When is the gas going to flow to Europe again?

Ukraine is doing everything that is possible for the gas to start to flow to the EU as soon as possible. But we need two to tango. First of all we need gas to come to Ukraine, so that we can transport this gas to the EU as we were always doing. Yesterday Ukraine made a very serious effort to facilitate and to speed up the process, signing with the European Commission an agreement. (see document below)

What is at risk, is the trust. We need confidence building measures to be taken quickly, and it was Prime Minister of Ukraine, Yulia Tymoshenko which suggested to European Commission President Jose Barroso to send as soon as possible EU monitors to the Ukrainian-Russian border to the metering stations to monitor the gas supply. This happened on the morning on the morning of the 7^th of January, after we received this Orthodox Christmas gift from Gazprom, and the full stop of gas supply to the EU (after the stop of gas supply to Ukraine happened on the 1^st).

President Barroso responded positively our proposal, and apparently suggested that Russia, (President Putin) also responded positively.

On the 8^th of January we arrived with the Ukrainian delegation to Brussels, and immediately met President Barroso and Energy Commissioner Piebalgs. We agreed and signed a document which has made it possible for the EU monitors to come and have full access to the relevant installations and metering stations to verify the situation with the gas supply.

Today, monitors are on the ground.

It is a very important step for the transparency and openness of the Ukrainian side, which we believe will be reciprocated and supported by the Russian side for the metering stations on their side of the border.

In addition to what has already happened it would be good for Russia to resume the gas supply. Because it is not normal in the midst of the winter, for commercial or other reasons to cut the gas supply. There is a humanitarian aspect to it. Yesterday we heard many members of the European Parliament expressing the frustration to the situation, especially from the more heavily impacted countries.

We expect that Russia will resume its gas supply as soon as possible, preferably today.

This evening the Prime Minister of the Czech Republic, Mirek Topolánek is flying to Kiev to meet with PM Tymoshenko. So we see a more active involvement of the EU as a facilitator of the process that would allow to restore the situation.

 
They are very latent, in the beginning the whole approach was that it is a commercial issue which they had nothing to do with. It then became clear that the issue is a multidimensional issue which requires involvement for pure logic. There are producers, transitors, and consumers. The procedures and the process should be built with respect to this logic. There is a role for the Commission to play; at least an honest broker role. In this sense, they send in EU monitors to verify.

I am not here to participate in the propaganda war. I am here to find a solution, and the first step to this is monitors on the ground to have the data to present to the EU authorities.

We understand that after some hesitation Russian Prime Minister Putin accepted this idea, and we believe that while accepting this Russia will fulfill its promise to resume the gas supply already today.

This is precisely why the monitors should be on the ground. There are six inlets, entry points, on Ukraine’s eastern border, and six outlets on Ukraine’s western borders, on the borders with the EU member countries and with Moldova. The direction which goes to the Balkans goes through Moldova.

What happened since the 1^st of January when Gazprom stopped the gas supply to the Ukrainian consumers? - Every day after that, Gazprom erratically changed the level and the amount of supply, and the entry points of the supply, which put the system at stress.

The system is more than 30,000 km of pipes; more than 70 stations with generators that pump the gas through the system, and various storages. It’s quite complicated, and the most developed system in Europe at least in terms of volume pumped.

So this erratic behavior of Gazprom, in addition to what we believe was manipulation in Moldova by Transgas – owned 51% by Gazprom. The changed sporadically from the northern part of the Moldova station to the southern part. These are quite technical issues.

 

 

That was erratic behavior by Gazprom, with a constant decrease of the gas supply.

On the 6^th of January, out of six stations through which gas was coming from Russia to the Ukraine, only one was functioning. And in the morning, 7:44am of January 7^th, the last station was shut down, so zero at the entry. There was nothing to pump further.

It is important to assess why is it happening and what has been learned from the first gas war of January 2006 which lasted only 3 days; now we have 9 days so far.

To prevent this from happening, the Tymoshenko government took two measures. Firstly, to accumulate reserves of gas in storage, which we did, and which allows us to still continue supply of gas to Ukraine’s consumers and industries at a reduced level. Secondly, to create a memorandum that would guide negotiators of Gazprom and Naftogaz in their negotiation process (See document below) signed by Vladimir Putin and Yulia Tymoshenko. There are 7 points but two are key, point number 1 – there will be direct contracts between Gazprom and Naftogaz without any intermediaries. And point number 2 –gradual structure transition in the course of 3 years to economically sustainable and mutually approved prices for gas and the tariffs for transit.

 

 

 

 

The RosUkrEnergo is a fundamental case in the lack of transparency in the energy sector. Not just in the Ukraine, but for the whole of Europe. When it appeared and got a monopolistic role in January 2006, Tymoshenko was not in the government. She protested from the very beginning and fought actively to get rid of the RosUkrEnergo and any other intermediaries because there is no logic why the gas companies should not have direct contracts between them. We reached a very important step when the Russian political leadership agreed with that. And that is why this memorandum is so significant.

The RosUkrEnergo belongs on the Ukrainian side to individuals. The whole ownership structure of the RUE was a mystery for a long time. There was an international investigation on that and there is a global witness report which investigated this.

We now understand that the Polish government, which also has to deal with RosUkrEnergo, also wants to get rid of the RosUkrEnergo. So the RosUkrEnergo is becoming a Pariah in a way. I think that is also one of the reasons why those negotiations are so difficult because there are of course vested interests, in both sides, to try to preserve a role of RosUkrEnergo.

The Prime Minister is committed to do everything possible to remove RosUkrEnergo and go for direct contracts.

 

 

The way out is to implement the memorandum between Prime Minister Putin, a strong man, and Prime Minister Tymoshenko, a strong lady. Pacta Sunt Servanda: It is something that has been agreed, and it remains to be implemented. If this memorandum is implemented, there is no role for RosUkrEnergo left. And it would be a contribution not only to the energy security of Ukraine and Russia, but a contribution to the energy security of Europe.

The memorandum between the two Prime Ministers was signed in October. In the same month, as a follow-up, Dubina and Miller, signed an agreement (see document below) in Moscow about the principles of the long-term cooperation in the gas sector, which develop further the points of the memorandum, make some parameters in terms of the technical matters, and establishes as a deadline, the 1^st of November, until which both sides agree to finalize negotiation and sign a contract.

The purpose of this was exactly to avoid another gas war.

 

 

 

There are many reasons. We know how difficult and how damaging the crisis was for many corporations in the world, and Gazprom is not immune. There is definitely a recalculation of the costs of this crisis for Gazprom. The usual strategy of Gazprom so far has been to exploit the situation of the monopolist as a supplier, and then to get concessions from the countries to which it supplies its gas. And as a result we know there is in a number of countries, including Moldova and Belarus. The same strategy was applied to Ukraine, and Ukraine resisted it. Gazprom now has stakes in Ukraine’s gas transportation system. That might be one of the reasons why Gazprom delayed.

The formal reason was an issue of debt. Gazprom claimed that Naftogaz owed money, and delayed signing the agreement until the debt was paid. And that’s the issue. The debt has been paid, on the 30^th of December. An amount just over $2 billion was paid. There were still 2 full working days to finalize an agreement. But the gas was cut.

 

This is a subject of the negotiations and that should be agreed. The logic that Ukraine sees here is straight forward. The price of gas is not fixed and fluctuates. It is usually the price of oil that defines the price for gas. And usually when contracts are signed for the long term, there are clauses for automatic adjustment of the price in regular time periods. This adjustment reflects the price of oil with a 6 to 9 month retrospective period. So the price of oil 6 to 9 months ago would define the price of gas today.

Now, if we take a county with who has the most active relations in the gas sphere, Germany, the average price in 2008 for Russian gas to Germany was $400. Now it’s a little bit higher. Because of the price of oil, the average price for 2009 is going to be approximately $280 or 30% lower.

The gas goes to Germany mainly through the Slovak and Czech Republics. Minus the transit fee in both countries, and minus the transit fee through the territory of Ukraine. That should give you a price, if you apply the aforementioned parameters of around $210.

When Gazprom gave us the offer of $250, which is an increase from the current $179.5, while insisting that the transit fee is frozen at the current level, namely $1.7 (per 1,000 cubic meters across 100 km), defacto means that Naftogaz, for 2009 would be subsidizing Gazprom for transiting the Russian gas through the territory of Ukraine. Therefore it was not acceptable.

But this is the nature of negotiations. But you do not just cut the supply of gas. For Gazprom I think that this is a strategic mistake. The real and only serious consumers of Russian gas is western Europe. And then with this erratic behavior, and lack of sensitivity, Gazprom is killing the goose laying the golden egg, which is counterproductive.

Which again brings us to the root of the problem. Whether it’s purely commercial, or commercial plus political, or commercial plus… what else… what else? Put at risk the reputation and reliability of Ukraine as a transit country, and give some arguments for Nord Stream, and South Stream, and kill Nabbucco. There are pipeline politics at play here!

Energy is no longer about trade; it’s about security.

 

 

I spoke to Tymoshenko this morning; she said that nobody, including Putin tried to reach her. So it is not true. It is true that Tymoshenko is sick at the moment with tonsillitis, but she will be meeting Czech Republic Prime Minister Topolánek today so anybody who is will can reach her. I don’t know about President Yushchenko.

 

 

We care about the rep of Ukraine as a transit country. As lessons learnt from the gas crisis in 2006 and 2008, and because of the Ukraine’s strategic aspirations and its European vocation, to come closer and become a member of the Union in the future, we need a change of paradigm. The change of paradigm has to do with the fact that Ukraine will be responsible, and will be in contract with the EU companies for the transit, and not be dug into a standoff with Gazprom which is a monopolist. Which means that you shift the border from the western part of Ukraine, to the Eastern part of Ukraine. If the current situation would appear, the Ukraine would be responsible to the EU.

That would be most logical not just because of this logic of transit and the consumers on the receiving end. It would be more logical because of the better compatibility of Ukraine with the Energy sector of the EU. Ukraine is a member of the energy charter and the transit protocol. Ukraine signed and ratified it, while Russia signed but did not ratify. Ukraine is becoming a party of the energy community treaty, which is as of today south eastern Europe and members of the EU are part of, which means the harmonisation of the energy aquis, which is a very important part of harmonisation. Ukraine is willing to synchronise its electricity system with the UCTE, the European system, which makes Ukraine a more harmonious and a natural partner of the EU in the gas sector. This is the logic which we presented in Brussels, and we received an initial positive response to that and we look forward to continue the process.

And our responsible behaviour aims to increase confidence and to strengthen Ukraine’s reputation as a reliable partner for the EU to secure uninterrupted stable transparent transit of gas to the EU.