Ukraine gas TSO mulls overhaul of EU border points to ease operations

LONDON (ICIS)–The newly-established Ukrainian gas grid operator is considering mergers of its western border interconnection points in a bid to streamline operations and deepen regional market integration, the head of GTSO told ICIS in an interview.

Sergiy Makogon, general manager of GTSO, said interconnection points which had been booked for the transit of Russian gas under a previous legacy contract and border points which have been used for imports of gas into Ukraine from Hungary, Poland and Slovakia may be merged into virtual interconnection points (VIPs).

This means that GTSO could cluster up the Budince-Velke Kapusany interconnection points on the Slovak border, Beregovo 1400 and Beregdaroc 800 on the Hungarian border and Drozdovichi-Hermanowice on the Polish border.

Ukraine had been forced to operate double interconnection points as Beregovo 1400, Drozdoviche and Velke Kapusany had been blocked by Gazprom for transit to Europe under the terms of a ten-year contract which ended on 1 January 2020. This meant that Ukraine could not use these points for reverse flows and had to establish separate interconnections for imports.

However, as a new five-year contract has been signed with Gazprom based on EU rules, and GTSO concluded interconnection agreements for 13 out of its 24 interconnection points, it may be possible to establish VIPs to facilitate flexible hub-to-hub trading.

Reducing the number of points and simplifying operations would help shippers in Ukraine and the region to streamline operations, Makogon said.

The experience of other European TSOs, which merged interconnection points, shows that the establishment of VIPs has led to improved hub liquidity.

Makogon said GTSO had proposed to Eustream, its Slovak counterpart, to merge the Budince and Velke Kapusany physical points into a VIP as well as switch to European energy units and introduce virtual reverse flows.

“However, Eustream needs some time to manage legacy contracts. We hope it would not take much time to solve all the issues on the Slovak side,” Makogon said.

VIRTUAL FLOWS

As a preliminary step, Ukraine has already established virtual flows with Poland, after the Polish transmission system operator Gaz-System offered capacities on its platform last week.

This means that Ukraine can retain a certain portion of gas for its own needs out of a total quantity earmarked for export.

Makogon said similar operations should be introduced on the Hungarian and Slovak border in line with the provisions of the EU’s Capacity Allocation Mechanisms Network Code (CAM NC) and the interconnection agreements signed with Hungary and Slovakia.

Since the beginning of the year, imports from Hungary had dropped to zero while those from Poland only barely picked up from 22 January because of oversupply and low demand in Ukraine and the region.

Meanwhile, Slovak flows on the Budince interconnection point have also fallen as Ukraine booked only 30% of capacity for Q1 ’20.

However, Makogon said there was a strong case for both Hungary and Slovakia to offer capacities for virtual reverse flows to Ukraine as these would deepen market integration.

SLOVAKIA

A source close to Eustream confirmed Slovakia and Ukraine now had a standard interconnection agreement for Velke Kapusany, which enables virtual reverse flows, in addition to the existing IA at Budince.

However, he noted that since the IA with GTSO for Velke Kapusany was signed on the final day of 2019, Eustream still needed time to phase out the interconnection agreement with Gazprom, introduce a testing regime and adapt the information system.

The source said the signing of the interconnection agreement happened at the last minute, which meant that the Slovak TSO would require some time to adapt its IT system and implement new exit capacity, especially if public procurement is involved. The source concluded that Slovakia was still in the implementation period, but fully in line with the provisions of the interconnection agreement with Ukraine, stressing that virtual reverse flows would be functional as soon as IT systems are implemented and tested.

SHORT-HAUL

To boost the attractiveness of the Ukrainian market, GTSO has also started offering short-haul tariffs from 1 January, which effectively allow non-resident companies to ship gas in between CEE markets via Ukraine or to inject it in the country’s storages for one season before getting it back.

Short-haul tariffs are four times cheaper than usual entry-exit tariffs, which means that to enter Ukraine, store gas within one season and get it back would cost €1.50/MWh in total. Meanwhile, the cost of short-haul transit would be around €0.60/MWh.

Tariffs were calculated based on an EU-aligned tariff methodology and cover the period 2020-2024.

ROMANIA

Makogon said GTSO would also reach out to the Romanian transmission system operator Transgaz to extend the existing interconnection agreement from one interconnection point Orlovka – Isaccea 1 to include all existing borders – Tekovo-Mediesu Aurit, as well as Orlovaka-Isaccea 2 and Orlovka-Isaccea 3.

Although Romania has historically relied on Russian imports via Mediesu Aurit and Isaccea, two physical points some 700km apart, it agreed to sign an interconnection agreement only for the Orlovka-Isaccea 1 point, which has been traditionally used for transit. In theory it could immediately sign interconnection agreements for Mediesu Aurit-Isaccea Import VIP and Orlovka -Isaccea 2. It could also sign an interconnection agreement for Orlovka-Isaccea 3 when the existing legacy contract with Gazprom expires in 2023 . However, despite repeated attempts from GTSO, Transgaz has so far refused to expand the IA to other border points.

“My understanding is that Romania needs Mediesu Aurit for security of supply. We will propose to sign an interconnection agreement. If Romania doesn’t need it, we will close it,” Makogon said.

INTERCONNECTION AGREEMENTS

If Transgaz were to sign interconnection agreements for all border points with Ukraine, the country would have 17 interconnection points covered by IAs out of a total of 24 points bordering Belarus, Hungary, Poland, the Republic of Moldova, Romania, Russia and Slovakia.

Currently it has 13 points covered by IAs, including two with Russia.

In practice this means that all neighbouring TSOs which include interconnection agreements with GTSO, including Russia’s Gazprom, as TSO, operate in line with European network codes with regards to nominations and matching, operational balancing agreements (OBA), as well as the alignment of energy units.

Under the transit agreement with Russia, Gazprom would transit a minimum 65 billion cubic metres (bcm)/year in 2020 and 40bcm/year up to 2024, however, Makogon explained that the volumes which Gazprom decides to ship to neighbouring Hungary, Moldova, Poland, Romania and Slovakia may differ from year to year in line with confidential terms embedded in the new commercial agreement.

FUTURE PLANS

As a five-year transit contract has been signed, the focus of GTSO is now on tightening up internal balancing rules including daily balancing, neutrality mechanism, introducing new IT systems, clamping down on the unauthorised off-take of gas and improving transparency.

A study by the Ukraine-based Dixigroup shows that although the gas sector is the most advanced in terms of transparency, it is still short of several targets related to balancing, natural monopolies, supply, reliability and security and consumption.

Concrete details are yet to emerge on how GTSO proposes to meet its objectives.