Leasing Out Gas Transit System: Ukraine’s Slap at Russia or Feasible Economic Remedy?

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On August 14 the Ukrainian Parliament passed a bill allowing U.S. and European Union companies to lease Ukraine’s gas transit facilities on a venture basis. Prime Minister Arseny Yatsenyuk called the bill “a genuine leap forward” for Ukraine’s energy independence on his Facebook page. But he admitted that the path ahead for the Ukrainian government will not be an easy one.

“The government clearly sees that at this stage there is hardly a line of those willing to invest into the Ukrainian gas transportation network. But we took a first step to involve the EU and the U.S., to attract additional investments, and to make the EU interested in increasing the gas transit through Ukraine so that together we gain more profits,” Yatsenyuk wrote. Questions remain, however. Who will profit from this enterprise, and, more important, why the rush?

Arseniy Yatsenyuk welcomes

https://www.facebook.com/yatsenyuk.arseniy

Arseniy Yatsenyuk welcomes

The Bill of Resignation

The document still needs to be signed by Ukrainian President Petro Poroshenko to become law, but that is merely a formality, as the president’s office has made a significant effort to make sure it is passed by Ukraine’s parliament, the Verkhovna Rada.

According to the bill, the Ukrainian government will keep control over the national gas transportation system, or GTS, by keeping 51 percent of the entity’s shares, while 49 percent will be offered to U.S. and EU companies. This joint venture will manage both transit pipelines and underground gas storage facilities.

The bill was welcomed in the U.S. and European media and was often referred to as Ukraine’s sanctions against Russia. However, its passage was not easy. There were several unsuccessful attempts, and the last failure caused Yatsenyuk to announce his resignation. His resignation was not accepted by the parliament, and when the bill finally passed, it was backed by 228 parliament members, just two votes more than the required minimum.

Unclear Future

There is a great deal of skepticism about the future of the bill and the venture. Russia’s state-owned gas giant Gazprom and the Russian media top the list of those skeptical that Ukraine will be able to attract substantial interest from investors.

The Council of the European Union noted at its recent meeting that it supports the efforts at dialogue between Ukraine and Russia about the gas transit and supply issue and that “the Ukrainian gas transit system needs urgent modernization.”

The calls for modernization and investment are not new, and even during former President Viktor Yanukovych’s rule, Ukraine’s representatives in the EU welcomed potential European investments in the modernization of its gas transport system. In November 2013, a EU-Ukraine summit ended with Yanukovych’s notorious decision not to sign a free trade agreement with the EU, which substantially led to the Maidan protests and the president’s removal from office.

The documents prepared for the summit, however, indicated the prospects for EU-Ukraine cooperation in the energy sector, including gas pipelines. In particular, the committee noted that Ukraine was a “reliable partner of the EU, willing and able to ensure stable and secure gas flows to Europe. The committee also noted in the statement that it was looking forward to the first loan from the International Financial Institutions so that Ukraine could start the reconstruction of its major natural gas pipeline.

Being the logical step on Ukraine’s path to Europe, the new law still raises questions. Why are only U.S. and EU companies allowed to participate in the joint venture, not Canadian, Australian or Japanese ones, for example? Those countries can hardly be accused of backing Russia’s military and economic interests in eastern Ukraine. Was the bill a symbolic thank-you to the EU and U.S. for imposing strict sanctions on Russia? Or was it more than a political gesture, and will it lead to creation of a new model of natural gas transport Europe?

This cartoon refers to the previous Russia-Ukraine gas crises in 2007 and 2009 when Russia shut off its gas supplies transported through Ukraine, which largely affected European countries.

flickr / marvelous_blue under Creative Commons

This cartoon refers to the previous Russia-Ukraine gas crises in 2007 and 2009 when Russia shut off its gas supplies transported through Ukraine, which largely affected European countries.

The South Stream Challenge

Ukraine is currently suffering a second major dispute on gas prices with Russia and trying to use all possible means to achieve more economic independence from its eastern neighbor. Kiev belies that allowing EU and U.S. companies to invest in its GTS would give Ukraine’s Western partners more confidence in the country’s ability to transport gas smoothly. Russia, for its part, has been facilitating construction of the South Stream gas pipeline bypassing Ukraine—a project that would deliver a significant blow to Ukrainian gas transport profits. Yatsenyuk’s cabinet believes the bill will not only bring in investment but also remove the need for construction of the South Stream pipeline.

Though Russian President Vladimir Putin has repeatedly said that South Stream is purely an economic endeavor (after all, Europe has already suffered some gas shortages, when Ukraine and Russia couldn’t negotiate the price in 2006 and 2009), there is surely grand politics involved.

A $21.6 billion project, it should be finished by 2018. In this case, Ukraine would lose as much as 60 billion cubic meters of transported gas, according to Andrei Kobolev, chairman of the Ukrainian state company Naftogaz, which controls all national pipelines. However, the opportunity to invest in a fully operational and profitable Ukrainian gas transport system might seem more attractive for Western companies than waiting for the South Stream pipeline to be finished.

“Ukraine has to create a kind of a consortium we tried to create with Russia some time ago,” Ivan Nadiein, head of the Committee on the Energy Security of Ukraine, told the Ukrainian newspaper Den (Day). “Today [Russia’s] participation is no longer possible. However, the participation of the Europeans is very powerful and guarantees energy security for Ukraine and Europe. This is the only possible option in the current conditions, and I cannot see any risks if it is implemented.”

Ukraine’s interest in the venture project is clear and rather simple: Its government wants to secure cash flow for the future. As for the EU and U.S., besides economic reasons, such as securing gas transport to avoid any shortages in the future, there is an important political rationale—showing support for Ukraine and denouncing Russia’s annexation of Crimea and its aggressive policy in eastern Ukraine.

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