Ukraine - Europe's natural gas hub

For years Ukraine's image has been tarnished with the adage - gas swindler, unreliable and insecure transit  partner, amplified by Gazprom and Kremlin propaganda. Calls and plans to bypass it against such background seemed an almost legitimate pursuit. 

This perception has been widely shared by a number of European leaders that helped generate used an almost automatic sympathy for Russia's energy projects bypassing Ukraine. 

I have always preached that ultimately it is not the politicians but consumers and the market that decide where gas flows and when projects happen. Yet the gravity of geopolitics seemed to omnipresent to ignore in the Ukranian saga. 

In this game of geopolitical circumvention and outwitting, that Bulgarians seemed trapped into. Yet we were missing the most natural and logical outcome from the tug war over possible rerouting of Russian gas - the "Streams" of Gazprom. Ukraine could become Europe's natural gas hub for Russian gas, notably if and when EU companies, possibly with Russian partners, take operational and management control over Ukraine's gas transit system and the storage capacity. They do not need asset ownership just control to secure free and uninterrupted gas flows. 

Then the next logical step could naturally follow - Russian gas destined to Europe via Ukraine could be bought and traded at Russian-Ukrainian border. Henceforth not only Gazprom, but independent gas producers in Russia could benefit and solve Gazprom perceived transit risk in Ukraine. 

EU buyers and Ukrainian international TSO could then take care of follow on transit or use of the gas storage volumes and payments needed to meet peak demand in winter. Ukraine's developed gas transit system and storage facilities are unmatched in Europe. Their replacement or circumventing will cost tens of billions of dollars to EU consumers. It will also make Russian gas shipped over already great distances uncompetitive to alternatives. Russia will loose market share unless and until it lets independents compete on the EU gas market and take niches left in the geopolitical power play that Gazprom is currently giving up.

Such considerations are becoming more relevant and timely with regard to the ongoing exchange of threats and strong verbiage between UkrTransGas and Gazprom on who needs to pay for the usual buffer gas stock - some 12 billion cubic meters in Ukrainian gas storage needed to secure peak demand and smooth transit of Russian gas in winter.

Emotions run high after the interconnection agreement signed between the Ukrainian and Hungarian TSOs at the beginning of this week. Following it the Ukrainians submitted a request asking Gazprom Export to share the shipping codes of all gas deliveries through the transit system of Ukraine. Under the current contract the Ukrainian TSO transfers title of gas at the Western border back to Gazrprom Export and thereafter it is passes on to the respective TSOs in Slovakia, Hungary and Romania.  

The Ukrainian TSO has no idea on the end user as it is deliberately kept in the dark on the specific shipper codes that identify buyers. The details of this scheme are explained at length by Kommersant Daily in an article of last week, that sheds light on the upcoming crucial decisions of the EU Energy Union with regard to its role and involvement with Ukraine's transit system. A hands on approach is the better option when it comes to mitigation of transit risk through Ukraine and far better and economically sensible when compared with the billions the EU would have to spent to connect to Gazprom's bypass projects half way in Turkey. 

Turning Ukraine into Europe's major Eastern Gas hub will lease new life and meaning to the the EU Energy Union as it will naturally resolve the perceived challenge of single pricing for Gazprom gas and the must of common contracts. The price will be market referenced to a perfectly legitimate border benchmark at the Russian-Ukrainian transfer point. To consumers the cost thereafter will be a transparent blend of hub price plus legitimate transportation costs.

There is little doubt that this side of the story is just a fragment in the larger topic of virtual reverse gas, that once made possible will substantially boost liquidity and balancing capacities in East European gas market. Such an exit from the current impasse will be further influenced by the concurrent procedures in the anti-trust investigation against Gazprom by the European Commission and the precedents set by a number of arbitration cases against the Russian gas monopoly in EU courts.

The case for Ukraine as the natural gas hub of Europe in the East is transpiring. This will in no way compromise the aspirations of individual countries to host essential transit or storage projects. After all this is the logic behind gas hubs' reason to exist - they are not vertical hierarchical systems, but complex integrated networks. Greater interconnectivity enhances the options for each player in the respective national gas markets.

 The gas interconnection agreement signed last week between EU countries signals the entry of the gas game over Ukraine in the endspiel phase. Circumventing Ukraine might prove far more difficult than using it to do what it has done well for decades - safely transiting and storing gas.