On Russian Gas Front, Germany Does Ukraine No Favors

Ukraine's biggest fear, as vocalized by the
CEO of its most important state owned
enterprise, Naftogaz, is Russia bypassing its
traditional gas transit route in Ukraine in
favor of north European pipelines. Late last
month, the Supreme Court of the European
Union lifted its ban on Russia's Gazprom from
using the 290 mile long OPAL pipeline in
Germany. The Russians keep getting improved
options to bypass Ukraine.
The ban, which was temporarily imposed by
the court following a dispute by Poland
claiming Russians had too big of a market
share, did not hurt Gazprom all that much
anyway. Now that it is open, Gazprom is
increasing deliveries, but not expected to
break current demand trends for Russian gas.
The trend still favors European demand for
Russian natural gas, regardless of the E.U's
role as Ukraine's white knight.
What's worth pointing out here is that
Germany is not the least bit interested in
roadblocking Russian access to European gas
markets as the Americans are. In fact, the
recent sanctions law signed by President
Trump this week gives the president leverage
to sanction companies working on the Nord
Stream II pipeline, a pipeline that will
eventually connect to OPAL. German's went
crazy on the news, with some top officials
calling for counter sanctions.
On one hand, OPAL's reopening, along with
the new Nord Stream project, flies in the face
of the European Union's united front against
the Kremlin's support of anti-government
rebels in Ukraine. Europe is supposed to be
punishing the Russians for breaking up
Ukraine into autonomous republics in the
east. But their most powerful nation,
Germany, continues to give Russians ample
alternatives to punish Ukraine for turning
Westward instead of Eastward by using
natural gas as a way to pressure Kiev.
Ukraine has always been a key transit route
of Russian gas into Europe. That is changing
fast. Ukraine does not like the idea.
Naftogaz is hugely important to Ukraine. It
alone ccounted for 16% of the country's
budget revenues in the first seven months of
2017, the company said on Friday.
"This is all politics," Andriy Kobolyev,
Naftogaz's CEO told me a few months ago
about the new pipeline alternatives opening
up for Russia. "If Nord Stream II is built and
you add Turkish Stream to that too then it is
clear that Russia will use them instead of
Ukraine's transit system, denying us and the
country hundreds of millions of dollars in
transit fees."
Gazprom is partnering with BOTAS Petroleum
of Turkey to build another pipeline system
through the Black Sea. This is another
alternative to Ukraine.
Since the six month OPAL ban was lifted,
Gazprom's gas transit through the pipeline
gave it its leadership position back with some
40% of the pipeline's capacity in their hands.
Gazprom deliveries went from 56 million
cubic meters per day under the ban to 71.5
million cubic meters per day post-ban,
according to pipeline operator OPAL
Gastransport. Meanwhile, Russian gas
deliveries through Ukraine's pipelines into
eastern Europe fell slightly.
This is a sign of things to come for Ukraine.
OPAL connects to the already existent Nord
Stream pipeline which leads to Russia via the
Baltic Sea.
German oil firm Wintershall is partnering
with Gazprom to finance Nord Stream II, the
sister pipeline to the Nord Stream line already
in place.
According to Slovak pipeline operator
Eustream , Russian gas transit via Ukraine fell
by around 8 million cubic meters from 161
million to 155 million on Aug. 3.
See: Best To Assume Russian
Sanctions Last Foreve r --
Forbes
Guess Who Is Sick Of Russia
Sanctions? -- Forbes
What The Russia Sanctions
Law Means For Trump,
Ukraine -- Forbes
Ukraine has been pulling
away from Russian gas
following legal disputes with
Gazprom. The two countries
have been at loggerheads for
the past three years, leading
to sanctions on Russia by
Brussels and Washington.
Ukraine is still clawing its
way back from political
crisis which saw its
President Viktor Yanukovych
ousted following popular
protests in February 2014.
Last year, the country's
highly unpopular Prime
Minister Arseniy Yatsenyuk stepped down.
Ukraine has become the poster child of
Russian encroachment into European politics,
something that has served the interest of a
number of politicians in the U.S. and Europe
who have taken to blame Russia for a number
of anti-establishment failures over the years,
not the least being Brexit and the election of
Donald Trump.
Gazprom's access to OPAL has been a matter
of controversy since the 2009 passing of the
so-called Third Energy Package by the
European Commission. The Package does not
allow single suppliers to dominate the market.
As it is, Russia accounts for at least a third of
all foreign gas imports into the E.U., with
Germany being the biggest buyer in terms of
percentages coming from Russia.
On October 28, 2016, the European
Commission agreed to exempt OPAL from the
Third Energy Package until 2033, citing
energy security matters. By doing so, they
increased the quota of Gazprom and gave
them a much larger position in the spot
market traded on the PRISMA platform,
Europe's leading gas trading system. The move
gave Russia greater leverage to ship gas into
Europe via OPAL for the foreseeable future,
counting for the vast majority of the
pipeline's shipping capacity today and over
the long haul as well.
Sadly for Ukraine, even with what amounted
to a clog in the drain for Gazprom gas going
through OPAL, Russian gas to Europe in
January stood at around 19 billion cubic
meters, or 26% more than Gazprom deliveries
recorded in January 2016.
In the first half of the year, Gazprom exported
95.6 billion cubic meters of natural gas via
OPAL, or 12.6% more than the same six
month period last year.
That doesn't mean Ukraine is obsolete, despite
the narrative that Nord Stream II will put
Naftogaz and, by default, Ukraine, six feet
under.
Transit through Ukraine rose by 21.8% to 45.7
billion cubic meters, according to Naftogaz.
And they did this without relying on Russian
gas, either. There is hope for Ukraine,
especially if it develops its own untapped
natural gas resources and reform its own
Soviet-era energy sector. They have the skill
set to do it, and if there is enough
hydrocarbons under the ground over there,
they will have no problem attracting
interested parties.
Still, energy experts believe that with OPAL's
floodgates now open to Gazprom, it could give
the publicly traded Russian gas giant another
14.6 billion cubic meters in sales to Europe
this year.
Meanwhile, transit capacity via Ukrainian
pipelines is under-utilized as Russia turns
elsewhere, Alexander Sobko, an energy
analyst at the Skolkovo Business School told
the Vedomosti business daily yesterday. "The
new export volumes via OPAL will more likely
be due to a redirection of gas transit rather
than to new export records," he told the
paper.

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