Gazprom’s position is breaching EU law

Interview with Andriy Kobolyev, CEO Naftogaz.
December 21, 2014, Energie pre Vas Portal, Slovakia

Interview with Andriy Kobolyev, CEO Naftogaz.
December 21, 2014, Energie pre Vas Portal, Slovakia

Times are changing in Ukraine and Naftogaz, its oil and gas giant. Central European Energy Conference 2014 hosted in Bratislava a very special guest – for the first time, CEO of Naftogaz accepted the invitation and participated in its panels. Energy analyst Jozef Badida seized the opportunity and discussed with Mr. Andriy Kobolyev challenging issues such as the Slovak-Ukrainian gas interconnector, contract and relationship with Gazprom or alleged disappearance of Russian gas from Ukrainian underground storages. Mr. Kobolyev was quite open. It seems that transparency and market principles become the key components of their transformation.

During CEEC 2014 you emphasised a large reverse flow to Ukraine once again. What is behind this idea?
Firstly, it is not correct to call it a reverse flow. The correct name of this idea is backhaul as it is called in the gas industry. The idea requires a signed interconnection agreement between Eustream and Ukrtransgas. That doesn’t mean that Gazprom contract which they signed to book capacity will suffer or Gazprom will not be able to transport gas. This idea will allow Ukraine and Slovakia to optimise gas flow without being blocked by Gazprom. Take the example of a European company willing to send its gas from Slovakia to Ukraine in a volume, letґs say, 50 mcm per day. At the same time, there is Gazprom sending 100 mcm of gas through Ukraine to Europe. In a normal life, and that is what Eustream is doing at its Western borders, you will do just simple netting, sending just the resulting balance across the border. And everyone is happy.

We speak about virtual reverse flow.
Yes, indeed. Gazprom receives its full volume of gas in Slovakia for further transportation to its EU clients while the European company is able to deliver gas to Ukraine. Nobody is affected in a negative way. What will be modified is that Gazprom will not be able to block such flow. At the moment they are trying to block the flow from Europe to Ukraine which is against any market principle and legislation, such as the 3rd Energy Package and anti-monopoly law of the EU.

So the main problem is missing interconnection agreement between Eustream and Ukrtransgas and Gazprom playing role of intermediary, right?
Well, the role of Gazprom is very specific. It plays a role of matching partner what is definitely against the EU law. Gazprom as a shipper, under the European legislation, cannot be a matching partner. That is prohibited. So what we are trying to achieve is to make sure that Eustream and Uktransgas are matching partners. In that case, a virtual flow will be available for both sides, not only for the Ukrainian side but also for Eustream. This will allow a free flow of gas in both directions.

How is then possible that Gazprom is in this position, as you said, not complying with EU law?
We believe there are still old arrangements between Eustream and Gazprom which need to be brought in line with the current directives and regulations. From our side, we, as Ukraine, are prepared to change our contract with Gazprom in that respect as needed.

So you have the transit contract with Russians which gives Gazprom the privilege to be a matching partner, right?
No, we didn’t give this right to Gazprom. For us, changing this contract is much easier. Actually, our analysis shows that it is quite an easy task. The key idea is the preparedness of Eustream to change its contract with Gazprom. And yes, Gazprom will not like it.

So how can we do it? As you mentioned, Gazprom would be quite reluctant.
Indeed, but there is the principle of rule of law. If there is legislation which clearly says that interconnection agreement should be signed by gas transmission system operators only then this is something that needs to be done. There are many cases in Western Europe when interconnectors were blocked by shippers who loved to enjoy a dominant position, and European Commission was requiring those agreements to be changed. And all contracts were changed. If it is against the law then it must not be in place.

Slovakia is the EU Member State for the last 10 years and our contract with Gazprom is still valid. It means that it is not breaching EU law.
No, it is against EU law. We are in permanent discussion with European Commission. If you look at the implementation of the 3rd Energy Package, it is going from the Western to Eastern European countries. So slowly, bit by bit, these changes are being implemented at different interconnectors. It is a matter of time. So people understand it is against EU law but there should be some efforts on Slovak side and the side of European Commission to implement the changes.

How would you like to motivate Slovakia to do it?
We believe the principle of European solidarity should be applied. If there is EU legislation and if Ukraine has joined the Energy Community taking on the obligation to implement the 3rd Energy Package, I don’t know why it should not be done. Unlocking the primary interconnector is beneficial not only for Ukraine but other countries, such as Hungary, Romania, Bulgaria, as well. They can source gas through Ukraine and get access to western European gas and our underground gas storages.
And again, in the interest of Slovakia is proving another very important factor. South Stream is a similar exemption that Gazprom wants Europe to accept. So Gazprom is bluntly saying “we don’t care about the 3rd Energy Package, we believe it is not right, we need to build South Stream, this is the way we do business. And you, Europe, should go along with this.” If Slovakia doesn’t allow any exemptions on its territory, you have the right to expect other countries not to allow any exemptions on their territory.

Look at Nord Stream, there is a partial 50% exemption on capacity utilisation of connecting pipeline OPAL.
It is a very good example. We believe exemptions should not be granted. Now large international companies which are supplying gas to Ukraine through Nord Stream are being cut by Gazprom. We know there are several cases of Gazprom reducing supply to those countries even through Nord Stream. This proves the following things. First point – the problem is not the route but the supplier. The Nord Stream route is fully controlled by Gazprom but there is still an unexplained reduction of supply, the nominations are not covered. Why? Secondly, if the problem is the supplier then the same problem can occur with the South Stream. This is an arrangement Europe should not allow.

Alright, but Ukraine currently imports around 1 bcm of gas per month from EU. How is it possible if your suppliers are cut by Gazprom?
That is because Gazprom is not the only supplier to Europe. It is the fact Gazprom doesn’t want to realize. Due to the 2009 gas crisis and Russia’s recent actions, European companies and customers have created other sources of supply to replace Gazprom. The best examples are the LNG terminals. Those companies are not anymore dependent on Gazprom to the extent they were dependent on it two or five years ago. Moreover, they respect contracts, not political ideas, and they are supplying us.

Do you have many suppliers? Is there already competition of gas deliveries?
There are many gas suppliers and we are selecting the best in terms of conditions. Companies come to us, they make offers and we are able to choose those suggesting the best price. One of the facts we wanted to prove, and we believe we have already proved it, is the following - there is enough free gas in Europe which can be supplied to anyone. That happened due to the implementation of the 3rd Energy Package mostly in the Northern European countries.

It seems that you are trying to change a historical system of gas deliveries to Ukraine.
No, we are not doing that. We are just trying to implement the measures which have already been implemented in Northern Europe. If you look at Germany or the Netherlands and the way how markets are functioning there, they have created an efficient market. And they have done it in a simple way. They have removed the monopoly position of incumbent companies, not just Gazprom. By doing that they managed to achieve an efficient market. What we are suggesting to the Slovaks, Hungarians, Poles and Czechs is to create an efficient market here, in this region. And it is quite easy. You don’t have to adopt new legislation – just implement the existing one which has already proven to be efficient. As a result, you will unlock a huge market potential. That will be for the benefit of everyone, not only Ukraine. Speaking simply of Slovakia, the more gas is transported through your country, the more money Eustream will make.

They might lose Gazprom as a client.
No, they might not. Why would they lose Gazprom?

At the moment Gazprom is rerouting its gas deliveries to Europe, mostly using Nord Stream. They don’t send their gas through the Slovak-Ukrainian gas corridor so much.
Yes, that is true. But firstly, there is the ship-or-pay condition in Gazprom’s contracts with European TSOs. Using other routes affects their costs. Secondly, if the Russians see a unified, determined position of the European countries they will change their tactic. They will play by the rules. They will not be able to discriminate European consumers anymore. This is a bluff that needs to be called. The old days for Gazprom are over. Gas prices are declining. Oil prices are falling. New suppliers are reaching European market. Gazprom needs to fight for its market share. If they stick to their current strategy, their market share in Europe will soon become very small. This is something you canґt tolerate for long. You can pretend you don’t care, but in reality you canґt afford it.

Do you think that the backhaul to Ukraine is a main condition in creating this regional market?
We believe it is one of the key elements which are missing. Firstly, European companies will get access to the largest market in this part of the world. Secondly, they will get access to the largest underground gas storage. And thirdly, you will connect Balkan countries, Hungary, Romania, and Bulgaria with the western European markets in a very efficient manner. You see it is not just about Ukraine. We believe some work should be done in other countries, too. There should be the extension of pipeline capacity in Poland and Lithuania to cover their LNG capacities. Therefore countries like, for example, Slovakia or Ukraine, can get access to LNG.

Yes, but LNG is more expensive than piped gas.
Well, the price of LNG is fluctuating. Now, it is going down and at some point of time LNG will be competitive. For instance, the LNG price for Baltic States is not worse than the price recently offered by Gazprom to these countries. In the end, in order to get lower price from any supplier, it doesn’t matter whether it is called Gazprom or E.ON, you have to show that you have the alternative. Until that time, any supplier will be seduced to charge you a higher price. If there is competition, the price will be lower. If you look at the global LNG picture, you will see that Japan will likely decrease its LNG consumption because they are re-launching their nuclear power plants. The USA is trying to increase the export of LNG. So in two or three years I expect significantly lower LNG prices. But even now, the LNG price is competitive in some countries, for example in Spain. In conclusion, the more alternatives you have, the more efficient your market is. That is what we need to create here – an efficient market. Our idea is that the Eastern European countries should create a joint and efficient gas market. And the more liquid this market is, the fairer the price we all are going to get.

Indeed there is a huge potential but also uncertainty with regard to the situation in Ukraine. There are probably not many companies willing to invest in the Ukrainian gas sector. They are simply afraid.
Why would you need to invest? You just need to trade gas. There are many companies now willing to trade with Ukraine. If you look at the open season which was run by Eustream there had been many companies willing to supply gas to Ukrainian consumers and some of them have actually won a part of the capacity and are currently supplying.

Alright, at the end I would like to ask you for two explanations. Does Ukraine really need full underground gas storages in order to ensure a stable gas flow to Europe?
That is not true. Our transit flow doesn’t depend on the UGS because we take gas from the East and then bring it to the West. Gas flows directly through Ukraine and there is no connection with the UGS. That is a misconception. However, Gazprom is not able to cover peak demands in Europe immediately because it takes 36 hours to transport gas from the Eastern to Western borders of Ukraine. So to cover this peak consumption they need to use our underground gas storages.

And is it true that some Russian gas suddenly disappeared from Ukrainian UGS at the end of 2013?
There was no Russian gas in Ukrainian UGS in 2013. Actually, the last Russian gas stored in our UGS was in 2005. There was a dispute between several companies about certain volumes of gas. And one of them was RosUkrEnergo, a Swiss company with a notorious reputation in Ukraine. But it has nothing to do with any disappearing of gas whatsoever.
We realise that following a decade of constant bickering between Ukraine and Russia over gas there is an issue of trust to us and our system in the EU. The Russians have made up too many fake stories that Ukraine did not refute in time. That is why raising transparency was among the first items on my agenda when I took over in Naftogaz this spring. In May, we have started publishing balances in our underground storages at GIE transparency platform transparency.gie.eu. This autumn, we have started providing information on gas inflows and outflows in our system at ENTSOG website transparency.entsog.eu. We have made numerous requests the EU to send its envoys to gas metering stations to monitor the inflows and outflows of gas in Ukraine. I hope this and our other actions will help to rebuild trust.
We want to start providing gas storage services to several European companies, and we are currently negotiating conditions of that. And I believe we will be successful.

Thank you, Mr. Kobolyev.

The interview was done by Jozef Badida, an energy analyst of website epv.sk


Andriy Kobolyev
has over eight years of experience in the oil and gas sector in Ukraine.
 Prior to his appointment as CEO of Naftogaz of Ukraine, Andriy was an adviser at the AYA Capital private investment and banking group and a management consultant at PwC. Andriy worked for Naftogaz of Ukraine between 2002 and 2010, where he started his career as a specialist in the Economy and Price Policy Department. In 2006-2007, he occupied the position of director of the Department for Corporate Finance and Price Policy and in 2008-2010 he was an adviser to the chairman. In these roles he took part in numerous negotiations with Russia's gas monopoly Gazprom.
 In 2000, he graduated from the International Relations Institute at Kyiv National Shevchenko University with a Masters in International Economic Relations.

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