Dmytro Marunych, Co-chairman Energy Strategies Fund, Kiev
The outcome of the tripartite consultations on the signing of a contract for the transit of Russian gas through the territory of Ukraine to EU countries, in particular the signing of the minutes of the governmental meeting of representatives of Ukraine, Russia and the EU on December 20, 2019, is estimated by the European side as a compromise between Ukraine and Russia, which minimizes the risks of winter 2019/20 season for Central and Eastern Europe.
Following the fulfillment of a number of conditions by the Russian PJSC Gazprom, the protocol envisages the conclusion of a settlement agreement between Gazprom and NJSC Naftogaz of Ukraine, a contract on the organization of transit, as well as an agreement on reservation of capacities between Naftogaz and Operator GTS of Ukraine LLC. In addition, Operator GTS of Ukraine LLC shall align the text of the agreement on the interaction of network operators with representatives of Gazprom. The conclusion of such an agreement is the first step to create the technical possibility to continue the transit of Russian gas after January 1, 2020.
The complete or partial termination of gas supplies through the Ukrainian territory to the countries of Central and Eastern Europe is considered as an unlikely scenario. The minimum aggregate consumption of Russian natural gas by countries in the region, such as Bulgaria, Hungary, Serbia, Slovakia and the Czech Republic, does not allow Russia to reduce the volume of Ukrainian transit below 40 billion cubic meters in 2021-2024, and before the acquisition of operational capacity of “Nord Stream 2”, it loads the Ukrainian GTS at the level of 65 billion cubic meters of Russian gas by the end of 2020.
Thus, in 2018, Gazprom Export sold 38.4 billion cubic meters of gas at the Eastern European market (see the table).
Poland, Hungary, the Czech Republic and Slovakia remain the largest importers of Russian gas in the region. There was a significant increase in Russian gas supplies to the region, by 12.6% in 2016-2018, which is connected with the overall increase in local consumption.
The state and prospects of further consumption of Russian gas by countries of the region are evaluated as follows (priority criterion is the level of consumption):
To date, Poland retains the status of the largest Russian gas consumer in the region and the largest importer of Gazprom resources among the neighboring countries. At the same time, Poland showed the largest decrease in Russian gas imports in recent years, which reduced by 9%. In the first half of 2019, Russian gas supplies to Poland fell by almost 30% as compared to the same period of the previous year.
Warsaw is Gazprom’s main opponent in Eastern Europe. In particular, the Polish government does not intend to continue the so-called “Yamal contract”, signed between PGNiG and Gazprom in 1996. The contract expires in 2022, with deliveries set at 11 billion cubic meters of gas. At the same time, according to the “take or pay”rule, Poland is obliged to pay 85% of the contracted volume.
Reduction of Russian gas consumption is carried out within the framework of the formation of a portfolio of import contracts based on market principles and prices. Its key elements are the import of LNG through the terminal at Świnoujście, and the production of Norwegian gas via the Baltic Pipe between Poland and Denmark, the capacity of which is estimated to be up to 10 billion cubic meters per year.
LNG supplies from Qatar and the US to Świnoujście terminal in 2018 amounted to 2.7 billion cubic meters. In recent years, LNG share has increased by 6% up to 19% of total imports. According to the government plans, up to 5.5 billion cubic meters of LNG will be provided under long-term contracts starting from 2022. American Cheniere Marketing International can deliver an annual supply of 1.95 billion cubic meters of gas for the period from 2023 to 2042; and 2.7 billion cubic meters during 20 years can be provided by Venture Global LNG.
At the same time, according to experts, Poland will continue to import the largest volumes of gas from Russia against the background of increasing its consumption to 22.0 billion cubic meters by 2022. In the event of interruption of Russian gas supplies by the Ukrainian route, Poland is expected to have the lowest risks among the countries of the region, primarily due to the presence of transit pipelines passing through the territory of Belarus and its own LNG terminal.
Unlike Poland, Gazprom’s second key partner in the region has significantly increased its volume of purchases, which increased by 40% from 2016 to 2018.
In March 2019, Hungarian Minister of Foreign Affairs and Trade Péter Szijjártó announced that he had signed an agreement on guarantees of gas supplies to Hungary, regardless of whether a transit agreement between Russia and Ukraine would be concluded. The document provided for the possibility of purchasing part of the gas needed for domestic consumption through Austria, as well as the maximum filling of underground gas storage in the country, amounting to 6.3 billion cubic meters.
Hungary is defined as a transit country through which the European part of the Turkish Stream Russian energy project bypassing the Ukrainian territory can be routed. The start of gas supply from Bulgaria to Serbia through the continuation of the Turkish Stream is planned for 2020. At the same time, the necessary infrastructure in Bulgaria has not been completed. This impedes compliance with the forecast deadline for the start of deliveries of Russian gas to Hungary scheduled for 2021.
According to experts, Hungary remains one of Gazprom’s key partners in the region and is implementing a strategy to increase Russian gas pipeline supplies to Europe.
With relatively small volumes of consumption, Bulgaria continues to lay claim to create a gas hub of Southeastern Europe – the Balkan Gas Hub. The stability of gas supplies from Gazprom’s resources was guaranteed by the completion of construction of pipeline infrastructure for receiving gas from the Turkish Stream, which could be put into operation on January 8, 2020.
Bulgaria signed agreement to obtain 15.7 billion cubic meters of Russian gas, which corresponds to the throughput of the 2nd strand of the Turkish Stream gas pipeline. Following a prolonged scandal over the selection of a contractor, the construction of a pipeline intended to supply Russian gas from the Turkish Stream to the border with Serbia has now been intensified.
At the same time, Sofia intends to reduce its almost total dependence on Russian gas and attract energy from alternative suppliers. Thus, starting from 2020, Bulgaria intends to import up to a third of the natural gas from Azerbaijan through the Greek territory. Greece-Bulgaria Interconnector Agreement (IGB) was signed on October 10, 2019; a project worth EUR 240 million, partly funded by the EU.
Gazprom’s historic monopoly on the Bulgarian gas market was shattered in 2019, when Gazprom’s supplies fell by 14.58% compared to last year. This volume was replaced by 303.5 million cubic meters of gas from Greece, which is increasing its LNG imports, including from the resources of American Cheniere and BP. In addition, the construction of the Giurgiu compressor station is underway at the Giurgiu-Rousse gas pipeline, which will allow Bulgaria to import up to 1.5 billion cubic meters of gas from Romania.
The Giurgiu-Rousse pipeline is an element of one of the Eastring project variants. The Eastring route runs from the Bulgarian-Turkish border to the compressor station in Veľké Kapušany at the Ukrainian-Slovak border. An important element of the Balkan Gas Hub project is also the expansion of Bulgaria’s Chiren underground gas storage facility.
According to experts, Bulgarian projects of diversification of gas supply by capacity are comparable to the implemented projects of Poland. Considering the much lower (than in Poland) volumes of gas consumption domestically, the plans for construction of new and use of the existing pipeline infrastructure of Bulgaria are rated as very ambitious. One of these projects is the reverse use of the Trans-Balkan gas pipeline after the expected decrease, and in the long term, the termination of the transit flow through the Ukrainian gas station “Orlovka”.
4) Czech Republic
In recent years, the Czech Republic has increased its imports of Russian natural gas by a record 42%. Currently, up to 98% of imports come from Russian gas supplies through Germany, where energy comes from the Nord Stream pipeline.
According to experts, with stable annual consumption of the Czech Republic at about 8-8.5 billion cubic meters, Gazprom will continue to dominate the Czech gas market. At present, having developed a cross-border pipeline infrastructure, the Czech authorities do not initiate new projects to diversify gas supplies to the country.
Currently, Slovakia continues to play a key role in securing the transit of Russian gas to Central and Western European countries. The term of the transit contract signed in 2009 between the Slovak national gas transport company Eustream a.s. and Russia’s Gazprom Export before the EU’s Third Energy Package came into force, expires in 2028.
Between 2016 and 2018, Slovakia increased its gas imports from the Russian Federation by 38% and became the 4th largest importer in the region. The interdependence of Gazprom and Eustream pushes the parties to find a compromise, which in turn may affect the contractual basis of Russian gas supplies. For example, the joint initiative of Gazprom and Eustream for organizing additional gas supplies from Russia’s Nord Stream 2 energy project to the countries of the region, in particular Hungary, may be promising for Slovakia.
Eustream, under the existing contract, has agreed with Gazprom the possibility of transporting Russian gas from the western direction (Czech Republic and Austria) to Slovakia and Hungary in case of a complete cessation of gas supply through the Ukrainian GTS.
As a part of forecasting of Gazprom’s strategy towards Central and Eastern Europe, it should be noted that despite the general tendency of Russian gas exports to Western Europe to decrease (as of November 15, 2019, it decreased by 1.1% as compared to the same period of the previous year), taken into account the threat of cessation of transit through Ukraine at the same time, the deliveries to Austria increased by 33.3%, to Hungary – by 40%, to Slovakia – by 43.2%, to the Czech Republic – by 29, 1%.
At present, given the record high levels of filling of underground gas storages in EU countries, warm temperatures at the beginning of winter, regulation of the issue of transit through Ukraine, it is likely that total Russian pipeline gas imports to the EU will continue to decline in 2020.
Another significant factor influencing the formation of Gazprom’s strategy in the EU markets was the European Commission’s antitrust investigation process, which was halted in 2018 with significant image losses for the Russian side. As a result of the process, Gazprom was not fined, but the company agreed to a number of conditions that change its business model, namely:
1) Natural gas prices for consumers in Central and Eastern Europe are linked to the corresponding prices at gas hubs located in Western Europe.
2) Gazprom undertakes not to impede the free flow of natural gas between the countries of the region.
3) Gazprom cannot use its dominant position in the EU markets to create barriers to access any country’s infrastructure by setting transparent and fair tariffs for its use.
In addition, Gazprom’s position is influenced by increased competition between LNG and pipeline gas, primarily from the US, as well as a decrease in spot gas prices. Significantly, the supply of LNG by the Russian energy company NOVATEK (the leader of LNG exports to the EU in 2019) is in competition with Gazprom’s pipeline supplies. As a result, supplies of the latter are reduced in value. Climate factor also plays a role – winters are mainly warm in most EU countries.
The Russian side’s response to the existing threats is the correction of Gazprom’s policy towards the EU as a whole, and the countries of Central and Eastern Europe in particular.
At present, Gazprom sells shares in local distribution companies (primarily in the Baltic States and the United Kingdom). At the same time, measures are being taken to modernize and expand the underground gas storages, owned by Gazprom. Thus, underground gas storages Bergergermer in the Netherlands (2014), Damborgice in Czech Republic (2016), 34.1% of Conexus Baltic Grid in Latvia (2017), Katarina in Germany (2017) were fully or partly acquired.
Starting from 2018, Gazprom has began to use an electronic trading platform to sell gas to foreign consumers beyond the volumes set by long-term contracts. This intends to increase the flexibility and responsiveness of EU final consumer deliveries in terms of volumes of gas supplies. Owning an extensive modern gas storage network is a prerequisite for successful completion of this task.
Gazprom’s last long-term contracts with European partners are expiring by 2036. Some of such contracts (in particular with Bulgaria, Serbia, Hungary) were resigned for shorter terms. However, the general tendency is the complete replacement of long-term contracts with short-term contracts and pegging to the stock quotes and actually with the stock trading.
In these circumstances, the interconnectedness of the European GTS is crucial for building the gas market, ensuring security of supply to countries in the region. Meanwhile Poland, Hungary, Slovakia and the Czech Republic are well connected to each other and to Western Europe, the southeastern part of the continent is characterized by a low level of interconnection. EU policy initiatives have not been able to fully secure the completion of the necessary pipeline projects, and funds to support them have been diverted to Northern Europe.
Interconnectors are also crucial for the creation of a regional hub, in particular for the southeastern part of the EU, where gas pricing is mainly linked to oil quotations. It should be noted that under these conditions, Bulgaria’s initiative to establish the Balkan Gas Hub can be intercepted by Romania, with its developed pipeline infrastructure, a larger capacity of the gas market and the availability of significant volumes of its own production being an advantage.
In general, a diversified market model was created in the EU, which is characterized by competition both between the growing number of suppliers from different countries and between the methods of supplying hydrocarbons (the share of LNG is increasing, which in some cases demonstrates higher competitiveness than pipeline gas), and by different types of contracts as well.
While in the north and in Poland, LNG and pipeline gas supplies from Norway are Gazprom’s main competitors, Romanian offshore projects compete with Gazprom in the south of the region at the Black Sea shelf. Romania could become a net exporter of 4-5 billion cubic meters of gas per year already in the mid-2020s, which is sufficient to meet the expected growth in demand not only in the Balkans but also in terms of supplies to Hungary, thus reducing the demand in Russian gas.
An analysis of Gazprom’s presence in the European gas market in recent years shows that the company has generally been able to adapt to new business conditions. While Gazprom’s share of the European gas market is likely to decline in the medium term and gas prices will tend to decline, the Russian supplier’s position will remain strong, including in Central and Eastern Europe.
Image of Alexey Miller from gazprom.com.