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BREC Alumni Jack Sharples, extended interview

02 December 2015

Author of European Geopolitical Forum's Gazprom Monitor Annual Review, and BREC Alumni Dr Jack Sharples, talks about Russian gas and Ukrainian transit for this coming winter, in advance of his presentation at the BREC Meeting on December 16 2015.

Questions from Sergio Matalucci

SM: Does Ukraine have enough gas in storage to last the winter?

JS: I think so, yes. Ukraine has more gas in storage than it did a year ago. So, all other factors being equal, the amount in storage should be sufficient. However, the amount that Naftogaz withdraws from storage this winter will depend on patterns of consumption and supplies (imports), which may be difficult to predict.

At the beginning of the winter heating season, on the 30th of October, Ukraine had approximately 17.05 bcm in storage, some 900 million cubic metres (mcm) more than last year. During winter 2014-15, Naftogaz withdrew 8.5 billion cubic metres (bcm) from storage. If similar amounts are extracted during winter 2015-16, then yes, the current stocks will be sufficient.

SM: Will Kyiv buy gas in the coming months?

JS: Naftogaz imports gas from two sources: Russia from the East and Europe from the West, via Slovakia. Last year, Naftogaz suspended its imports of Russian gas in June. At the end of October, Naftogaz and Gazprom agreed on a ‘Winter Package’ that enabled Naftogaz to resume the import of Russian gas on the 9th of December, and continue to import Russian gas throughout the winter.

This year, Naftogaz again suspended imports of Russian gas in the summer and resumed imports on the 12th of October. However, imports were suspended again on the 24th of November. Recently, the Naftogaz CEO, Andri Kobelev, stated that Naftogaz will not import any Russian gas in December, and could even wait until the end of winter to resume imports of Russian gas. The Ukrainian Energy Minister, Volodymyr Demashchyn, agreed that Ukraine will not import Russian gas in December. However, Demashchyn remained open to the possibility of Ukraine importing Russian gas in Q1 2016. Gazprom and Naftogaz will reportedly reach an agreement on the matter by the 20th of December. Ukraine will not import any more Russian gas before the end of 2015 but could resume imports in 2016. It is a question of both price and politics. For the next month at least, Naftogaz will survive on a combination of gas storage and imports from Europe.

SM: What are the complexities here?

JS: The first complexity is the weather, which we cannot predict, and will have a strong influence on levels of Ukrainian gas consumption. We cannot take a repeat of last year for granted.

The second complexity is Ukraine’s energy balance. In trying to reduce its gas import dependency, Ukraine has become more dependent on coal. But the conflict in Eastern Ukraine has badly affected Ukrainian coal production, and imports from Russia were suspended on the 27th of November. A shortage of coal could increase gas demand. In the context of suspended gas imports from Russia, this could lead to gas shortages in Ukraine, unless sufficient volumes are purchased from Europe to bridge the gap. Ukrainian gas consumption and imports are significantly lower than they were in 2008 (before the financial crisis). Since then, in addition to reduced economic activity related to a struggling economy, the Ukrainian government has made a concerted effort to reduce Ukraine’s gas import dependency by replacing gas with coal in many power stations. However, Ukraine also halted the import of electricity from Russia on the 13th of November. Furthermore, the conflict in Eastern Ukraine has severely impacted Ukrainian coal production. This combination of rising coal demand and declining production led to increased dependence on imports, including from Russia, during 2015.

The destruction of electricity power lines from Ukraine to Crimea on the 20th and 22nd of November elicited a stern response from Russia. On the 27th of November, Russian coal exports to Ukraine were halted. The Ukrainian Energy Minister, Volodymyr Demashchyn, then announced that Ukraine has sufficient coal supplies to last 4-6 weeks. The Ukrainian Energy Ministry will use that time to source additional coal imports from the United States, South Africa, and other suppliers.

SM: Do you expect any issues with the transportation of Russian gas to Europe?

JS: At the moment, no. As long as Ukraine continues to import gas only from Europe, a suspension of transit is unlikely. The previous interruptions in gas transit (in 2006 and 2009) were caused by breakdowns in negotiations over Russian gas supplies to Ukraine. At present, neither Russia nor Ukraine would gain anything from a suspension of gas transit: Russia wishes to continue supplying its European customers, and the Ukrainian government and Naftogaz wish to retain good relations with European governments and energy companies. If such a suspension of gas transit were to occur, the impact would be far less dramatic than it was in January 2009. The share of Ukrainian transit in Russian gas exports to Europe has fallen dramatically over the past decade, from 80 per cent in 2005 to 40 per cent in 2014. In January 2015, gas transit via Ukraine accounted for 35 per cent of Russian gas export to Europe, with Belarus accounting for 40 per cent, and Nord Stream for 25 per cent. However, Nord Stream cannot be used at full capacity due to ongoing regulatory issues with its onshore sections in Germany, while the Belarusian gas transit network is already operating at virtually full capacity. If gas transit via Ukraine is suspended, the countries that would be affected are Slovakia, Hungary, Austria, Serbia, Italy, Bulgaria, and Greece. While Italy and Greece have access to alternative LNG imports, Austria, Hungary, Serbia, and Slovakia have access to imports from Europe. This would leave only Bulgaria as being truly exposed.

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