Russia-Ukraine transit talks: The risks to gas in Europe
Trilateral talks between the European Commission, Russia and Ukraine on arrangements for gas transit across Ukraine from January 2020 are expected to resume in late May.
While the commercial logic for putting arrangements in place is obvious, for both Gazprom and Naftogaz Ukrainy, political factors are elevating the risk that no agreement will be reached by 31 December, when the current transit contract expires. The supply interruption that may result would, in the first place, impact consumers in Ukraine and south-east Europe. It might also produce a broader political risk to the position of gas in European energy markets, reinforcing doubts about Russia’s role as a reliable supplier, and arguments that gas should not be seen as a destination fuel for the energy transition.
The background to the talks is that, while Gazprom continues its efforts to diversify transit away from Ukraine, the two principal alternative routes under construction – Nord Stream 2 and Turkish Stream – will certainly not be fully operational by the end of this year, and are unlikely to be fully operational until 2021-22.
Construction of Nord Stream 2, which is largely complete in Russian, Finnish, German and Swedish territorial waters, is being delayed by the Danish regulatory authorities. At the Danish energy agency’s request, Nord Stream 2 AG last month submitted an application for a third alternative route through Denmark’s exclusive economic zone, but condemned the request as “a deliberate attempt to delay the project’s completion”. The decision by Brussels on 15 April to extend the Third Gas Directive to pipelines starting outside the EU may also obstruct Nord Stream 2. In addition, the EUGAL pipeline from Germany to the Czech Republic, which will transport about half of Nord Stream 2’s 55 bcm/year capacity, will not be complete until the end of 2020 at the earliest.
Construction of both strings of Turkish Stream offshore, and of the onshore continuation of the first string to Turkish destinations, is complete. But the continuation of the second string to Bulgaria, Serbia and Hungary will not be commissioned until 2021 at the earliest.
Therefore, subject to assumptions about the level of demand in Europe for Russian gas, 50-90 bcm/year of Ukrainian transit capacity may be needed in 2020, but this will fall steeply by 2022. After that, assuming that Nord Stream 2 and Turkish Stream are operating at full capacity, the availability of a small residual level of Ukrainian transit capacity will probably be desirable for Gazprom, but may not be essential.