Expert opinions

Will the new Ukraine–Russia gas deal happen?

The question regarding a possible extension of gas deal is still hanging in the air these days. There are now many issues between Kiev and Moscow complicating a further gas transit – geopolitical tension between the two countries, possible US sanctions, incomplete gas pipelines are just a few of them. And yet the contract between Russia’s and Ukraine’s energy giants should be signed no later than the end of 2019, or December 31, to be precise.

A 10-year gas transit deal that was allowing Russia to supply gas to Europe is about to expire. Although there are certain conversations taking place regarding a possible strike of a new deal between Gazprom and Naftogaz, a formal agreement has not been reached yet.

One of the reasons for that is it is inconvenient for Gazprom to renew an agreement with Naftogaz, as it is hoping to complete a huge pipeline project to Germany, Nord Stream 2 (NS2), some time soon. In case it actually happens, there will be no need for transiting gas through Ukraine to reach the European market anymore.

However, NS2 was expected to be finished by the mid-2020 which is more likely to be delayed now due to the possible US sanctions against companies that are involved in the project – Anglo-Dutch Shell and French Engie.

Not wanting to be locked in a long-term deal, Gazprom offered Naftogaz a one-year gas transit deal. But Ukraine rejected this offer, as the country wants to get a longer contract that will guarantee supply to its customers.

However, Gazprom is not the only one being interested in extending the deal. Naftogaz earns approximately $3 bln per year as transit fees for Russian natural gas. Therefore, losing the contract would mean a loss of great revenue for the whole country. But any delay to NS2 would be beneficial for Ukraine in ongoing talks with Gazprom.

Russia, on the contrary, is trying to stabilize its position on the market and secure its status of a gas supplier to Europe, especially in the face of a new competitor – the United States.

Experts are still inclined to believe that an agreement will be reached, but not before both sides start actively discussing this matter.

As Daragh McDowell, head of Europe and Central Asia at Verisk Maplecroft, said, “The Naftogaz/Gazprom dispute is complicated by the fact that it involves corporate issues between both companies as well as the political conflict between Russia and Ukraine.”

Notably, Russia became the largest supplier of natural gas to Europe both in 2018 and 2019. In 2018, about 40% of EU natural gas imports were coming from Russia, followed by Norway (approximately 35%).

But the US became a major competitor for Russia. EU data showed that liquefied natural gas coming from the United States to Europe had risen 272% between April 2016 and July 2018. And it seems the US Congress is ready to go even further, as it is likely to approve sanctions against companies that are involved in the construction of Nord Stream 2 pipeline, as well as TurkStream. That can be explained by the fear of Moscow spreading its malign influence in Europe and undermining the energy security of NATO.

By Natalia Revishvili,

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