The Russian decision, on 16 June, to halt gas supplies to Ukraine spells trouble for the coming winter. Even if the current crisis is resolved, uncertainties over Ukraine will remain. Therefore, the EU needs to prepare for another gas crisis, both in the short term, by establishing crisis mechanisms, and in the medium term, to prevent future crises. Agata Łoskot-Strachota of the Centre for Eastern Studies (OSW) in Poland sets out the urgent steps the EU needs to take to solve the Ukrainian gas mess.
The core of Ukrainian-Russian gas controversies has been the same for years. Political independence of Ukraine is correlated with a high gas price of Russian gas. For Ukraine the end of the Yanukovych regime and the turn towards the EU meant a rapid (but not unexpected) rise of the gas price (over 80% since April) and a demand for the quick payment of real and alleged debts.
Currently the negotiations seem to be in a stalemate. Ukraine demands a lower gas price as a prerequisite for the settling of debts, while Russia wants Ukraine to pay its debts first, and only then wants to talk about a lower price. The fact that Ukraine has paid off a small part of its gas debts (May 30), did not lead to a compromise – it merely pushed forward the deadline for the payment of the majority of debt and gave a bit more time for negotiations. Russia has now switched to a system of prepayments – Ukraine is to receive only the amount of commodity for which it has paid in advance. This measure entered into force on June 16 – and as Ukraine had not paid for future supplies (partly as a result of the price dispute), Russia halted supplies.
Supplies to the EU have not been affected yet, as both Moscow and Kiev have promised not to interfere with the transit of gas. But although Russia has no interest in cutting off gas supplies to the EU, Europe cannot assume that its supplies will not be affected. During the 2006 and 2009 crises, it proved impossible to limit the effects to Ukraine.
At that time, Russia accused Ukrainian parties of illegally siphoning off gas supplies. The details of those alleged gas stealing incidents – who exactly was responsible for what – have never been definitely clarified. Nevertheless it is evident that gas supplies for Ukrainian internal needs and transit to the EU remain strongly interconnected. The gas is transported through the same infrastructure. In addition, there is insufficient transparency and information about the parameters of the gas flows through the Ukrainian transmission system. For one thing, there is still no gas metering station on the Eastern border of Ukraine.
The present situation differs from 2006 or 2009 mainly because we are now in the summer period. During the spring-summer season most of Ukrainian natural gas demand is covered by domestic production. The instability in the east of the country has not yet affected gas production, and all of the Russian gas received (but not paid for) in recent months has been pumped into storage, to meet Ukraine’s domestic needs. This means that at this moment Ukraine is able to cover its gas needs for at least several months.
At the same time it does not constitute any guarantee of the stability of Russian gas transit to the EU during the autumn-winter season. In less than half a year the internal consumption in Ukraine will increase 2-3 times in a single month, and so will the demand for import and the vulnerability to interruptions in supply. Obviously gas transit to EU will then be more susceptible to interruptions, the siphoning off of gas and conflicts between Ukraine and Russia.
Furthermore, even if there are no serious disruptions of Russian gas supplies to Ukraine during the winter of 2014/2015, it remains necessary for the stability of gas transit to the EU during the peak consumption period that Ukrainian storage facilities are filled. These storages enable the immediate increase of supplies in case of a sudden hike in demand in Europe. They are also needed internally, as the gas-intensive Eastern Ukraine needs more gas in winter from pipelines that are refilled with gas stored in Western Ukraine. The problem is that right now there is no one who has an interest in buying and storing the gas that will be needed then, due to the high costs and because of the risks – the possibility of theft and the general instability in the country.
So far, the EU’s primary reaction – in addition to trying to help renegotiate the supply contract between Russia and Ukraine – has been to reinitiate work on its energy security strategy and the intensification of cooperation in this field with the G7 countries, especially with the US. The efforts have focused generally on decreasing Europe’s dependency on Russian gas. In May the European Commission has come out with an ambitious and extensive proposal for a new energy security strategy. But it is difficult to say how concrete those emergency plans are and if and how they could be implemented over the next months.
What is particularly important is whether there exists or is being created a regional emergency plan for the Central & South Eastern European countries. These are the countries most vulnerable to any disruptions of Russian gas supplies. They are both heavily dependent on Russian gas and they tend to have limited diversification options. Their exposure and their sometimes strong business ties with Russian companies also make it difficult to align their policies with EU policy in general (see for example Bulgaria’s policy towards South Stream). At the same time, for Ukraine, its connections with these countries presently offers the only short-term possibility of diversification of its gas supplies.
So what should the EU do in the present circumstances? It should take both short-term and long-term steps to stabilize the gas situation.
As to short-term measures, the focus of preparations for the immediate security of gas supply threats should first of all be on the creation of an emergency plan for the states of Central and South-Eastern Europe (CEE), for the reasons just mentioned. Despite the progress that has been made in recent years in expanding infrastructure, these countries remain weakly connected with each other and with the rest of the EU.
Such an emergency plan should concentrate on strengthening the resilience of the countries of the whole region against possible interruptions in the supply through a range of available instruments: diversification, fuel switching, the immediate increase of energy efficiency, development of key infrastructure and filling up of storages. These actions should be coordinated for example through the creation of a dedicated task force established by the EU.
Secondly, the EU should assist Ukraine in increasing by all feasible means its immediate resilience to Russian gas supply disruptions. This can be done in several ways.
- The EU should help curb internal demand for gas by helping Ukraine to implement available energy efficiency and fuel-switching measures.
- As those options are rather limited in the short term, it will also be necessary to continue to search for possibilities to diversify the country’s gas supplies. The only currently functioning alternatives to the Russian gas connections are those with Poland and Hungary, which allow for the supply of about 20-25% of Ukraine’s current annual import demand (and only about 10% of import demand during the peak consumption winter season). One additional option that could be pursued in the short term is to enable reverse gas flow from Slovakia. If so-called large reverse flow on one of the main gas transit pipelines from Ukraine to Slovakia becomes feasible (following the example of Poland, which succeeded in starting virtual reverse flow in the aftermath of the 2009 gas crisis), it would allow for the replacement of most of Ukrainian gas imports from Russia. However, so far, after months of EU and US pressure, the two sides have only agreed to the possibility of launching so-called small reverse, allowing for supplying 8-10 bcm of natural gas annually, and this winter possibly even less. Combined with the Polish and Hungarian connections, as well as domestic production, this would allow securing a maximum of 40-50% of Ukraine’s natural gas demand this winter.
- In this context it is essential to support Ukraine’s efforts to increase its gas stocks substantially. It is necessary to establish a mechanism of filling Ukrainian gas storages with the gas volumes necessary for transit stability purposes for the nearest autumn-winter season (minimum 10-12 bcm). There are, at this moment, no concrete proposals as to who, on what basis, and at what price would buy and store the necessary gas for this purpose. Russia is not very likely to take on this responsibility, in the current situation. Ukraine itself tries to encourage Western companies to use its storages (third party access is possible, prices for storage are low). However, to date the EU and western companies have not developed any concept under which they could become actively engaged in filling up Ukrainian storages for the purpose of stable transit to EU. Like the Russians, European companies are probably not willing to take on the additional costs and risks without guarantees or mechanisms that would secure their interests.
- Finally the EU should find ways to increase security of gas transit in Ukraine by providing monitoring of gas flows through the Ukrainian gas pipelines (and preferably also the stocks) and to improve access to information and transparency of data, for example by installing a gas metering station on Ukraine’s border with Russia and ensuring constant access to the metering stations on the western borders.
In the longer term, what is required is that the EU and its Member States continue a strategy of integrating the Ukrainian energy market with the EU. This can be done first of all through the Energy Community framework. The Energy Community – an international organisation consisting of the EU and 8 countries in South Eastern Europe (Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Moldova, Montenegro, Serbia and Ukraine) – was specifically created for this purpose. Pushing forward reforms of the Ukrainian gas market in line with EU law, as laid down in the Energy Community treaty, would allow for gradual integration of Ukraine into the EU gas market (e.g. by establishing rules for third-party access to storage and pipelines, defining the role and competencies of the transmission system operator, and so on). This would help diminish risks for European companies who would like to become active in the Ukrainian gas sector. This would also seem to be key for the successful implementation of bigger reverse flows.
It seems clear that if EU actors want to go prevention gas crises in future and at the same time help reform the Ukrainian gas sector, they should be ready to take on much of the burden related with securing gas transit via Ukraine – first of all this winter, but also further into the future. To achieve this kind of engagement, what is needed – and what has been missing so far – is a clear answer on the EU side what it believes are its strategic interests with regard to Ukraine – both in energy and at the political level. In other words, the question is how determined the EU and its member states are to integrate their gas and energy market with Ukraine. No really convincing answer to this most fundamental question has come out of Brussels or the various European capitals so far.
Agata Loskot-Strachota is Energy Policy Expert at the Centre for Eastern Studies (OSW) in Warsaw.