Fourteen months ago, Russia and Ukraine signed a new five-year gas transit agreement. The current agreement – unlike the previous contract – is based on the fixed tariff regardless of the gas price. The contract includes a ship-or-pay clause for 225 billion cubic metres (bcm) for 2020-24 and Naftogaz also serves as an intermediary between Gazprom and Ukraine’s transmission system operator (TSO). Guaranteed minimum revenue from organising gas transmission services for Gazprom will exceed 7.1 billion US dollars over the five-year period. In 2020 alone, Gazprom paid 2.11 billion US dollars for the gas transit. Furthermore, Ukraine’s gas transit revenues were shielded from the gas price slump resulting from the introduction of COVID-related restrictions in Europe. Ukraine’s gas TSO (Gas Transmission System Operator of Ukraine/GTSOU) also benefited from the lower prices as it had to pay less for 2.7 bcm of fuel gas, the GTSOU bought from Gazprom in 2020.
Ukraine transit arrangement is rather unique in the European gas universe with short-term flexible capacity bookings. The GTSOU also have one of the highest entry/exit fees in Europe making the transit via Ukraine expensive when compared to other routes. The most recent version of the tariffs published by the energy regulator indicates that the entry tariffs on the Russia-Ukraine border are the highest when compared to the exit fees on the EU-Ukraine border and to the EU average as well.
Since 1 February 2011, Ukraine has been a contracting party to the Energy Community and over a year ago the country finalised the unbundling of its gas transportation system. Little has moved with time in Ukraine’s gas transmission system which is hardly able to take up the challenge of providing large-scale transit services or transforming itself into a low-carbon energy services provider without the financial and technical support of Western companies and institutions.
According to the GTSOU’s Ten-Year Network Development Plan (TYNDP) 2021-30 only one per cent (414 kilometres) of Ukraine’s gas pipeline system (33.079 kilometres) is 10 years old or less, while 72 per cent (23.650 kilometres) of the pipeline network is at least 33 years old. Only three out of 529 compressor stations are ten years old or less and almost 80 per cent (414) are at least 31 years old. Furthermore, 92.3 per cent of 1390 gas distribution units are functioning with less than 50 per cent of their initial efficiency. Only one per cent of them are 10 years old or less and over 60 per cent are 30 years or older.
The GTSOU has very modest ambitions regarding the new gas infrastructure. Currently, only the Urengoy–Pomary–Uzhgorod pipeline (28-32 bcm/year) has the funds secured for refurbishment. According to the TYNDP 2020-29, investment in pipelines (excluding VAT) will reach 0.825 billion Ukrainian hryvnias (24.3 million euros) in 2021-22 and 1.254 billion hryvnias (36.85 million euros) in 2023-29 and only 206 kilometres out of 33.190 kilometres of pipelines will be fully replaced.
Investment allocated to the gas distribution units is also rather modest: 2.02 billion hryvnias (59.5 million euros) in 2021-22; 3.82 billion hryvnias (112.3 million euros) in 2023-29 (excluding VAT). Funds committed to the modernisation of compressor stations are more significant but also not sufficient to maintain a full-scale transit via Ukraine: GTSOU plans to invest 15.23 billion hryvnias (450 million euros) in 2021-22 and 4.04 billion hryvnias (119 million euros) in 2023-29.
Instead of competing with other TSOs for clients and greening the gas infrastructure, Ukraine’s state institutions and private companies are openly lobbying for sanctions against the competitors. For example, Naftogaz, Ukraine’s National Security and Defense Council and Polish President Duda lobbied the US to sanction the Nord Stream 2. The project’s delay was at least partly due to active Poland’s and Naftogaz lobbying. Ukraine’s gas company confirmed it was able to “provide critical information to Congressional officials and key actors in the Trump administration about Russia’s capacity to finish Nord Stream 2” and expressed the company’s gratitude to the “Senators and other friends of Ukraine in the United States who ensured passage of PEESA last year and who have now introduced this new PEESA Clarification Act”.
Therefore, funds are being spent on lobbying, not on refurbishing or re-purposing Ukraine’s GTS/offering competitive transit fees or increasing domestic gas production. Ukrainian gas production in 2020 was down 2 per cent year on year with the state-owned producers (Naftogaz) reducing output by 5 per cent, while the private companies increased their production by 7 per cent.
The position of the GTSOU on the transit is also ambivalent. On the one hand, the TSO announced plans to maintain and refurbish only around 40 bcm/year of a transit pipeline capacity. On the other hand, its CEO Sergiy Makogon stressed that “GTSOU has free capacities […] in the volumes that Germany needs”. These two statements do not seem to be compatible with market reality.
Ukraine’s GTS capacity will be needed in the mid-term future, especially during the peak periods. It is therefore unclear how Ukraine’s refurbished transit capacity will be able both to replace the Nord Stream-2 capacity and address EU’s additional demand during the cold days especially since the Ukrainian gas corridor is fed from different, depleting gas fields, while the Nord Stream 2 pipeline is connected to the newly developed Yamal megaproject.
Last but not least, Ukraine does not seem to be ready for the energy transition both from a regulatory and a technical perspective. In 2011, Ukraine introduced a carbon tax and despite an increase, the carbon price is significantly below 1 US dollars/tonnes of CO2 which makes it the lowest carbon price in the world. Furthermore, Ukraine’s “regulatory framework for hydrogen is fragmented” and there have been “no instances of the provision of financial support from the government to date”. It is also unclear how these modest investments in infrastructure will allow Ukraine to produce and transport 16.6 bcm of hydrogen by 2030 and 5 terawatts-hour/year of biomethane by 2035. These projects might become a reality in case Ukraine receive assistance from Europe. For example, in February 2021, Ukraine initiated talks with Germany on advanced payments for green hydrogen. In this regard, the country’s policy is not consistent. Ukraine asks Germany for assistance while lobbying against Berlin’s key gas project – the Nord Stream 2 pipeline.
Sanctions activities may be convenient for domestic politics, but they might weaken Ukraine’s political ties with a number of EU Member States, critical of the US pipeline sanctions. It would be more efficient for Ukraine to focus on the energy transition.