Ukraine Transit Talks End with no Results (Update 2)

(Adds comments from Naftogaz )

The European Commission's attempts to broker a deal on gas transit between Russia and Ukraine ended in failure October 28, with no agreement on the key issues. The European Union's commissioner for the energy union, Maros Sefcovic, who relinquishes that post when a new commission is empanelled on November 1, said the blame lay with the Russian delegates, who lacked the will.

This would not have come as a surprise, given Russia's refusal to accept the findings of the Stockholm arbitration tribunal. It ruled in February 2018 that Gazprom owed Ukraine money for gas transit under a ship or pay contract, but not that Ukraine owed Gazprom money for gas deliveries under take or pay terms, which were both agreed in 2010. Russia argues that this is asymmetrical, since the economic crisis in Europe that led to the under-delivery of gas for transit was also the reason for Ukraine taking less gas for its own needs.

Gazprom CEO Alexei Miller told his prime minister Dmitry Medvedev just over a week ago that talks on the next transit contract would only be possible once the present ruling had been dismissed. However Ukraine announced late last week that a Dutch court had approved the seizure of Gazprom's shares in South Stream, the Dutch company that owns the TurkStream pipelines. In its own statement, Naftogaz urged Gazprom to outline a plan for paying the $3bn it owes under the Stockholm award.

Despite this major stumbling block, Sefcovic said that he was "certainly not giving up as long as there is time. At the end of the meeting, we had better mutual understanding and I am 100% convinced that there is a possibility to arrive to a balanced solution." Sefcovic's full statement after the meeting can be read here.

The EC told NGW that it would be up to the next president of the EC to decide whether to retain Sefcovic in his broking role or to pass that task on to his successor, the Estonian Kadri Simson.

According to Naftogaz, the EC in the meeting proposed that a new long-term contract be signed between Gazprom and the new independent operator of Ukraine's gas system, due to be spun off from Naftogaz by January 1. This contract would require Gazprom to pump fixed volumes of gas via Ukraine, paying tariffs set under EU standards.

Naftogaz, unsurprisingly, said it supported this proposal, which would ensure stable transit revenues for years. Gazprom, on the other hand, favours a shorter contract that would enable it to cut back on transit volumes via Ukraine once Nord Stream 2 and TurkStream are up and running.

The head of energy at global law firm CMS’ Ukraine office Vitaly Radchenko said that the market "has been bracing itself for the worst case scenario. The failure to reach an agreement today proves that filling up storages to capacity has not been in vain. Gas storage in Ukraine has notably increased in recent months. Since August, Naftogaz has even been offering the service to residential customers. 

"The continued failure of these trilateral talks will no doubt motivate the Ukrainian government further in its efforts to produce more of its own gas and move closer to energy self-sufficiency. Hopefully the measures undertaken on the Ukrainian side, by the EU and EU states to date, will be enough to avert a gas crisis this winter.”

European storage is almost 100% full, according to Gas Infrastructure Europe, and Ukraine has pumped more than it says it needs in order to ensure the winter period can be managed safely.

However, gas demand growth in Europe does depend on the perception that it is a reliable fuel, as its main selling point at the moment is that the market needs security of supply to offset the intermittency of renewables.