Press digest

2019 December 26

Russian, Ukrainian State Gas Companies To Meet On Finalizing New Contract

The state-owned gas companies of Russia and Ukraine are set to meet in Vienna on December 26 to finalize a new transit contract.

Officials from Russia's Gazprom and Ukraine's Naftogaz are looking to replace their current 10-year contract, which expires on January 1, and replace it with a five-year deal to keep Russian natural gas flowing to Europe via Ukraine during the winter.

"We have already completed our 'homework': we have prepared draft contracts that are ready to be signed," Naftogaz Executive Director Yuriy Vitrenko said on Facebook.

Russian Energy Ministry Aleksandr Novak told Russian media on December 25 that he expected the transit agreement to be finalized this weekend.

Energy relations between the two neighboring countries are part of bigger geopolitical tussle involving military occupation -- Russia invaded and annexed Ukraine's Crimean Peninsula in 2014 and has backed separatists in the eastern part of the country -- alleged cyberwarfare, propaganda, and international lawsuits on human rights abuses and misappropriated assets.

About 40 percent of the 200 billion cubic meters (bcm) of gas that Russia sends to Europe annually is transmitted via Ukraine's vast network of pipelines.

However, those volumes will most likely decrease based on a preliminary agreement the two sides reached last week in talks that were mediated by the European Union.

Next year, Kyiv is expecting to transmit a minimum of 65 bcm, or about 22 bcm less than it did in 2018. Minimum volumes would decrease further to 40 bcm in 2021-2024 under the new contract.

As part of the new contract, Russia has agreed to honor by December 29 a Stockholm arbitration ruling that awarded Ukraine $2.9 billion in a dispute between Naftogaz and Gazprom.

Over the next five years, Kyiv expects to make at least $15 billion for transmitting 225 bcm of Russian gas to the EU, according to Ukrainian Energy Minister Oleksiy Orzhel.

In turn, Ukraine Naftogaz would release seized Gazprom assets in Europe and both parties have agreed to drop reciprocal court claims that haven't concluded and sign an out-of-court settlement.

Transit fees should be "competitive," according to the preliminary agreement, and the rate should correspond to those applied by gas-transit operators in Western and Central Europe.

Meanwhile, Russia has 10 percent left to complete its 2,460-kilometer Nord Stream 2 underwater pipeline to Germany, which would eventually make Ukraine's pipeline network unnecessary.

However, U.S. sanctions earlier this month forced underwater pipe-laying work to stop because they target companies involved in the project, the main one of which is a Swiss-Dutch company.

As a result, completion of Nord Stream 2 could stretch to 2023 or beyond, Aleksei Rakhmanov, president of Russia’s United Shipbuilding Corporation, said on December 24. It would take Russia two years to design the ships needed for the project, and even more to build, he said.