Ukraine’s new JV will ‘remove the need for South Stream’

Ukraine's parliament agreed on 19 June to discuss a bill to allow gas transit facilities to be leased on a joint venture basis with participation from firms in the EU or USA.

Ukraine suggested bringing in European and US companies to help operate the strategic pipeline that carries Russian natural gas across the country to Europe.

Ukraine would hold 51% and foreign partners would be offered 49% in the venture, which would manage both transit pipelines and underground gas storage facilities.

Suffering a third cut-off of natural gas supplies from Russia in under nine years, and with political relations in crisis, Ukraine is desperate to become less dependent on Russian gas, but at the same time to provide more reliable transit for the Russian gas that Europe needs.

The government said the joint venture would bring in investment and remove the need for the South Stream pipeline, which Russia's Gazprom is building to take gas to southeastern Europe across the Black Sea, avoiding Ukraine.

It would also aim to boost Ukraine's capacity to receive "reverse flows" of Russian gas reimported back from EU countries.

"If Europeans join this company, Russia will not build South Stream," Prime Minister Arseny Yatseniuk told parliament. No date was set for discussion of the bill.

South Stream obstacles

South Stream has fallen foul of EU competition authorities, which object to the fact that it will not be open to other gas producers. However, a number of EU countries including Germany, Austria and Bulgaria are strongly in favour, and European Energy Commissioner Guenther Oettinger said on Monday that it was a project the EU could accept.

If it is built, the pipeline threatens to deprive Ukraine's badly strained budget of the transit fees that it currently receives from Russia for gas heading towards Europe.

The EU imports 30% of its natural gas needs from Russia, and about half of that comes via Ukraine, with some already having been diverted through the Nord Stream pipeline under the Baltic Sea.

Its supplies were briefly cut off in 2006 and 2009 when Ukraine argued with Russia about the price of its gas.

On Thursday, Naftogaz said Gazprom had informed the company of its intention to terminate a contract under which Ukraine provides additional gas to Europe when European consumption rises, and is then compensated by Russia.

Naftogaz said it had been told the contract would be terminated on 23 June, and that it believed the move was intended to discredit Ukraine as a reliable supplier.

Gas cut off

The flow to Ukraine has been cut off again after Kiev refused to accept a price rise imposed by Russia following the ousting of pro-Moscow president Viktor Yanukovich in February.

Ukraine, whose new President, Petro Poroshenko, plans this month to sign the association and free trade agreements with the EU that his predecessor shunned, has continued to allow transit gas to flow normally across its territory.

Oettinger, who has been mediating in the dispute, has said he hopes to bring both sides back to the negotiating table by mid-July.

For its part, the EU has tried to support arrangements for Ukraine to be able to re-import Russian gas back from other parts of eastern Europe, to help it offset in part any disruptions to supplies from Russia.

Ukraine, which consumes about 45 billion m3/yr of gas and supplies just less than half that from its own production, has said it expects to receive about 6 billion m3 in reverse flows from EU countries this year.

The wider plan

The move is part of an effort to revamp the pipeline, which is among Kiev's most valuable assets, and ensure Ukraine remains a key transit country for gas to Europe.

Analysts say it's also an attempt to defuse potential claims that Ukraine might be siphoning gas intended for European customers.

Focus on the pipeline has intensified since Russia on Monday halted gas supplies to Ukraine after talks over past debts failed.

Russia continues to send gas on to Europe through Ukraine's pipelines but there are fears over whether the flow of gas will continue uninterrupted if Kiev and Moscow relations remain frosty.

Alexei Kokin, an oil and gas analyst at the Moscow-based UralSib bank, called Prime Minister Yatsenyuk's offer "a sensible idea" that could bring much-needed investment to revamp the pipeline as well as oversight of the gas flow.

Gazprom, which has complained about the shabby state of the Ukrainian pipeline, should be pleased, Kokin said, "unless it gets paranoid and suspects that the operating company helps Ukraine to siphon off the gas, which no respectable organisation will do."

There would be risks for a company to get involved financially in a country that is torn by a militant uprising and political divisions. Whether Ukraine will be able to entice an outside company will depend on the terms it offers, such as a share in the gas transit fees that Ukraine gets from Russia, Kokin said.

Edited from various sources by Elizabeth Corner

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