UPDATED: Ukraine, Russia sign gas transit, legal claims protocol

BUCHAREST (ICIS)–After months of intense bargaining, Ukraine and Russia have finally reached an agreement for the transmission of Russian gas via the Ukrainian system from January 2020.

Under the terms of a three-point protocol unveiled on 21 December and to be ratified by 29 December, Russia would continue to transit gas via Ukraine from January 2020 and pay a $2.9bn debt including interest to the Ukrainian incumbent Naftogaz as part of a Stockholm transit arbitration award of February 2018.

For its part, Naftogaz would drop its $12.2bn legal claims against Gazprom, and refrain from freezing Gazprom property, assets or cash as part of its Stockholm transit arbitration award of February 2018.

The settlement also stipulates that Ukraine would terminate any current or future requirements for fines from Gazprom based on a decision by the Antimonopoly Committee of Ukraine.

Ukraine and Russia have until 29 December 2019 to sign the agreement, but they will also have one full week to consider its terms before fully endorsing them.

UKRAINE

The country has been mounting a fierce battle to retain its historical role as the main transit corridor of Russian gas to Europe, fighting rival routes such as Nord Stream 2 and TurkStream and insisting on the attractiveness and flexibility of the Ukrainian transmission system.

Russia had been expecting to divert all volumes currently transited via Ukraine to the new routes which cross the Baltic and the Black Sea and implicitly terminate its dependence on Ukraine as political relations between Kyiv and Moscow have deteriorated in recent years.

However, last-minute sanctions imposed by the US against Nord Stream 2 and TurkStream, prompted a company involved in pipelaying for Nord Stream 2 to suspend activity as the project was only weeks away from completion.

This may have strengthened Kyiv’s hand in negotiations, but was not enough to persuade Russia to agree on a long-term deal for the same volumes it currently transits via Ukraine.

Under the terms of the protocol, Gazprom will be shipping 65 billion cubic metres (bcm)/year via Ukraine in 2020, the first year of the agreement. Volumes would be reduced to 40bcm/year between 2021-2024, or less than half of the volumes currently transited via Ukraine.

Furthermore, under the protocol, Gazprom will sign an agreement with Naftogaz, which will be tasked with ‘the organisation of transit’ via Ukraine.

Even though the new transmission system operator of Ukraine – GTSOU – and Gazprom, as system operators will sign an interoperation agreement, it will be Naftogaz’s responsibility to book capacity in the Ukrainian system for the transmission of gas. Naftogaz, as the ‘organiser of transport’ will be asked to sign a transport agreement with GTSOU.

According to a Gazprom statement, Naftogaz, as the organiser of transit, would take on risks that may arise in the transition period.

Traders say these risks will mainly relate to transmission tariffs which are expected to increase from 2020 since the volumes of transit gas will decrease.

Gazprom could be expected to pay a sum it may consider competitive for the tariffs, but any difference up to the real cost of transmission as set by the Ukrainian regulator NERC would have to be shouldered by Naftogaz.

ICIS addressed a number of questions related to the agreement to Yuriy Vitrenko, executive director of Naftogaz and one of the main negotiators but did not receive answers by publication time.

RUSSIA

Gazprom has opposed the Stockholm arbitration award but has now given ground, agreeing to pay the required $2.9bn by 29 December 2019.

Although it had opposed extending the Ukrainian transit route beyond 2020, the latest arrangement will allow Gazprom to ship 65bcm/year of gas to Europe via Ukraine in 2020. This may give the US enough time to lift sanctions against Nord Stream 2 and its contractors the chance to complete all the necessary infrastructure to bring Nord Stream 2 and the TurkStream corridor online.

This means that by the time the two projects are fully operational in 2021, as expected, Russia will increase its market share in Europe, shipping 55bcm/year through Nord Stream 2, 31.5bcm/year to Turkey and southeast Europe and another 40bcm/year through Ukraine.

As for Russia’s specific deal with Ukraine, its risks are passed to Naftogaz.

“Today we are no longer interested [in tariffs]. This will be a problem for Naftogaz,” Dmitry Kozak, Russian deputy prime minister told journalists on 21 December.