For Europe bound gas, Russia successfully by-passing Ukraine

For Europe bound gas, Russia successfully by-passing Ukraine

Russia is increasing finding ways to get its cheap natural gas into Europe without having to rely on Ukrainian pipelines. And if the Turkish Stream gets built according to plan over the next three years, Ukraine will have to find new ways to make money from the energy business instead of relying on the easy and steady flow of Russian gas transit fees. The European Network of Transmission System Operators for Gas (ENTSOG) said that over the last week alone, Gazprom has "significantly increased" gas transmission via the Baltic Sea pipeline known as Nord Stream. Almost all additional gas volumes passed into Europe through Germany's OPAL pipeline.

The volume of transmission through Ukraine has fallen dramatically, Ukraine's state-run energy giant Naftogaz said in a statement on Friday. The combined daily supplies to Europe via Ukraine and Nord Stream remain stable, however. According to ENTSOG, the daily use of Russia's Nord Stream–OPAL pipeline route has grown from 57.1 million cubic meters (mcm) to 80.5 mcm. Russia's Gazprom increased the use of the OPAL line from 50% to over 80% of its capacity into Europe, proving once again how much the Germans are tied to the Russian energy matrix even as nearby Poland and Lithuania have new liquefied natural gas terminals as alternatives. LNG is more expensive than gas piped in from Russia.

During the same one week period before Christmas, volumes of gas transmitted through Ukraine’s lines leading into Slovakia have fallen from 148.9 mcm to 120.8 mcm per day.

ENTSOG data suggest that there is a connection between the increase in OPAL and the decline in transit to Europe through Ukraine and Slovakia. Naftogaz says this data challenges the statement of the European Commission that Gazprom’s wider access to the OPAL pipeline will not lead to less transit via Ukraine.

Naftogaz fears that the increase in alternative routes for Gazprom means the Russians are taking "deliberate actions" to decrease transit through Ukraine’s gas transmission system, leading to lower fees and less negotiating power for the Ukrainians.

Natural gas is the source of nearly all political strife between Russia and Ukraine.

The Euromaidan movement began in 2013 when then-president Viktor Yanukovych, an ally of Vladimir Putin, opted out of a trade deal with the European Union in favor of cheaper long term natural gas contracts from Gazprom. A public revolt ensued, leading to Yanukovych's ouster in February 2014 and the installation of a pro-Western Prime Minister named Arseniy Yatsenyuk who was a favorite of the U.S. State Department.

Yatsenyuk's new position led to a bitter divorce with Russia. That split ultimately saw large chunks of Ukrainian real estate taken over by the Russians. Crimea, a historic Black Sea peninsula that is home to the famous post-World War II peace negotiations city of Yalta and Russia's only warm water naval port, once again became part of Russia in March 2014. The move led to sanctions against Russia.

Arseniy Yatsenyuk

Naftogaz has been the promise of Ukraine now for the last three years. The company promised to reform, but political in-fighting among opposing political parties and their allegiances to Ukrainian oligarchs have stalled privatization plans. Naftogaz insiders have said that the company stays out of politics. But it is Ukrainian politics that have remained deeply enmeshed in Naftogaz and its future.

Naftogaz executives and others in the private sector agree that Ukraine needs to develop its own sources of energy in an independent manner so its gas is not used as merely a means for cheap energy for certain oligarchs and their friends.

Russia is also planning to build a second pipeline alongside the existing Nord Stream line in the Baltics. Poland rejected the deal in the third quarter because a number of the multinational oil companies involved, including Shell Oil, already had a large market share in Poland. Anti-trust authorities there said the new pipeline, dubbed Nord Stream II, would give the multinationals an even bigger market share, making it harder for Poland's LNG endeavor to be a viable alternative for Europe. The deal is now on ice.

But over the last several weeks, Russia and Turkey have mended fences following the downing of Sukhoi fighter jet over Syria. Turkey shot it down. Russia sanctioned certain Turkey businesses shortly afterwards. Today, both governments are on better speaking terms and the Turkish Stream pipeline deal between Gazprom and BOTAS Petroleum is back on.