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No post-2020 Russian-Ukraine gas transit now 'base scenario': Naftogaz

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Amsterdam — Ukrainian natural gas company Naftogaz has adopted a "zero transport" base scenario as a result of its negotiations with Russia's Gazprom for the transit of Russian gas to Europe from January 2020, Naftogaz Managing Director Yuriy Vitrenko said Monday.

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Political events have shaped the relationship between Gazprom and Naftogaz over a number of years, culminating in what Vitrenko referred to as a "smokescreen" of trilateral talks brokered by the European Commission last week.

"Looking into the future, the base case scenario is unfortunately ... no transit through Ukraine from 2020," he said in a presentation at the S&P Global Platts European Gas and LNG summit in Amsterdam. "To understand the context of today's negotiations -- or trilateral talks that they call them -- we have to understand that the Nord Stream and Turkish stream [projects] were political, not economic."

Vitrenko argued that previous infrastructure projects initiated by Russia were politically motivated.

"What were the reasons for the construction of Nord Stream 1 and the Turkish Stream? To my mind, these reasons are rather obvious," he asked. " There is somebody who doesn't want Ukraine to earn money on transporting Russian gas thorough it. You can see that this money is very important for Naftogaz, and for Ukraine."

Gas transportation currently accounts for 3% of the Ukraine's GDP and constitutes 4.5% of all exports from the country.

GAS STRATEGY

Russian gas strategy coincided with political events, Vitrenko said.

"You can also see some political context when you simply look at what Ukraine pays for imported gas and how much it receives for transit services," he said. "You can see that before Putin came into power, and the first, and the first time we had a pro-EU president, the Ukraine paid roughly the same amount of money for imported gas than what it received for transit services. This has all changed drastically. And after this, we have paid more for gas than for gas transmission services.

"You can run this data and see that there is no correlation with market pricing or something like that, it is purely politically driven. They wanted to punish us for our European choice. On average, I can say that Ukraine started to pay $5 billion, or 5% of GDP more for imported gas than it received for gas transit."

"In 2014, Ukraine showed to the world its European choice," Vitrenko said. "This time it was more serious, because we had mass protests which meant the pro-Russian president had to leave Russia. And again Russia used natural gas as a weapon. The price for Ukraine was increased by two times overnight, then there was another request for take or pay obligation.

"During the time of increased Russian military aggression against Ukraine, it led to a three times increase in import cost," he said.

'OPTIMISTIC SCENARIOS'

Aside from its working assumptions, Naftogaz has mapped out more optimistic scenarios as to how the talks will play out.

"The optimistic political scenario is that Russia agrees, or at least negotiates, on alternatives, like for example, with swaps with Nafotgaz or other operators, and so Gazprom will have no risk in transporting through the Ukraine," Vitrenko said. "Or it could also change the delivery points in the contracts with their European offtakers.

"The optimistic legal scenario," Vitrenko added, "is that Gazprom is a single exporter channel, but exports of gas are allowed for independent producers in Russia. So if Gazprom will allow or implement this, [it would not be] abusing its dominant market position. This would be to the benefit of European consumers."

However, Vitrenko said "there are still unacceptable demands from the Russian side. They say that in order for us to have negotiations, there should be an amicable agreement which basically they would refuse from our right to get $3 billion that they have to pay to us, based on the decision of Stockholm arbitration. Luckily, there is a consolidated position the European Commission and Ukraine, that this revision of the Stockholm arbitration should not be a condition to enter into negotiations, and that the new transit contract should be based on EU rules. The proposal is about 60 Bcm on average from Gazprom for a period of at least 10 years or longer, with an extra 30 Bcm on average available for short-term bookings by Gazprom or for other shippers."

CONTRACTUAL COMMITMENTS

Naftogaz's perspective on the situation acknowledges that Russia may not even now need the Ukrainian transport link.

"Russia can cover their minimum contractual commitments if the Nord Stream 2 is not finished on time and they continue to transit through Ukraine," Vitrenko said. "They can cover their minimum contractual obligations even without Nord Stream 2 and without Ukrainian gas transit."

As for the working scenario, Vitrenko confirmed that unbundling of an independent transmission system operator from Naftogaz was on track and that capacity allocation auctions will take place as soon as interconnection agreements were signed by it and Gazprom, but warned that this would make "blanket tariffs very high," although with "transmission tariffs [that] are very competitive."

Vitrenko ruled out any notion of concessions to Gazprom's negotiating stance for extending the current transportation agreement.

"An extension should be compared with other available options, [as it would bring] sizable transit revenues [to Naftogaz], he said.

"We are talking about billions of dollars -- which could be beneficial for Naftogaz, but Naftogaz insists on a new transit contract with an unbundled TSO, instead of an extension of the current contract with Naftogaz," Vitrenko said.

"This is for many reasons, also including the reason that we are serious about having a proper market in the Ukraine," Vitrenko said. "Naftogaz, despite being the incumbent, started these real reforms. Many international partners helped us or we helped them, but together we created a liquid wholesale market in Ukraine.

"Extension of the current contract with Gazprom will make unbundling impossible, and will also limit the development of the market. That's why we would like to have a new contract, or for example an option where we would have a swap with Gazprom. But then Naftogaz would book capacities with an unbundled TSO under the European rules," he added.

"But unfortunately, Gazprom say that they are ready to negotiate an extension of the current contract with Naftogaz only in return for Naftogaz refusing from the enforcement of $3 billion," Vitrenko said. "This is not an acceptable condition for us. The next year we expect to enforce the previous award from the arbitration. We are talking about $11 billion-$14 billion, without interest, and it include this cost resulting from lost transit. So if Gazprom decides to block transit through the Ukraine, it will have to pay for that."

-- Neil Hunter, neil.hunter@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com

S&P Global Platts Gasoline, Naphtha & LPG Conference | November 27, 2019 | Rotterdam

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