Ukraine's Naftogaz may be “forced to adapt” to current challenging market conditions and “to react to competitive pressure by reviewing its transit fee strategy, potentially even reducing its transit fees” the Oxford Institute for Energy Studies argued.
In a recently published paper senior research fellow Thierry Bros said that “given there appears to be no realistic chance left for increased transit revenue, Ukraine’s choices appear limited if it wants to retain part of the $1bn/y transit fee that does remain.”
Last month, Naftogaz potentially lost $700m/year from the $1.7 bn transit revenue it received in 2015 from Gazprom for transiting 64.1 bcm, he explained.
With the intergovernmental agreement signed on 12 October 2016 between Russia and Turkey, the 17 bcm/y currently transiting Ukraine for Turkey could well disappear from 2020, he said, adding that furthermore, following the recent EU Commission deal on OPAL “an additional 10 bcm/y bound for Europe could disappear even sooner, giving rise to the possibility that transit volumes through Ukraine could be as low as 37 bcm/y post 2020.”
Moreover, on 10 November this year, the Polish gas monopoly PGNiG asked that the European Commission publish the text of its decision on OPAL. “However, until the European Commission has done so, the state-owned company cannot take any legal steps against it, and, as a result the rerouting of gas via Nord Stream will increase its load factor and profitability, and could also improve the business case for Nord Stream.”
In addition, “the OPAL decision also raises the question of continued EU support for Ukraine, even as the latter continues to fight both militarily and politically with Russia” Bros said.
“It must now at least be an open question as to whether the European Commission will feel able to continue its support of Ukraine, at a time when European citizens have other priorities (employment, migration) and European companies continue to prefer to deal with Russia, as it is the largest oil and gas resource holder in the world and the largest seller of hydrocarbons to Europe.”
In addition, EU sanctions in response to Russia’s actions in the east of Ukraine and Crimea, introduced on 31 July 2014 and prolonged until 31 January 2017 “could be more difficult to renew in future, as evidenced by the Italian prime minister preventing the European Council from publishing a call for sanctions against Russia on 20-21 October 2016” the paper explained.
On top of that, the recent election of Donald Trump in the US also “gives rise to uncertainty for Ukraine going forward” it added.
In light of all these issues “the transit of Russian gas through Ukraine stands out as an extra political and commercial stumbling block” Bros said, adding that “lowering the current transit fee could therefore be a sensible move” Bros suggested.
This way, “Naftogaz could make Nord Stream 2 financially less attractive by reducing the price of its own transit,” he argued.
“In contrast by hiking the tariff now, Ukraine is sending the opposite message to stakeholders, who have no reason to assume that Naftogaz will fulfil its pledge to reduce prices later, especially as by then it may be purchasing no gas from Russia and will therefore have a much stronger bargaining position than in the past, when it was reliant on imports from Gazprom” Bros concluded.