EU key to Putin’s pipedream

(naftogaz.com)

Item: Russian PM Vladimir Putin proposes the merger of RAO Gazprom and Ukraine’s natural gas monopoly NAK Naftogaz Ukrainy

Background: In the 50 days since his election, Ukraine’s President Victor Yanukovych has made improved relations with Russia his top priority. (Relations between the two countries were poor for the past five years because Russia did not like the previous Ukrainian president.) Yanukovych and his government have met with their Russian counterparts 7 times in the past 6 weeks and have made a series of important deals, most notably the gas-for-fleet deal whereby Russia will sell natural gas to Ukraine at significant discounts in exchange for the prolongation of the Russian Black Sea Fleet’s port lease in Crimea until 2042.

This deal was rammed through Ukraine’s parliament, causing the much publicized chaos last week. On the heels of the chaos, Russian PM Vladimir Putin proposed the merger of RAO Gazprom and NAK Naftogaz Ukrainy. The state-owned Ukrainian company operate the country’s International Gas Transit System (IGTS)* that currently transports most of Gazprom’s natural gas deliveries to Europe.

Analysis: The chances of Ukraine agreeing to the full merger proposal are slim, unless the European Union agrees. Although official Kyiv has made many concessions to Moscow in recent weeks, Yanukovych said that Ukraine has no intention of giving up the IGTS. Following Putin’s merger proposal, a spokesperson for Ukraine’s presidential administration said that the proposal came as a surprise and has not been formally discussed. But Ukraine’s system is in desperate need of modernization to the tune of an estimated $2 bln per year. And much ado is being made about alternative transit routes that would bypass Ukraine to European consumers. **

With Putin’s merger statements, Moscow is trying to secure an upper hand and better bargaining position in the Russia-Ukraine-EU triangle of talks on the management of Ukraine’s IGTS. The model that previously enjoyed support in Kyiv and Brussels was the creation of an international consortium that would manage the IGTS on a concession basis. The consortium would be made up of the supplier (Russia), storage and transit (Ukraine) and the consumer (EU countries).

Putin’s suggestions of a merger may prove to be nothing more than a pipedream with a purpose: by loudly staking a claim today, Putin hopes to secure a better position in the future consortium. Gazprom is also trying to gain access to Ukraine’s domestic gas market and secure the rights to deliver and collect for natural gas deliveries to households. Moscow may “ease up” on its IGTS designs in exchange for other concessions to Gazprom.

All that said, the Russia-Ukraine merger would only be possible if the EU’s government and energy companies accede to such a plan. Today (May 3), a spokesperson for EU Energy Commissioner Gunther Oettinger reacted to the media reports on the possible merger. Marlene Holzner said that it is an “internal matter which concerns the two governments,” Interfax-Ukraine reported. “It is important for us as the European Union that Ukraine should continue reforms on the modernization of its domestic gas market to make it more transparent,” Holzner said. Only if the EU leaves it up to Moscow and Kyiv to ensure transparency, then Putin’s proposal may turn a pipedream into reality. Some Ukrainian media outlets are already spinning the EU Energy Commissioner’s reaction as tacit consent to the proposed merger. (The notion that Western Europe has sold out to Gazprom is oft-repeated in Ukraine.)

* Ukraine’s IGTS infrastructure includes 37,800 km of high pressure natural gas pipelines, 73 compressor stations (5,400 MW ) and 211,000 km in distribution networks, 13 underground gas storage facilities (30 bcm ). IGTS output capacity is 179 bcm (142 bcm to Europe). Current Ukrainian law forbids the privatization of the IGTS or its constituent parts.

** Alternative East-West Gas Pipelines to Europe

South Stream –63 bcm capacity, due 2015 (Russia, Bulgaria, Greece, Italy, Serbia, Hungary, Croatia, Slovenia, Austria)

Nabucco – 31 bcm per annum, due 2015 (Turkey, Bulgaria, Romania, Hungary, Austria)

Nord Stream – 51 bcm, due 2012 (Russia, Finland, Sweden, Denmark and Germany)

Ukraine’s IGTS –179 bcm, already in place (Russia, [Belarus], Ukraine, Poland, Slovakia, Hungary, Romania)