March 7, 2018
Responding to Russia: Time to Back Backhaul
By John Roberts
Gazprom’s response to what it saw as an adverse February 28 ruling by an arbitration court in Stockholm, effectively ordering the Russian gas giant to pay $2.64 billion to Ukraine’s national gas company, Naftogaz, was unexpected. Not only did Gazprom cut off its limited direct supply of gas to Ukraine—gas that Ukraine already paid for—on March 1, but Gazprom Chairman Alexei Miller stated the following day that supplies transiting through Ukraine to customers in central Europe were also being terminated.
“Gazprom had to immediately start the procedure of the termination of the contracts with Naftogaz on gas supplies and transit at the Stockholm arbitration court,” Miller said.
However, the Gazprom chief’s statement was not wholly accurate.
While Gazprom did stop its supply of some 18 million cubic meters a day (mcm/d) a day to Ukraine, the Russian giant does not appear to have actually halted gas deliveries to customers beyond Ukraine. On the Ukrainian side, Naftogaz reported that transit operations from the first to the third of March were running as normal, at a daily rate of around 264 mcm/d.
On the Russian side, an Energy Ministry spokesperson told TASS that Russian Energy Minister Alexander Novak had assured European Commission Vice President Maros Sefcovic in a phone call “that no threat exists to supplies of Russian gas to Europe” and that “transit remains as reliable as in the past." The spokesperson added, "Until the contracts between Gazprom and Naftogaz are terminated in court, there is no risk to transit of gas via Ukraine.”
But Gazprom appears to be laying the groundwork for a precipitate end to transit across Ukraine, which was previously expected to terminate when the current contracts expire in 2020. In the week running up to the February Stockholm arbitration decision, Gazprom increased supplies to European customers through other pipelines, so that total deliveries to European customers (excluding Ukraine) were roughly 30 percent above 2017 average daily levels.
This demonstrates that Gazprom can deliver the total volumes required to serve its European customer base without transiting Ukraine, even if it does not address how to get gas to specific customers, notably in central and southern Europe.
Gazprom’s actions raise extraordinarily serious energy security concerns for consumers in the rest of Europe, as well as in Ukraine. Fortunately, unlike the gas crises of 2006, 2009, and 2014, there was no immediate danger of a supply shortage, since even the Ukrainians managed to find a way to keep going, thanks to cutbacks at home and increased supplies from Poland.
More worryingly, Gazprom’s unilateral actions demonstrate that it is not prepared to honor agreements and obligations. This alone deals a serious blow to the concept that Gazprom’s gas deliveries to European customers are commercial arrangements undertaken by a company that may play a tough game but is nonetheless abiding by the rules.
This behavior is not new. A recent Ukrainian statement noted that “during the past five years, Ukrtransgas (the Ukrainian gas transit authority) repeatedly reports on continuous violations of the transit contract by Gazprom.” A long-standing Ukrainian complaint, reiterated amid the Stockholm judgment, is that Gazprom is routinely delivering gas at entry into the Ukrainian transit system at a pressure roughly 20 percent below the contracted level, forcing extra costs on Ukraine to ensure delivery levels on departure are at the proper pressure.
By unilaterally abrogating its supply agreement and initially threatening to abrogate its transit arrangements with Ukraine, Gazprom is publicly acknowledging that it can only be expected to honor its obligations if it either lays down the delivery rules itself or the purchaser of its gas wields sufficient clout to ensure Gazprom honors its obligations.
From a consumer perspective, there is a silver lining. Now that Gazprom has made its intentions clear, serious consideration can be given to the prospect that gas infrastructure developed by the Soviet Union to connect to customers in a swathe of Europe from the Balkans to Austria will soon become idle.
To put it another way, those pipes, notably the Brotherhood system and the Trans Balkan Pipeline, can be used for reverse flows. Instead of carrying Russian gas to southern and western Europe, this infrastructure can be used to deliver gas to these markets from a variety of suppliers, including piped gas from Azerbaijan and liquefied gas from the United States.
Ironically, reverse flow along the biggest of these lines, the Brotherhood system, could be used to carry Russian gas entering the European Union (EU) in Germany or Poland back to Ukraine. In a few years, it could also be used as an export system for Romanian offshore gas reserves in the Black Sea that are currently awaiting development.
Achieving this will require diplomatic finesse. Russia will undoubtedly pressure central European governments—particularly Hungary and the Czech Republic—to oppose this development. But reversing Soviet-era pipelines is not unprecedented. In 2009, an EU-backed program provided for gas to flow from the Czech Republic to Slovakia at Lanzhot, while in 2014, as a response to a previous cutoff of Russian gas supplies to Ukraine, Slovakia rehabilitated and reversed the 14.6 billion cubic meters a year (bcm/y) capacity line between Uzhhorod in Ukraine and Vojany in Slovakia, so that this line now provides Ukraine with the bulk of its routine gas imports. Significantly, when Gazprom complained in 2014 that backhaul—as reverse flow is commonly known—was being introduced on the Uzhhorod-Vojany pipeline to enable 10 bcm/y to flow from Slovakia to Ukraine, the European Commission overrode such protests. Poland and Hungary have also carried out various backhaul projects.
Now that Gazprom has proven an unreliable supplier to Ukraine and a questionable supplier to countries served via Ukraine, the European Union must put in place the kind of insurance policy that can be provided by ensuring reverse flow capability on the Brotherhood Line to western Europe and the Trans Balkan line through Moldova, Romania, and Bulgaria to Turkey.
This would have had to be addressed in late 2019 or early 2020, since Gazprom has signaled its intention to abandon transit through Ukraine for years. By addressing the issue now, the European Union, and the complementary association of member and non-member states in southern Europe known as the Energy Community, can achieve several objectives.
They can rapidly improve European energy security without having to focus on the construction of wholly new lines. Existing projects, such as the BRUA system under development to enable 4.4 bcm/y of gas to flow between Bulgaria, Romania, Hungary, and Austria can—and should—proceed. But with the Trans-Balkan system capable of carrying at least 15 bcm/y and the Brotherhood system over 100 bcm/y, there would be no need for the development of massive new trunklines favored by Slovakia, Hungary, and Serbia, who like the idea of vast projects but have a limited ability to pay for them.
Gazprom has thus given the European Commission cause to dramatically reduce the costs of providing energy. It would be foolish not to take advantage of Russia’s mistake in once again opting to use gas as a weapon.
John Roberts is a nonresident senior fellow at the Atlantic Council Global Energy Center.