Problem issues of Ukraine’s gas transit

1. Problem issues of Ukraine’s gas transit (theses of the report on international conference«Ukraine’s oil and gas industry: reliability, stability and perspectives») L. Unigovskyy

2. Ukrainian gas transport system is the strategic component of energy complex. Its effective work provides not only state budget revenues, stability of gas supplies to population and industry, but also energy security to many European countries. It is very important therefore to estimate the usage of its capacities for gas transit to Europe in middle- and long-term perspective. The basis for such analysis are documents of European research centers, EU official papers, Gazprom documents as well as experts assessments concerning Eurasian and neighboring markets of gas production and supply. Before analysis we would like to formulate important principles which determine gas transit to European Union. Hydrocarbons supply in large volumes will always contain political component and will be related to political interests. That is why the term "petropolicy” is being used. European countries are interested in diversifying not only sources of supply, but also gas transport routes into EU. European consumers value reliability of supplies even more than its cost in reasonable amount. Every new conflict between Russia and Ukraine harming reliability of gas transit decreases Ukraine’s chances to stay almost monopoly gas transit route no matter which party is guilty. The estimate of utilized capacity of Ukraine’s gas transport system in middle- and long-term perspective depends on Russian gas import into EU as well as on gas demand in Europe. Figure 1 shows different prognoses of gas import volumes into Europe.

3. Fig.1 Prognoses of gas demand in Europe for the period up to 2025 by the leading energy agencies, scientific centers and consulting companies

4. We underline that during past few years only many studies in respect of gas problems have been completed. Among others these are research by Athens Technical University (PRIMES model) under umbrella of EU DGTREN, by OME, by Energy Research Center of the Netherlands etc. • Almost all forecasts were based on oil prices between $40 and $50. In 2006 new research based on PRIMES model took into account bigger price escalation. Price dynamics taken into consideration for forecasting gas consumption and import into Europe are shown on fig. 2. • In this new forecast gas demand in Europe was decreased by 130 bcm comparing to DG TREN forecast in 2003. It is interesting to note, that this forecast shows also the gas consumption decrease in Europe by 0,2% annually. • Europe own gas production will decrease in 2028 to the amount between 114 bcm (by DG TREN-2006) and 66 bcm (by ОМЕ-2007). • DG TREN (2006) and ОМЕ (2006, 2007) forecast EU-27 import requirement as following: • 2010 - 353-358 bcm; • 2030 - 552-636 bcm.

5. Fig. 2 International prices for energy resources for European energy markets by alternative price scenario

6. On the basis of upcoming projects analysis (including LNG import terminal constructions) and its comparison with import forecasts OME make conclusion that in 2010 gas infrastructure capacity will exceed gas demand in Europe by 153 - 187 bcm (40% - 53%), in 2030 - by 194 - 278 bcm (30% - 50%). This situation not only heightens competition between transit routes, but also let resource producer maneuver for changing routes. For example, according to estimate of Slovakian gas transport company «Preprava» the construction of Yamal-Europe gas pipeline led to the loss of 18 bcm gas transit for Slovakia annually during 5 years. We also underline that planned (by RWE) GAZZELE pipeline construction (fig. 3) will increase transit routes competition because of gas transportation to central and southern Europe by Nord Stream.

7. Three options of GAZELLE route Source:RWE Transgas Net Fig. 3 GAZELLE gas pipeline as Nord Stream extension to Check Republic

8. Now let’s see how all of that will affect Ukraine’s gas transport system utilized capacity. The comparison of modeling results of transit gas flows, scientific research results, our calculations provided the basis to evaluate the potential volumes of gas transit through Ukraine. It is forecasted as follows:2010 - 113,5-139 bcm, 2020 - 82-90,5 bcm,2030 - 56-90,5 bcm.This forecast takes into account the current state of Ukraine’s gas transport system, its lesser effectiveness comparing to Belarus system because of its age and lengths. Although the real distribution of gas flows between these two systems will also depend on tariff policy, final gas consumption regions in Europe as well as political situation.It has to be taken into account that high oil and gas prices, application of energy saving technologies as well as usage of alternative sources may lead to the stabilization of gas consumption in Europe by 2020 which is proved by DG TREN forecast.In that case minimal forecast volumes of gas transit through Ukraine may worsen by 2020-2030.What has to be done?.We have two major options (see fig. 4).First – do not change the actual management of gas transport system. Second – create multilateral consortium or corporation (joint stock company).

9. Possible ways of development Conservation of existing situation Creation of joint-stock company (corporation) Creation of multilateral consortium Ukraine’s gas transport system(transit component) Fig. 4 Possible ways for development of Ukraine’s gas transport system

10. Both options need careful studies. Here are the main stages of such study. 1. Evaluate the volumes of gas transit through the territory of Ukraine in long term perspective and economic indicators of Ukraine’s gas transport system for the option of conservation of existing management system. 2. The same for the options of consortium and joint-stock company. 3. Determine the reasons for using “gold share” for the options of consortium and joint-stock company. 4. Determine the possible members of consortium (or shareholders). 5. Analyze possible judicial, economical and management basis for creation of consortium (or joint-stock company). 6. Evaluate the sources of investments. 7. Compare options. The conclusions should be based on middle- or long-term forecasts and options analysis but not on the current situation analysis. In case of consortium's creation, it should be multilateral. As transit country Ukraine is interested in its competitors participation - Belarus, as well as in participation of supplying countries, financial institutions, Gazprom. Consortium is becoming reasonable way of development in case of some transit volumes guarantees only. Besides the gold share's mechanism will guarantee the state influence on key aspects of consortium activities.

11. CONCLUSIONS • There are major risks in economically viable operation of Ukraine’s gas transport system in future. The main risk is the substantial decrease of gas transit volumes through Ukraine. To relax these risks the consistent policy of mutually beneficial cooperation with supplying countries must be worked out – with Russia, Turkmenistan and other Central-Asian producers. The common gas policy should be implemented. This will stabilize transit volumes through Ukraine. • 2. To lessen Belarus competition advantages Ukraine’s gas transport system must be completely reconstructed in short-term perspective, including major transit gas-mains such as Urengoy-Ujgorod, Souz, Bratstvo. • 3. The decrease/increase perspectives of future gas transit volumes through Ukraine depend on 3 major factors: • First - gas production level in Russia and Central-Asian countries (which export its gas through Russian territory and do not have direct access to European gas market); • Second - potential Russian gas export to Europe taking into account the increase of domestic Russian gas consumption and gas demand in Europe; • Third - new gas export routes construction passing by Ukraine (Nord Stream, Yamal-Europe, South Stream etc.).

12. 4. In general it may be assumed increase of Russian gas export to Europe. According to different estimates it may come to 166-171 bcm by 2010 and 166-207 bcm – by 2015-2030. But further substancial increase may be questionable because of production restraints, domestic demand increase in Russia and diversification policies implemented by both EU (diversification of suppliers) and Russia (diversification of consumer markets). The above mentioned export increase first of all will be possible due to the enlargement of Central-Asian gas export. 5. In spite of all well known disadvantages of Ukraine’s gas transport system Russia will need its capacities to fulfill its European contract commitments. But Russian dependence on Ukraine’s transit route will decrease. 6. In case of Russian gas export escalation the decrease of transit volumes through Ukraine will be gradual. It will depend on speed of alternative routes construction, mainly Nord Stream as well as Ukraine’s strategy towards Russian gas transit to Europe. 7. Almost the worst situation may arise in case of simultaneous construction of Nord Stream and Yamal-Europe second stage on the background of stabilization of Russian export volumes. It will inevitably lead to major transit decrease through Ukraine. Exactly this situation may be forecasted by the year 2020. In this connection the construction of GAZELLE gas pipeline may play very negative role for Ukraine as it will divert surplus gas volumes from the north of Germany to south, to central Europe – to Check Republic.

13. 8. Additional risk may arise in case of South Stream construction for Russian gas export to Italy or/and Austria. It may transport ("take away") all gas of planned to construction Caspian gas pipeline and considerably limit Russian gas transit through Ukraine. 9. Another challenge may provide increase in consumption of LNG instead of pipeline gas (as LNG infrastructure in Europe dispose free regasification facilities). In this case price factor may prove decisive.10. In any case well thought-out tariff policy for gas transit services will be needed from Ukrainian party because Ukraine may face very realistic danger of loosing substantial amount of gas transit volumes. The optimal gas transit tariff level will be also effective instrument for influence on future infrastructure projects.