Olga Bielkova – International tasks of the GTS Operator of Ukraine: whom to be friends with and for what?

Author’s article by Olga Bielkova, Director for Interaction with State Regulatory Bodies and International Organizations of the OGTSU for the publication “Mirror of the Week”.

80% of the Company’s income is associated with the “international” activities of OGTSU.

The Ukrainian gas transmission system is a unique infrastructure that has been supplying gas to Europe for more than half a century. In fact, the main services of the Operator of the Gas Transmission System of Ukraine (OGTSU) are transit of Russian gas to the EU and cooperation with gas importers to Ukraine. Although it is the domestic gas market that is very important for the country, and all initiatives are implemented primarily with the idea on guarantees for the Ukrainian consumer. But today 80% of the income of the GTS Operator of Ukraine is associated with the “international” activities of the Company. And, based on this structure of income, we, as the Company, are obliged to do everything possible to expand cooperation with international partners, companies and countries. Otherwise, most of the fixed costs of maintaining the GTS will be a burden on the domestic consumer.

Expanding international cooperation is not an easy task. Each of our neighbors has its own development ambitions, including through competition with OGTSU. The controversial Nord Stream-2 and Turkish Stream-2 are still being discussed in Europe, which pose a direct threat not only to the Company, but to Ukraine as a whole. There are also many new trends that pose challenges for all infrastructure projects, in particular liquefied natural gas (LNG) and the future decarbonization of the EU.

Accordingly, in the next four years, OGTSU shall find a way to keep transit, increase the number of new services for international and Ukrainian customers and introduce new forms of transportation and use of natural gas, including the capabilities of the GTS.

Our team is a national team to protect the interests of the country

It would be a significant oversimplification to think that the issue of keeping transit is exclusively in the interest of one state-owned Company. In fact, we defend the interests of our country and the entire region of Eastern and Central Europe. Thus, in our opinion, international experts underestimate the dramatic consequences of changing the methods of natural gas supply to the EU both for Ukraine and for the countries of Central and Eastern Europe.

If Nord Stream 2 is not completed, no tragedy will happen, because now everything is working flawlessly. But if the Ukrainian route disappears, then Europe may find itself in a trap of dependence on one supplier, who, moreover, will concentrate all transportation routes. Our position remains unchanged: we are categorically opposed to the completion of the construction of Nord Stream 2 and the strengthening of Russia’s gas monopoly in the EU.

Ukraine and the Ukrainian GTS cannot be overlooked or ignored. This system was built to transport huge volumes of gas, and Ukraine served it in good faith and fulfilled the obligations of the investor. We cannot be just a fallback for other projects.

All EU countries must calculate the consequences of the construction of the Nord Stream 2, which means a possible significant reduction in the volumes of the Ukrainian route for these countries. We will not be able to maintain the system without guaranteed transportation volumes and will have to optimize it.

In this sense, we also see new prospects for starting a conversation about transferring the point of trade of gas by Gazprom to its EU partners from the western border of Ukraine to the eastern one, as well as access to the Ukrainian route for other producers from Russia or Asia.

After all, now there is not a very logical situation. On the one hand, Ukraine has already adopted all the EU legislation in terms of the gas market, on the other hand, our partner is Gazprom, which works “in a different way”, and Europe tolerates this. And if earlier there could be fears about misunderstandings between the Ukrainian company and the Russian gas monopoly, and hence the risks for our gas market, then in 2020 10 billion cubic meters of gas from European traders have already been injected into underground gas storage facilities in western Ukraine for seasonal storage. So, we are trusted.

Europe has the right, as a respectable consumer of Russian gas, to seek the opportunity for all companies producing gas in Russia to export it to European countries through Ukraine. After all, this will have a positive effect on gas prices. We also actively discuss such ideas with international stakeholders.

As for relations with Gazprom today, they have been stable since the signing of the new transit agreement in 2019. We work normally at the working level – there is no collapse, interruptions or misunderstanding on our part.

We fulfill all our obligations under the Agreement, and Gazprom regularly pays for these services. But this does not calm us down, and we continue to defend the interests of the country as a whole and OGTSU in particular.

It should be noted that the OGTSU team is only a part of the national team, which today is fighting to keep gas transit to the EU through our country. It contains the President of Ukraine, the Verkhovna Rada, the Ministry of Foreign Affairs, the Cabinet of Ministers, the National Commission for State Regulation of Energy and Public Utilities of Ukraine, the Antimonopoly Committee, and other ministries and departments. And there is no other Company and economic sector in Ukraine that would receive more attention at each of the international meetings of our officials.

Countries that are most important for OGTSU

Every EU country has gas interests, so our folder of materials describes the challenges and opportunities for each of them.

Germany, France, Italy and Great Britain are the largest gas consumers in Europe, and the influence of the first two on the formation of European legal norms on the gas market is decisive. In these countries there are large companies – our trading partners are manufacturers of technologies and equipment that we need.

The USA is one of the most devoted defenders of European energy security in general and Ukrainian energy security in particular. It is also the largest natural gas producer in the world and a player in the LNG market. And also a consistent partner in protecting against the risks of Nord Stream 2 and in maintaining energy independence and stability of Europe.

Naturally, most often we work with border countries. In the west are Poland, Slovakia, Hungary, Romania, Moldova. On the eastern flank are Russia and Belarus.

Turkey is an important potential partner for us. Our interest is in the implementation of natural gas transportation to Ukraine from Turkish LNG terminals. The Balkan direction as a whole is of particular importance for us, given the far-off prospects.

These priorities form the basis for interaction with operators of neighboring countries.

We are actively working with Poland to expand the opportunities for the gas markets of both countries. The Polish gas market is a promising new source of natural gas supplies to Ukraine, in particular, the Swinoujscie LNG terminal. For the participants of the Polish market, Ukraine is interesting from the point of view of access to underground gas storage facilities located near the border. We have already signed all cooperation agreements, implemented virtual points and are distributing capacity at auctions.

Slovakia is traditionally a key partner-neighbor: 68% of transit falls on this country, imports to Ukraine – 65%. However, even with such basic good opportunities for developing cooperation, Slovakia is behaving quite conservatively. Unlike Poland or Hungary, the Slovak partners still do not see the prospects for using all the instruments that work in the European gas markets, in particular, the introduction of a virtual point and distribution of capacities at auctions. We plan to convince colleagues, because it is definitely in the interests of market participants on both sides.

There is a positive experience of cooperation with partners from Hungary, we are currently negotiating on the establishment of firm capacity in the direction of Hungary-Ukraine for further import of natural gas from the LNG terminal on the Croatian island of Krk. Such import will ensure the diversification of sources of natural gas supplies, which is important given Gazprom’s dominance in the European market.

The challenge for our cooperation is the risk of Turkish Stream-2 implementation and the possible transition of Hungary to gas transportation via this gas pipeline. We see it as our task to convince Hungary to diversify natural gas supply routes and keep transit through the Ukrainian GTS. Dependence on one source of natural gas supplies from the Russian Federation to Hungary via Turkish Stream-2 is a significant risk, especially given the complex relationships in the region.

The Romanian gas market at the current stage is somewhat limited for Ukraine due to the requirements of the national legislation of this country. We cooperate only in the part of gas transit and only through one cross-border point out of four possible. Although cooperation with Romanians can have great potential in the context of the development of the Trans-Balkan corridor. The increase of cross-border points on the border with Romania and the introduction of transparent distribution of capacity at auctions will significantly increase the economic attractiveness of the Trans-Balkan corridor.

Moldova, like Ukraine, is a contractual party to the European Energy Community. Accordingly, we have the same obligations to implement the requirements of the Third Energy Package. But for now, access to the services of the Moldova GTS is like a race with obstacles, which, we hope, will be removed in the near future. The development of the Moldovan market, as well as of the Romanian market, is a prerequisite for the development of the Trans-Balkan corridor. On the agenda is the issue of revising discriminatory tariffs for transportation services, unlocking the launch of a virtual reverse, as well as a standard agreement for transportation services.

The more we integrate into the EU market, the more benefits for our own consumers and the chances to keep significant transit to the EU through Ukraine. We are very proud that we have managed to implement all major European rules and regulations regarding the domestic gas market in Ukraine. And this is not only because we had to do it, but also because we saw the unique potential of repositioning the Ukrainian GTS for the benefit of the country and the market.

However, there is still a heterogeneous policy of individual European countries regarding the implementation of European business rules in relations with Ukraine. I call this the asymmetry of responsibilities. What Ukraine has undertaken obligations under Annex XXVII to the Association Agreement and other international agreements is not always fulfilled by EU members with regard to Ukraine. We understand that in the current EU regulations there is no obligation for Slovakia and Romania to necessarily meet us halfway, but as commercial partners we cannot understand why our colleagues do not see obvious benefits. Market participants are asking for these measures, we are ready, but we do not see reciprocity. I hope we can still find the right words for persuasion.

From our side, all the heads of the Company received KPIs from the CEO in many areas of international cooperation. All directors of OGTSU negotiate with partners and perceive this work as the main one. This is interaction with international financial organizations, regulatory bodies on new international opportunities for OGTSU and relations with companies-operators from other EU countries, international industry associations, even with politicians and experts in other regions.

In general, the transit system cannot be efficient without active cooperation with international partners.

Technology development and new opportunities for Ukraine

We understand that the energy sector is changing: not only new challenges, but also opportunities are constantly appearing. For example, beneath our eyes, liquefied gas has become an important factor of influence on the EU gas market.

For OGTSU, this is a special direction of international cooperation, which has a huge geopolitical aspect and requires agreement at the highest political level.

We are often asked: does Ukraine need liquefied gas at all? I would say yes, but not at any cost. In addition, it is not so important for us whether it will be delivered in Ukraine exactly as LNG or via pipelines, it is important for us whether the source of this gas will be different. And what is more, will Europe be able to use the LNG potential for its own diversification. After all, the more new sources of gas in Europe, the less dependence on Russia, therefore, preventing the dominant position of this country.

In the early stages, liquefied natural gas is another source of diversification and energy security. But subject to the built infrastructure and a further increase in its production in the United States, when we can see that LNG really starts to compete in price.

We see our mission in preparing our infrastructure for this moment and coordinating connections with terminals that can be geographically connected to the Ukrainian GTS. The nearest terminal is located in Poland, and it is planned to build another one there.

To transport natural gas from the Polish LNG terminal to Ukraine, it is necessary to assure relevant guaranteed capacities in the direction Poland-Ukraine.

At the moment, the transportation of natural gas to Ukraine is only possible in the form of a virtual reverse (backhaul), which depends on the volumes of physical gas transported in the direction of Ukraine-Poland, which significantly limits potential.

Among the theoretical possibilities, which nevertheless have real perspectives, the following sources and LNG terminals for both traditional and liquefied gas should be mentioned: Turkey, Greece, Croatia, Poland in the south, as well as natural gas supply to all European terminals from other continents.

The route for transporting gas from Azerbaijan is also interesting. The gas should be transported through the Turkish GTS and Trans-Balkan pipeline. For this to happen, Turkish cooperation is needed, as Turkey would then be a transit country.

It is also worth to mention that Trans-Balkan pipeline is not yet used to its full potential due to existing market constraints on the part of Moldova: absence of virtual reverse and non-transparent tariff policy for natural gas transportation across its territory.

In order to supply natural gas from the LNG terminal in Croatia, additional gas transmission infrastructure is required for ensuring the provision of guaranteed capacities in the Hungary-Ukraine direction that is currently being negotiated by the GTS Operators of both countries.

There is also a possibility of natural gas supply from the Balkan route from LNG terminals in Greece. Again, these options require detailed consideration.

Undoubtedly, the fundamental future of Ukraine’s GTS depends on the ability of our national team to maintain significant volumes of transit across Ukraine. Yet the contract with Gazprom is one of the decisive factors.

However, not the only option is Gazprom…

We have to keep up with the times, thinking about new infrastructure potential for transportation of decarbonized gases: biomethane, hydrogen, CNG. There is still a great deal of work to be done in these areas. And it’s certainly not the issue of one single article.