Gazprom seen stanching flow of gas to Ukraine

5/4/2014

CHASLOVTSY, Ukraine — As Ukraine tries to contain a pro-Russian insurgency convulsing its eastern region, a perhaps more significant struggle for the country hinges on what happens beneath the ground here in a placid woodland in the far west, on the border with Slovakia.

This is where around $20 billion worth of Russian natural gas flows each year through huge underground pipelines to enter Europe after a nearly 3,000-mile journey from Siberia. It is also, the pro-European government in Kiev believes, where Ukraine has a chance to finally break free from the grip of Gazprom, Russia’s state-controlled energy behemoth.

In an effort to do this, Ukraine has for years been pushing to start so-called reverse-flow deliveries of gas from Europe via Slovakia to Ukraine, thus blunting repeated Russian threats to turn off the gas tap.

An agreement signed last week between Slovak and Ukrainian pipeline operators opened the way for modest reverse-flow deliveries of gas from Europe, where prices are much lower than those demanded by Gazprom for its direct sales to Ukraine.

But the deal, brokered by the European Union and nudged along by the White House, fell so far short of what Ukraine had been lobbying for that it left a nagging question: Why has it been so difficult to prod tiny Slovakia, a European Union member, to get a technically simple and, for Ukraine and for the credibility of the 28-nation bloc, vitally important venture off the ground?

Some cite legal and technical obstacles, others politics and fear of crossing the Kremlin, but all agree that a major obstacle has been the power and reach of Gazprom, which serves as a potent tool for advancing Russia’s economic and geopolitical interests, and is ultimately beholden to President Vladimir Putin.

Gazprom not only dominates the gas business across the former Soviet Union, but it also enjoys considerable clout inside the European Union, which gets roughly a third of its gas imports from Russia and is itself vulnerable to Russian pressure.

All the same, a fog of mystery surrounds the reluctance of Slovakia to open up its gas transit corridor — through which Russia pumps a large portion of its gas to Europe — for large reverse-flow deliveries to Ukraine.

Built during the Soviet era to link Siberian gas fields with European markets, Slovak pipelines, according to Ukrainian officials and experts, could move up to 30 billion cubic meters of gas from Europe to Ukraine a year — more than all the gas Ukraine is expected to import from Russia this year.

Instead, the majority state-owned Slovak company that runs the system, Eustream, has offered only a small, long-disused subsidiary pipeline that still needs engineering work before it can carry gas to Ukraine. Once the work is finished in October, Eustream will provide just a tenth of the gas Ukraine has been looking for from Europe. The company says that small amount can be increased sharply later.

Here in Chaslovtsy, in southwestern Ukraine, where technicians from Ukraine’s pipeline company, Ukrtransgaz, and Gazprom monitor the flow of Russian gas westward into Slovakia, the Ukrainian head of the facility, Vitaly Lukita, said he wondered if gas would ever flow the other way.

“We are all ready here, but I don’t know why the Slovaks are taking so long,” Lukita said. “Everyone has been talking about this for a very long time, but nothing has happened.”

Andriy Kobolev, the board chairman of Naftogaz, Ukraine’s state gas company, said he was particularly mystified by the recalcitrance of Eustream because in 2011 the company had put forward the idea of using spare capacity in its trunk pipelines for reverse-flow supplies to Ukraine.

He said the Slovaks had rejected this option in recent negotiations, citing secret contracts with Gazprom. He added that did not know what the problem was exactly, because he had not been allowed to see the contracts.

Eustream executives declined repeated requests for interviews. Vahram Chuguryan, the company’s spokesman, declined to comment on the apparent change of heart or on whether it was related to an ownership reshuffle in early 2013, when a group of wealthy Czech and Slovak businesspeople purchased a 49 percent stake in Eustream. At the time of the purchase, Czech news media speculated that they were acting as a stalking horse for Gazprom.

Daniel Castvaj, a spokesman for Energeticky a prumyslovy holding, the company that made the purchase, denied Ukrainian assertions that Eustream has sought to limit reverse-flow deliveries to Ukraine, describing these as “not only untrue but nonsensical” since the pipeline operator, which makes its money off transit fees, has a strong commercial interest in boosting flows regardless of direction.

He said he was unaware of any 2011 offer by Eustream to use the trunk transit system to deliver gas to Ukraine, but added that such an option has always been technically and legally impossible “without the consent of Gazprom,” which has not been given.

European Union officials, frustrated by months of haggling and worried about possible legal problems raised by Gazprom’s contracts with Slovakia, hailed last week’s modest deal as offering at least an end to the logjam. José Manuel Barroso, the president of the European Commission, described it as a “breakthrough” but also called it a “first step,” signaling hope that Slovakia may, over time, allow more substantial reverse-flow deliveries to Ukraine.

Ukraine’s dependence on Gazprom to heat homes and power factories — it buys more than half its supplies from Russia — has not only left the country vulnerable to sudden price changes, which fluctuate depending on whether Moscow wants to punish or favor authorities in Kiev, but has also helped fuel the rampant corruption that has addled successive Ukrainian governments.

When Gazprom hiked the price of gas to Ukraine by 80 percent last month and threatened to cut off supplies if Kiev didn’t pay up, Ukraine’s interim prime minister, Arseniy P. Yatsenyuk, blasted Moscow for “aggression against Ukraine.”

“Apart from the Russian army and guns, they decided to use one of the most efficient tools, which are political and economic pressure,” he said.

By pushing to buy the bulk of its gas from Europe instead of from Gazprom and murky middlemen endorsed by Gazprom, Ukraine hopes to protect what it sees as a dangerously exposed flank from Russian attack. The best known of those middlemen, the Ukrainian businessman Dmytro Firtash, was detained in Austria in April and has been fighting extradition to the United States.

“Imagine where you’d be today if you were able to tell Russia: Keep your gas,” Vice President Joe Biden told Ukrainian legislators during a visit to Kiev last month. “It would be a very different world you’d be facing today.”

Nearly all the gas Washington and Brussels would like to get moving into Ukraine from Europe originally came from Russia, which pumps gas westward across Ukraine, into Slovakia and then on to customers in Germany and elsewhere. Once gas is sold in Europe, however, Gazprom ceases to be its owner and loses its power to set the terms of its sale.

All Ukraine really wants, said Kobolev, the chairman of Naftogaz, Gazprom’s biggest customer after Germany, is a “fair and transparent price” and a stable, uninterrupted supply.

Russia is currently demanding $485 per thousand cubic meters for the gas Ukraine buys directly — instead of the price of $268 it offered the Ukrainian government under President Viktor Yanukovych before his ouster — while “Russian” gas sold via Europe, which should be more expensive because of additional transit fees, costs at least $100 per unit less.

Russia denies using gas as a political weapon and says all Ukraine needs to do to secure a stable supply at a reasonable price is pay its bills on time and clear its debts, which Gazprom said total $3.5 billion.

Ukraine has already started taking reverse-flow deliveries from Poland and Hungary. But the quantities, around 2 billion cubic meters last year, have been too small to make much of a difference. Only Slovakia has the pipeline capacity to change the balance of forces.

“We have been struggling for a long time to convince them to find a solution,” said Kobolev, the Ukrainian gas chief. “We have now identified the problem, which was obvious from the beginning — restrictions placed by Gazprom.” Ukraine’s energy minister, Yuri Prodan, dismissed Gazprom’s legal and technical arguments as a red herring. “I think the problem is political. We don’t see any real objective obstacles to what we have been proposing,” he said.

Opposition politicians in Slovakia, noting that 51 percent of Eustream belongs to the Slovak state, attribute the pipeline company’s stand to the country’s prime minister, Robert Fico, a center-left leader who has sometimes seemed more in sync with Moscow’s views than those of the European Union.

“Fico thinks that it is necessary to be very nice and polite to Mr. Putin,” Mikulas Dzurinda, a former prime minister, said in a telephone interview. “This is the heritage of old communists in a new era: The big guys are still in Moscow,” he said.

At a news conference in April, Fico insisted that Slovakia was “really ready” to help assist reverse-flow deliveries to Ukraine. But he added, “We naturally protect our own interests” and will not risk punishment by Gazprom for moves that violate Slovakia’s own deals with the Russian energy giant.

Slovakia depends on Gazprom for around 60 percent of its gas supplies and worries that upsetting the Russian company would lead to higher prices for itself or even cuts in supplies.

Alexander Medvedev, the head of Gazprom’s export arm, said he had no problem in principle with reverse-flow supplies to Ukraine but said such arrangements “require the agreement of all parties involved,” including Gazprom.

“Normally, you can’t arrange a physical reverse flow without a new pipeline,” he added, indicating Gazprom’s opposition to the use of existing Slovak pipelines.

Watching over workers in Chaslovtsy as they laid new underground pipes, Ivan Shayuk, a Ukrainian engineer for Ukrtransgaz, shook his head when asked why the scheme was taking so long.

“What is the problem? The problem is simple — Putin,” he said.