Alternatives & Analyses: Ukraine emerges a winner in the battle with Gazprom – the lessons for Sofia

Few could foresee that the Kremlin’s ‘pincer’ strategy on Ukraine would go bust, and instead of defaulting, the Ukrainian gas transport system operator would end up with increasing importance and higher revenues from the sale, storage, and trade of natural gas.

Both Nord Stream 2 and Turk Stream 2 are in what it seems a dead end street.

Throughout Ukrainian gas transit history, not once have supply disruptions to the EU occurred due to a lack of reliability or malicious intent on the Ukrainian TSO side. All gas supply cuts and pressure reduction have followed decisions taken by the Kremlin, not in Kyiv. Regardless of what Russian government media preach, Putin’s problems arose after he decided to punish and circumvent Ukraine and hurl more than $ 60 billion (a conservative estimate) to subdue it. His gamble did not pay off.

The Russian President squandered the last remnants of control over Russia’s neighbor to the West.

Instead of the problematic transit through Ukraine, Russia gained an expensive impossible one via Germany and Turkey. Gazprom sales in Turkey in 2020 have collapsed by 62 percent since 2019, despite the “take it or pay” clauses in the contracts.  At the moment, it is hard to conceive a specific date for the completion and going online for either the Nord and Turk Stream – 2.

As many have warned, it is not the delivery routes or the lack of alternative suppliers, which are the critical issues for the natural gas markets but the declining consumption and the wild price fluctuations.

These articles analyses and comments are made possible thanks to your empathy and contributions, which are the only guarantors of independence and objectivity in our work. The Alternatives and Analysis team.

The margins between natural gas prices between the low summer season, when they fell below 3 euros / MWh, and the current rates at almost 14 euros / MWh have forced traders and suppliers to focus on storage capacity usage. As a result, Ukrainian gas storage facilities, which are unmatched in Europe, now hold a record of 28 billion cubic meters of cheap summer gas. European companies own more than 12 billion cubic meters of it, betting on demand outside Ukraine, securing cheaper gas in the winter. Ukrainian companies, including new private players, profit from indigenous UGS by importing gas from Poland, Slovakia, and Hungary.

When calculating the historic net gains from Russian gas transit for Ukraine, one must acknowledge that Gazprom enforced on Naftogaz Europe’s highest gas prices. Price premiums reached $ 80-100/tcm[U1]  between Gazprom’s sales prices for Germany and Ukraine. On typical annual gas purchases of 20 billion cubic meters (before Kyiv gave up on Gazprom’s gas), Naftogaz overpaid almost $ 2 billion each year versus transit revenues of $2.5 billion.

Against all odds, the ‘bypassed’ Ukraine recorded the lowest EU natural gas price this July.

Meanwhile, Bulgaria, which sided with Gazprom in bypassing Ukraine as a junior partner, spent nearly Euro 1,5 billion of its own money to fund a gas pipeline that would guarantee Russian gas’s monopoly in the region, while ‘enjoying’ three times higher gas prices in July.

The indebtedness level confronts the TSO – Bulgartransgaz with existential questions – “to be” or “not to be” as the company with less than a billion euro in asset value, before TurkStream, embarked on a 1,5-billion-euro project with a high-risk revenue profile and prohibitively high revenues – value-at-risk exposure.

The worst is yet to come as this coming winter; gas prices are likely to go further up as cheap summer gas in the Chiren UGS is below 10 percent of annual consumption. The Bulgarian TSO did not consider it worthwhile to spend BGN 55 million to drill and double the UGS capacity, yet it jumped into a debt of BGN 3 billion to build a restricted pipeline for Russian gas.

PM Borissov chose a Gazprom junior partner role over making Bulgaria an independent player, profiting from its geopolitical location. Ukrainians were forced reluctantly into adopting their gas and energy independence and now are reaping the benefits.

The law of unintended consequences.

To add insult to injury, Moscow might need to sustain gas transit routes via Ukraine in order to mitigate transit and political risk in Turkey. Geopolitical classics.

Ilian Vassilev

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