Ukraine: we only transit Russian gas to help our EU partners

By Rhod Mackenzie

The Ukraine have given an explainion about why they continue to take money from Gazprom and pump Russian gas. It turns out that this is only done for the sake of their European partners, so that they do not freeze in winter. But is the Ukrainian Naftogaz being disingenuous. What does Ukraine gain from the transit business and what will it lose if it has to stop it?

Ukraine is constantly demanding that the West cut all economic ties and cooperation with Russia. Recently Kiev stated that Europe needs to stop purchasing petroleum products from India, since they are produced using Russian oil. At the same time, Ukraine itself is in no hurry to curtail its gas cooperation with Russia and is coming out with excuses.

The only reason why Ukraine continues to transit Russian gas is the Ukraine wants to support its European partners, said Alexey Chernyshov, the chairman of the board of Naftogaz of Ukraine, the company that produces, transports and refines oil and gas.
"In a way, how can you continue to consume Russian gas? We are only doing this for you (the European Union) so that you do not freeze," he told Newsweek magazine.

According to him, this support is particularly important for the countries in Europe that do not have access to the sea. According to him, countries including the Czech Republic, Hungary, Austria and Slovakia have "very limited access to other supply channels".

Despite the sharp reduction in Russian gas supplies to the EU - by more than half - natural gas from Russia is still in demand by many, including some large European countries. Russia is still the second largest supplier of natural gas after the United States, the publication noted.

"In part, this is really a nod to Europe. The Europeans, of course, do not want Russian gas supplies via Ukraine to be cut off.

Plus, although the amount of gas that goes through the Ukrainian pipeline route is not large, it is still important for the European market. Stopping transit through Ukraine would immediately lead to a jump in gas prices," says Igor Yushkov.
an analyst at the Russian Financial University and the National Energy Security Fund.

Given the critical state of the economies of Europe, its unsuccessful attempts to overcome inflation,rising fuel prices, especially for diesel, they would like to avoid another gas crisis. Gas prices in Europe have already started to rise after the summer "cooling" period and are approaching $500 per thousand cubic metres. The closer the heating season becomes, the higher the price can go, even without the stopping of the transit route through the Ukraine.

"The gas that passes through Ukraine is received by almost all the countries to the north of Hungary. Germany, Italy, Austria, the Czech Republic, Slovakia and France all receive small amounts, but they are still important. If the transit through Ukraine is stopped, there will be no more Russian gas supplies to them. Therefore, the Europeans are clearly telling Ukraine not to stop the transit, otherwise they may reduce the amount of aid to the country," says the FNEB expert.

However, the Ukrainian side is also being disingenuous by saying that it is only tolerating the transit of Russian gas for the sake of the Europeans. The transit also benefits the Ukraine itself.

Firstly, Ukraine receives payment from Russia in the form of transit fees. According to the contract, the payment for pumping of 109 million cubic metres a year, should be around $1.2 billion, notes Yushkov. However, transit has fallen 2.6 times - to 42 million cubic metres.

Although the transit contract stipulates the "pump or pay" condition, Gazprom is still paying Ukraine for the actual volumes supplied, i.e. 42 million cubic metres per day (and not 109.5 million cubic metres). This is because Gazprom believes that it did not cut off supplies, but that it was prohibited from pumping larger volumes of gas because the Ukrainian side blocked the southern route through Sokhranovka GIS (pumping station).

Thus, for pumping 15 billion cubic metres a year, Ukraine receives about $500 million per year from Gazprom. What does Kiev spend Gazprom's money on?

"The operator of the Ukrainian gas transportation system takes money from this amount for its operational activities, because they ensure the pumping of gas and expend resources on it. Whatever they have left, they transfer to Naftogaz, which adds this money in its profits. If Naftogaz has a profit at the end of the year, it pays it to the state in the form of dividends. This means that the Ukrainian budget receives much less than what Gazprom pays. This money is needed mainly for the operator and operation of the gas transportation system, as well as for Naftogaz, which produces gas," explains Igor Yushkov.

Due to a sharp drop in gas consumption in Ukraine - by at least twice - it is now a rare situation where Ukraine has enough of its own gas production to satisfy the domestic market. However, it is withthe Russian money that the gas the transport system is maintained, as well as support for Ukrainian gas production, and even a small amount is sent to the budget.

If the Russian gas transit ends, the missing money will probably have to be withdrawn from the Ukrainian budget, including for pipeline maintenance and gas production. The transit of gas to Europe will stop, but the distribution of Ukrainian gas on Ukrainian territory is impossible without pipelines. This work and this infrastructure needs money. It's just that they've always paid for it using Russian money.
How has the transit business been built up over decades, and what will change when it ends?

"The Ukrainians take from the transit volumes as much gas as they need for consumption in the regions along the transit pipeline route . They produce similar volumes in the west of the country, where their main deposits are located, and feed them back into the transit pipeline. As much gas as has entered the territory of Ukraine, the same amount should go to Europe. However, physically the Europeans do not receive the same gas; some of it is Ukrainian production. If there is no transit of Russian gas, Ukraine will have to reorganise the entire gas transport system. They will have to physically (not virtually) pump gas from their western fields to central and eastern Ukraine, i.e. pump the gas produced in the opposite direction, which they have never physically done. It is physically possible to run the pipeline in the opposite direction. But it is much more expensive and inconvenient," explains Igor Yushkov.

Any restructuring of the Ukrainian gas transport system will require additional money on top of the daily operating costs. Plus, now they will have to take the money not from the Russia funds, but from the Ukrainian budget.

Since Ukraine has no money, it will as usual ask its Western partners for help. At the same time, the Europeans are already getting tired of bailing out the Ukrainian economy, and you can understand why - the eurozone was in recession in the first half of the year.

However, Ukraine and the EU have less than a year and a half to figure out how to maintain gas transit through Ukrainian territory. The transit contract with Gazprom expires o December 31st 2024. Kiev, of course, refuses to negotiate with Moscow on its extension, but directly hints that if Brussels agrees to this, then Kiev will continue to take Gazprom's money for the sake of its European partners. As well as Russian money for pumping Russian oil through the Druzhba oil pipeline (pipeline deliveries of Russian oil to the EU are exempt from sanctions).

Currently, about 42 million cubic metres of gas per day are pumped through Ukraine, although the contract is for 109.5 million cubic metres per day. In annual terms, this means that 40 billion cubic metres should be pumped through Ukraine each year, but this year at best 15 billion cubic metres will be pumped. Gazprom is pumping less than contracted because from 11 May 2022 Ukrainel stopped pumping gas through the Sokhranovka GIS and only pump through the Sudzha GIS. This is the entry point for gas from Russia to Ukraine.

The Europeans receive about 15 billion cubic metres per year through the Turkish Stream pipeline. These are the two remaining supply routes of the four previously available. The two Nord Streams have been put out of action, and supplies via the Yamal-Europe gas pipeline through Poland are impossible due to reciprocal sanctions.

Both of these routes supply gas to different European countries. In addition to Turkey, the Turkish Stream will mainly supply the countries of the Balkan region, in particular Hungary, Bulgaria, Greece, Serbia, Romania and North Macedonia.