′NordStream 2 to pump, but Ukraine gas transit will remain′ | Business| Economy and finance news from a German perspective | DW | 03.07.2018
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'NordStream 2 to pump, but Ukraine gas transit will remain'

German energy expert Roland Götz believes the controversial gas pipeline will come into operation in 2019. But Russia's Gazprom and Ukraine's Naftogaz first need to reach a gas transit deal, he says.

Dr. Roland Götz is one of the most-renowned scientists of Eastern European studies and an independent expert on European-Russian energy relations.

DW: Ukraine has dialed up its battle against the NordStream 2 gas pipeline. Denmark has raised opposition, too, while the United States has threatened to sanction all companies involved in the project. Nevertheless, the pipeline partners in Germany and Russia are confident to start laying the first pipes on the bed of the Baltic Sea soon. So, how sure are you that the project will be finalized?

Roland Götz: NordStream 2 is definitely going to come, but won't be operational as quickly as Gazprom may have wished for. Originally, the pipeline was expected to start pumping oil at the end of 2019 — exactly at the time when the 10-year Russian-Ukraine supply deal will expire.

But I expect the pipeline not to be able to run at full capacity on January 1, and Gazprom will remain dependent on pumping its gas via the Ukraine pipeline network for the short-term — at least until 2021, probably until 2022 or even 2023.

Why should this be necessary?

Picture of Roland Götz

Roland Götz

First of all, because the construction of NordStream 2 could be hit by delays. Denmark, for example, is withholding for political reason a permit to build the pipeline close to the island of Bornholm. This could delay construction for several months due to the search for an alternative route.

Moreover, should the US follow through on its sanctions threat — it will not stop the pipeline, but make financing more difficult especially for European companies that provide technical services for the project and could be forced to rethink their participation.   

And secondly?

Because of the European Gas Pipeline Link (EUGAL), which distributes most of the NordStream 2 gas throughout Germany. The first link of it is expected to be completed by the end of 2019, the second of it however not before the end of 2020. And, it'll take a few months before a newly-built pipeline is ready for full-capacity operation.

Ukraine is however not contending with a short-term solution for gas transit through its territory. Kyiv's goal is to prevent the pipeline altogether, for which it is actively campaigning in Brussels. 

It cannot be the goal of Ukraine to simply prevent NordStream 2 because it has neither the legal nor the factual means to stop it. Moreover, the presumption that the pipeline has to be negotiated and decided among EU member states is beyond reality. From a legal point of view, NordStream2 is an economic project guaranteed under the EU's freedom-of-business rules and based on EU gas market regulation. 

Infografik Karte Gaspipelines Europa Nord Stream ENG

 

Are you saying that the pipeline must not be seen from a political angle, too?

Every large-scale infrastructure project is almost always a political project, too — every highway, every airport has political repercussions. Those however do not determine the nature of a project. In the long run, Gazprom wants the majority of its gas exports to the West transported through underwater pipelines.

But for the short term, Gazprom needs to pump supplies via Ukraine, which means both Moscow and Kyiv need to negotiate an extension of the gas transit accord for the period beyond January 1, 2020.

Yes, Gazprom must aim for both — a short-term solution for an interim period of two to four year until NordStream 2 is fully operational, and a long-term agreement. It cannot be interested in a complete halt of its well-functioning Ukraine gas transit. It has to face up to the task of finding new contractual solutions to ship a certain amount of gas via Ukraine.

This could be achieved through a treaty between the two states as it exists today, but this is relatively unlikely. Moreover, it's a method rarely used with regard to current gas supply contracts. Another possibility could be a commercial contract between Gazprom and Ukraine's [state-owned] operator Naftogaz, which, after all, is already in the process of being privatized with the help of companies from the West.

What transit volumes are we talking about here? Gazprom CEO Alexei Miller speaks of about 10 to 15 million cubic meters of gas per year.

That's much too low and wouldn't guarantee the functioning of the Ukraine network. In my estimate, this would require about 30 to 40 million cubic meters per year, which is about half of what Russia currently pumps through Ukraine toward the West.

Do you really believe that Gazprom will agree to such a volume after it has spent so much money on pipelines circumventing Ukraine?

Yes, I do because the Ukraine network will continue to have a big and important reserve function for some time to come. Gas supplies are subject to seasonal fluctuations to which Gazprom needs to react. Even when its two NordStream pipelines are running at full capacity the company needs a regular backstop for its exports. Otherwise, it won't be able to react to spikes in demand in Europe which cannot be in the interest of Gazprom.

What should the Ukrainian government do now, in your opinion?

Ukraine's Naftogaz should come to the realistic conclusion that it needs to collaborate with Russia's Gazprom for many years to come. It has to take a constructive and not a confrontational approach —which, by the way, is required on both sides. The company should refrain from any political rhetoric and clearly separate between commercial and political interests in its long-term strategy.

The continuation of Russian gas transits should be in the focus of Ukraine's economic interests even though it's also clear that the political conflict remains unresolved for now. In the negotiations with the Russian side, Ukraine should emphasize the reserve function of its gas network and storage facilities.

What you mean is that Ukraine should focus on maintaining large gas volumes rather than on increasing prices for gas transit?

Ukraine will only win if it ensures that as much Russian gas as possible is being pumped through its pipelines for as long a time as possible. It will lose if it tries to raise transit fees sharply for a short time to hurt or even blackmail Gazprom. This would only lead to evasive strategies on the part of Gazprom that could possibly stop gas transit altogether. Russia has the means to do so, although it would hurt.

After all, Ukraine has pledged to abide by European rules governing the energy sector and which clearly prohibit raising transit fees arbitrarily and to the detriment of others. Ukraine would not be able to maintain such a policy in the longer term.

The interview was conducted by Andrey Gurkov

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