FEATURE: Bypassing Ukrainian gas transit 'the only goal' of Nord Stream 2: Vitrenko

The circumvention of Ukrainian natural gas transport for Russian exports to Europe is "the only goal" of the recently completed Nord Stream 2 dual-pipeline system, CEO of Naftogaz Ukrainiy Yuriy Vitrenko told delegates at the S&P Global Platts European gas and LNG conference Nov. 24.

As part of a panel discussion on infrastructure and investment, Vitrenko said that Naftogaz's involvement in the certification process for the system was also because he believed that its introduction would "damage participants within the European market," and that a legal case must be made for the dismantling of an export monopoly that any commissioning of the project would create.

"Nord Stream 2 is a geopolitical project," Vitrenko said. "Russia wants to essentially punish Ukraine for its European choice, and that is why they are building pipelines: just to bypass Ukraine."

The controversial pipeline system, which is set to link Russian gas production to Germany via the Baltic Sea running alongside the already operational Nord Stream network, has been physically completed, with one string now filled with gas, and the other undergoing pre-commissioning works.

Naftogaz was recently granted participation into the regulatory certification process being conducted by German energy regulatory authority BNetzA, with this process still standing in the way of the project's full commissioning. Shortly after Naftogaz was known to have been admitted, the certification process was suspended.

Vitrenko also described how Russia was also denying Central Asian countries access to its own gas transport network, and consequently depriving them of access to Ukrainian transport towards Europe.

"Ukraine has abundant capacity for transiting gas from Russia to Europe... we are [currently] 25% utilized, so 75% is available for more transit volumes," Vitrenko said.

"It should be available not only for Russian gas, but Europe can get a lot of gas from Central Asian countries like Turkmenistan, Uzbekistan and Kazakhstan, and it is really a shame that Russia blocks such exports, especially at a time of high prices, and when there is a shortage of gas in the European market."

Naftogaz's CEO also linked the current energy crisis in Europe, which has seen record-high wholesale prices and potentially supply shortages this winter, to "the political side" of the gas business, rather than commercial aspects, and added that there was a shortage of infrastructure capacity in Europe that was "depoliticized."

Certification process

When asked about Naftogaz's involvement in the German regulator's certification process, Vitrenko told delegates what this would entail.

"We are supposed to get access to the files in the certification process, so we can see the arguments of Gazprom, and why they think they are compliant with European law," he said.

"We also should be given the chance to present our arguments in the form of a report against those statements as well," he added.

Vitrenko said that Naftogaz buys a large amount of gas on the European market, and that a "negative effect" on competition from Nord Stream 2 was something that "really bother us."

Outlining its case against the project, Vitrenko said that: "Our position is straight-forward: in order for Nord Stream 2 to become compliant with Nord Stream 2 rules, third parties should get access to the pipeline, so basically [for the] monopoly of Gazprom for exports of pipeline gas to be broken up, so other producers of gas in Russia and exporters from Central Asia should be given the chance to forward gas through Nord Stream 2 to the European market."

He added that he thought third-party access rules should be extended to all pipelines linking Russia and the EU.

The amended EU Gas Directive currently states that such access should be granted for pipelines completed after 2019, and is a major point of contention in the certification process.

"The operator of Nord Stream 2 should be fully unbundled from Gazprom, basically meaning [it operates] like other European transmission system operators, and as an independent company from Gazprom," Vitrenko said.

"Germany is also a part of the European Union, and there was a recent ruling from the European Court of Justice that the German regulator should also take into account the effect on competition in other European markets," he said, specifying Austria, Slovakia, Poland and the Czech Republic as those who would also be affected.

Beyond 2024

The current transit agreement between Russia and Ukraine is due to expire at the end of 2024. It came into effect at the start of 2020, and was brokered by the European Commission.

The European Commission has previously told Platts that it was working to secure long-term transit through Ukraine beyond this accord, although Vitenko was skeptical that this would come to pass.

"Gazprom did not want to sign [the transit agreement] with the TSO, so they insisted that we signed it and organize transit for them, for many reasons," he told the conference.

"Unfortunately, the way it looks at the moment, we cannot expect a continuation of this transit agreement beyond 2024, and it also means that all the flows will be diverted to Nord Stream 2 and the TurkStream, and there will be no volumes of gas from Russian flowing through Ukraine to Europe."

Transit costs

Nord Stream 2 is expected to reduce Russian reliance on transportation through Ukraine and Poland, with such transportation requiring costly capacity bookings in national networks to perform.

Slawomir Sieradzki, director of gas market development at Polish network Gaz-System, was also on the panel, and fielded a question on the economic rationale of Nord Stream 2.

"For us, the Yamal pipeline is not our asset, it is the asset of Gazprom and PGNIG; as a national transmission system operator we are just managing it," Sieradzki said. "We do not have a huge profit from this as an operator."

"If you are looking at Nord Stream 1, it cannot fulfil the whole demand for Russian gas from Europe, so you need other infrastructure to be used also."

"Because the tariffs are cost-based, whatever the cost may be, this has to be covered by the tariff," Sieradzki said. "So if the flow through the Yamal pipeline is much smaller than through Ukraine, it still has to cover all the cost of this transit."

"So when Nord Stream 1 & 2 are fully used, you will reduce the usage of the Yamal pipeline and the Ukrainian system. If [Ukraine and Poland] are still needed, you would have to pay for the whole cost of this infrastructure."

"In total, you will pay much more, because you would be using the other two systems less effectively."

Vitrenko disagreed with the premise that the investment made into Nord Stream 2 would be equivalent to, and a substitution for, paying transit fees through Ukraine and Poland over the next few years.

"If you ship gas through Nord Stream 2, you also have operating costs," he said. "Building it is one thing, but then you also have to use compressor stations, because gas doesn't flow by itself."

"Undersea pipelines are rather costly, and also not very flexible, so sometimes you need to shut them down for maintenance."

"It is clear that if you have some abundant infrastructure, the first thing you should do is to at least try using it. If for example, if Gazprom was to negotiate with us or with Poland regarding some lower fees for transportation before they made this decision to build Nord Stream 2, then I would understand any kind of economic argument."

"But in this particular case, there was no discussion of this kind. That is why is it clear that they did not even try. They did not consider the economic side when they decided to build Nord Stream 2, Nord Stream 1, or other bypassing pipelines."