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Role of Ukraine in Russian gas supply to Europe

Katya Zapletnyuk

Editor, European Gas Markets

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Ukraine – between Russia and Europe

• Role of Ukraine as a transit country for Russian gas

• Ukraine’s storage and pipeline network

• Ukraine’s efforts to diversity its own gas supplies through

reverse flow from Europe

• Impact of the Russia-Ukraine crisis on European gas hubs

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Ukraine – key facts

• Annual demand in 2013 48.8bcm

• Ukraine’s gas imports in 2013

• Russia 25.84bcm (estimated price $413.5/1,000cm)

• Europe 2.13bcm (estimated price $401.65/1,000cm)

• Domestic production 20bcm

• Transit of Russian gas to Europe:

• 2009 93bcm/year 66% of total Russian exports

• 2013 85bcm/year 52% of total Russian exports

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Gas production and consumption in Ukraine

Source: Naftogaz

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Ukraine as a transit country

• Ukraine historically transported 80% of Russian gas to

Europe

• Despite increased overall gas deliveries to Europe in 2013

share of Ukrainian transit dropped to 54%. (Russian

exports to Europe totalled 162.7 bcm up 16% compared to

2012).

• This trend continued in Q1 2014 with transit via Ukraine

dropping 9% year on year to 17.67bcm

• Gazprom predicts transit through Ukraine to be around

70bcm in 2014 from 85bcm in 2013

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Ukrainian transit system and storage

Ukrainian storage sites are important for secure gas flows to Europe during

winter

Ukraine started publishing its storage data on the GSE transparency

platform in May, 2014

Ukraine has 12 storage facilities of some 30bcm located near the western

border of Ukraine

Ukraine needs to have at least 19bcm of gas in storage in the beginning of

the winter season to enable smooth transit to Europe

Gas volumes held in Ukrainian storage came to 12.614bcm as of 6 June,

2014

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Other pipelines transporting Russian gas

• Yamal-Europe (33bcm/year) and Nord Stream transport Russian gas to Europe bypassing Ukraine. Plans exist for South Stream.

• Yamal-Europe transits gas via Belarus and Poland. Nord Stream’s second string was commissioned in October 2012, doubling its capacity to 55bcm/year. Nord Stream flows gas between Russia and Germany under the Baltic Sea

• Germany has increasingly become a transit country for Russian gas in 2013. Total supply to the country was 38% higher than consumption, data collected by ICIS shows

• Southern states including Romania, Bulgaria, Greece and Turkey are significantly more dependent on Ukrainian transit

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Russian gas pipelines to Europe

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Russia-Ukraine payment dispute

• Russia and Ukraine signed a 10-year supply agreement in

2009

• Russia then provided two discounts. One of an about

$100/1,000cm in exchange for extension to Black sea fleet

lease in Crimea. In Q1 ‘14 Gazprom offered another

discount bringing the price to $268.5/1,000cm

• From April 2014, Russia rescinded all discounts and the

price for Ukraine rose to $486.5/1,000cm.

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Russia-Ukraine payment dispute

• Ukraine accumulated payment arrears in the end of 2013

and Q1 ‘14 despite the price decrease

• Ukraine also rejected the $486.5/1,000cm price and

threatened to take Gazprom to the Stockholm court of

arbitration

• Gazprom invoked the pre-payment mechanism for Ukraine

in the existing contract from June 2014 and said it will cut

supplies if no pre-payment is made. The deadline has been

moved several times, last time to 16 June

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Russia-Ukraine payment dispute

• On 30 May, Naftogaz paid Gazprom $786m for gas

supplied in February and March

• The deadline for supply cut-off was moved to 16 June

• Trilateral talks continue involving Russia, Ukraine and EU

representatives

• On 6 June Gazprom offered Ukraine a new discount but

the Ukrainian government rejected it as it wants to re-

negotiate the entire contract

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Reverse flow to Ukraine

• Ukraine is unhappy with the price of Russian gas in its long-term

contract and has been trying to import gas from Europe

• In 2013 Ukraine imported 2.13bcm of reverse flow gas from

Hungary and Poland

• Imports from Europe stopped after the Russian discount was

granted at the end of 2013, which made imports from the West

uneconomic.

• Reverse flow could start in autumn via the Vojany pipeline of

8bcm/year

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Reverse flow from Slovakia

• Slovak reverse flow project is politically supported by the EU

• Gazprom de-facto controls the Ukrainian side of the Velke Kapusany border point blocking virtual reverse flow

• Slovakia and Ukraine signed reverse flow MoU on 28 April 2014

• Eustream on 26 May announced an Open Season for physical reverse flow from Slovakia to Ukraine and has received interest from shippers

• Open season for reverse flow held in 2013 did not indicate interest on part of shippers

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Reverse flow capacity into Ukraine

• Poland 4-5mcm/day

(1.4-1.8bcm/year)

• Hungary 9.6mcm/day (3.5bcm/year)

• Slovakia 22mcm/day (8bcm/year)

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Dutch TTF price reaction

23

23.5

24

24.5

25

25.5

26

26.5

27

27.5

2803

/02/

2014

10/0

2/20

14

17/0

2/20

14

24/0

2/20

14

03/0

3/20

14

10/0

3/20

14

17/0

3/20

14

24/0

3/20

14

31/0

3/20

14

07/0

4/20

14

14/0

4/20

14

21/0

4/20

14

28/0

4/20

14

€/M

Wh

Winter '14 Winter '15

• 3 March – Reports of

Russian troops activity

in Crimea

• 1 April Gazprom

rescinds December

2013 price discount for

Ukraine

• 7 April – protests flared

up in Eastern Ukraine

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Conclusions

• Russia has been displacing gas to bypass Ukraine as a

transit country

• Ukraine needs to inject enough gas into storage in the

summer to secure European transit in the winter

• Ukraine tries to import gas from Europe via Poland,

Hungary and Slovakia

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Thank you!

• Contact:

katya.zapletnyuk@icis.com