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Analysis: Gas transit deal with Russia top priority for new Ukrainian govt


Servant of the People tops Ukraine parliamentary vote

New govt tasked with breaking gas transit deadlock

Zelenskiy party win seen positive for foreign investment

  • Author
  • Stuart Elliott
  • Editor
  • Jonathan Dart
  • Commodity
  • Natural Gas

London — Ukrainian President Volodymyr Zelenskiy's new government -- soon to be formed following the victory of his Servant of the People party in the country's parliamentary election on Sunday -- will have just over five months to resolve the standoff with Russia over gas transit.

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Holding the presidency and a majority in parliament should enable Zelenskiy to present a united front to Moscow on the future of Ukraine's role as a transit state for Russian gas to Europe, with as much as $3 billion a year of gas transit revenues at stake.

It should also help him push forward with his agenda, giving him a clear mandate to fulfil his election pledges, including fighting corruption and attracting increased foreign investment.

The former comedian's new grip on power may make it marginally more likely that Kiev can secure a deal with Russia on gas transit to Europe ahead of the expiry of Naftogaz and Gazprom's 10-year gas agreement at the end of 2019.

But a resolution of the dispute will still likely come down to the appetite of Russia's establishment -- at the highest level -- to commit to any long-term transit arrangement with Ukraine.

Given Moscow's previous comments on the matter, this is considered highly unlikely.

"While Zelenskiy will try for a deal he is very unlikely to get it," John Roberts, analyst at the Methinks consultancy, said.

Wrapped up in the gas deadlock is the ongoing conflict in eastern Ukraine, so a new gas transit agreement would likely need progress at the same time with Moscow on a lasting ceasefire.

Simon Pirani from the Oxford Institute for Energy Studies said some sort of provisional settlement in the east could in turn could help Kiev in its efforts to reach a deal on gas transit.

"There will be the possibility of a more meaningful negotiation on gas transit at the political level," Pirani said, adding however that he remained "very cautious" on a transit deal.

"The gas market is telling us it does not think a settlement is likely," he said, pointing to the pace of storage injections across Europe this summer -- particularly in Eastern Europe -- as buyers prepare for the possibility of disruption to Russian gas supplies in January 2020.


Ukraine used to transit around 110 Bcm/year of Russian gas to the EU, but this fell to a low of 62 Bcm in 2014 after Russia ramped up exports through the Nord Stream pipeline.

Transit volumes have since recovered, though, and totaled 87 Bcm last year given high demand in Europe for Russian gas.

However, Gazprom is looking to bypass Ukraine completely with the construction of the 55 Bcm/year Nord Stream 2 pipeline and the 31.5 Bcm/year TurkStream link, though some delays mean some kind of deal with Kiev will likely be necessary.

Ukraine -- with EU backing -- has proposed a new transit agreement that would be valid for 10 years and have a transit commitment of 60 Bcm/year.

But observers have said Russia and Gazprom are highly unlikely to agree to a long-term, big-volume transit agreement given their multi-billion dollar investments in Nord Stream2 and TurkStream.

The most to which Moscow would likely agree is short-term capacity bookings to meet peak European demand.

Talks between Moscow, Kiev and the European Commission are due to be held in the coming months. Russia delayed a new round of negotiations this summer until after the Ukrainianparliamentary elections.

The outcome of the talks -- likely now in September at the earliest -- will be critical to whether December 31 comes and goes without a deal.


Elsewhere, Zelenskiy has pledged to stamp out corruption and to attract international investment into Ukraine. Both could benefit the gas sector, especially the latter.

Ukraine has launched three exploration bid rounds -- plus a tender process for production sharing agreements -- in a bid to accelerate gas self-sufficiency.

In a video recorded in English earlier this month, Zelenskiy urged foreign companies to invest in Ukraine.

"Ukraine is one of the largest countries in Europe. We are ideally located geographically and we have a large population. So you can make money both internally and externally,"he said in the clip.

Roman Opimakh, the executive director of the Association of Gas Producers of Ukraine (AGPU), told S&P Global Platts that the win by the Servant of the People party was "extremely positive" for the further development of Ukraine's upstream.

"Many important reforms can now be implemented easily," Opimakh said, including a simplification of regulation, open licensing rounds and easy access to geological data.

"This will meet the current needs of the producers and investors, and is key to the government's goal to make Ukraine energy self-sufficient," Opimakh said.

However, Roberts said Ukraine should instead look to alternatives to gas. "Failure [on a transit deal] would make it all the more important that Ukraine developed an economy that steadily reduces the role of gas," he said.

-- Stuart Elliott,

-- Edited by Jonathan Dart,