs about 18 bcm of storage so the remaining 13 bcm could be offered to international partners.”

Indeed, in 2020, about 10 bcm of gas were injected into the Ukrainian storage by foreign traders meaning that GTSOU has trust from different partners.

“However, we still need Ukraine to be a transit country,” Sergiy Makogon underlines. “It is something critically important as well as allowing the European shippers to receive gas at the Russia-Ukraine border and to be able to decide if they want to keep gas in Ukrainian storage for winter or proceed with the transit to European markets. Right now, only Gazprom decides how much gas go where. We would like to give this opportunity also to foreign traders.”

An opportunity that might be threatened by the construction and operation of the controversial Nord Stream 2 pipeline, which will transport natural gas over some 1,230 kilometres from the world’s largest gas reserves in Russia through the Baltic Sea. Earlier in October, the gas-in procedure for the first string of the pipeline started and both Ukraine’s energy company Naftogaz and GTSOU submitted a request to the German energy regulator Bundesnetzagentur (BNetzA) to take part in the Nord Stream 2 certification procedure.

“As a company, we have a very strong set of arguments,” Mr Makogon says. “If Nord Stream 2 will be certified under the current application, that would be very detrimental not only to our interest but for the overall energy security of the region. As a TSO, we can only serve if there is enough demand, but if Nord stream 2 begins operations, Gazprom will use it to increase its position in Europe, convincing customers to not buy the cheap and convenient gas but to only use the Nord Stream 2.”

According to him, this ruins the principles of competition and will eliminate Ukrainian routes with Gazprom being in a very dominant position.

“Nord Stream 2 goes especially against the interests of current gas consumers like Hungary, Poland, Italy which are going to consume the same gas as before just not transiting through Ukraine,” the CEO of GTSOU points out.

“We have to look at the data. It is not up to Germany, as a country in favour of Nord Stream 2, to specify the route if gas is not coming for its consumption. The current capacity of Nord Stream 2 is 55 bcm and let’s say that Germany is not dying to get this gas. They will only use shares of that, so it is only fair that those who are customers get to define the routes.”

He also mentions different reasons, other than commercial ones, for example, the Baltics’ concern for the military presence.

“Finally, let’s remember that the Third Energy Package was not passed by the EU because we wanted to improve commercial conditions, but because we were concerned about monopoly and use of power by dominant players so the Package serves to eliminate such risks,” Mr Makogon adds.

Asked about the risks posed by ageing infrastructure, Mr Makogon points out that although the gas infrastructure is old, it is the same as the one existing in Russia or Slovakia and other countries, so with proper maintenance, it can work for many years (also because it is an onshore infrastructure so it is easier to maintain than the offshore one).

Courtesy of GTSOU.

“And when comparing Ukraine’s methane leaking with Russia’s, the latter is much higher,” he continues. “Actually, these infrastructural problems can happen in any kind of system. Let’s just think about the very recent disruption in Bulgaria’s pipeline. It was just built and it is already showing issues. In Ukraine, we have not only a robust infrastructure but also a flexible one and if something happens in a pipeline we can immediately switch to another one. In this way, we helped Moldova and Hungary, when they needed gas storage.”

Currently, Ukraine is not well connected to other countries but there are plans to change this status.

“We are discussing possibilities both with Slovakia and with Hungary,” reveals Mr Makogon.

“We are also eager to have a better connection with Poland to have access to different sources of gas, in particular, LNG market via Terminal in Swinoujscie or planned FSRU in Gdansk).”

Definitely, Hungary plays an important role in GTSOU’s LNG-related strategy, with a goal to create as many and diversified routes as possible.

“Technically, right now is not possible to deliver gas physically from Hungary to Ukraine, that’s why we are discussing with Hungary’s FGSZ to ensure that we can deliver,” explains Sergiy Makogon. “It is a sovereign right of Hungary to decide in which direction to go (for example, the recent contract signed with Gazprom). However, the facts of the last month show us that dependency on one single route especially without backup possibilities is dangerous for the security of supply. That’s why we are still proposing to use the infrastructure in Ukraine. From our point of view, it would be better for Hungary to have some diversity of supply and routes and Ukraine could be one of them as it was proved already by many decades of delivery.”

Cooperation is key also when it comes to future technologies. At the end of September, four leading Central European gas infrastructure companies, including GTSOU, have joined forces to develop a hydrogen highway in Central Europe, from promising future major hydrogen supply areas in Ukraine that offer excellent conditions for large-scale, green hydrogen production via Slovakia and the Czech Republic to large hydrogen demand areas in Germany and the EU.

“We are at a stage of other TSOs for now, so just Research & Development,” says Mr Makogon. “So, it will take us another 2-3 years to make a complete assessment of our infrastructure. The main goal is to develop a joint vision not just from a technical aspect but especially from a regulatory point of view. It is going to be an important topic for the next years, but I doubt that hydrogen will be our main business in the nearest term, let’s say in the next ten years.”

“For now, we are more focused on methane, which is important for the green transition, in particular in CEE, because of the switch from coal to gas.”

So, what is going to be GTSOU’s main focus in the near future?

“In the shortest period of time we believe in biomethane,” concludes Mr Makogon. “Ukraine could potentially produce up to 8 bcm of biomethane and next years this potential could grow quite significantly because of the higher prices and higher demand coming from Europe. Additionally, the law on biomethane was adopted by the Ukrainian parliament sot it will facilitate us.”

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