Naftogaz unbundling, Nord Stream 2 and new gas transit contract

UKRAINE - In Brief 01 Nov 2019 by Dmytro Boyarchuk
Yesterday, on October 31, Verkhona Rada completed a critical move for efficient gas transit negotiations with Moscow. Current, 10-years gas transit contract with Gazprom expires in two months. Kremlin has been getting prepared for this day already for many years. Russians have built Nord Stream, a roundabout gas pipeline to the EU. Nord Stream II is on the final stage. Capacities of the two Nord Streams are enough to leave Ukrainian gas pipeline empty. In our base-case scenario we assume loss of large part of $3 billion exports proceeds from gas transit already in 2020. Moscow has been lobbying alternative gas supplies routes for years claiming that Ukraine is not a reliable partner. And the hybrid war at the Eastern Donbas was a favorable background for Russians to promote this argument. Still European players were reluctant to dump Ukrainian gas pipeline totally. Availability of alternative routes means Nord Streams should not become a monopoly too. However, Europeans indeed remain concerned on stability of gas supplies given permanently sour relations between Ukraine and Russia. To remove political risks Eurocommission required Ukraine to comply with so called ‘Third energy package’ which presumes separation of gas transit business from gas extraction and gas distribution. The separation – or ‘unbundling’ – allows potentially supervising the gas pipeline jointly with European partners and puts gas transit on transparent ground thus reducing political risks. When Ukraine signed the Association Agreement with EU we committed to complete unbundling at some stage. Given turbulent political environment internally there was a skepticism for completing unbundling till the ...

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