Ukrtransgaz signs interconnection agreement with Hungarian gas transmission system operator FGSZ

Ukraine’s gas transmission system operator (TSO) Ukrtransgaz and its Hungarian counterpart FGSZ have signed an interconnection agreement governing both directions of natural gas flows on the interconnector across the Ukraine-Hungary border.

Ukraine’s gas transmission system operator (TSO) Ukrtransgaz and its Hungarian counterpart FGSZ have signed an interconnection agreement governing both directions of natural gas flows on the interconnector across the Ukraine-Hungary border.

The agreement applies to all pipelines crossing the border between the countries and is fully consistent with European Union’s 3rd Energy Package. This is the first agreement of this kind between Ukrtransgaz and a neighboring European TSO. The European Commission believes this agreement will serve as a model for other agreements on interconnections between EU operators and Ukrtransgaz.

Interconnector capacity in the direction of Hungary stands at 26 billion cubic meters per year. Interconnector capacity in the direction of Ukraine equals 6.1 billion cubic meters per year.

The agreement is the first step towards establishment of full cooperation with operators of neighboring gas transmission systems

Ukrtransgaz cannot currently fully cooperate with neighboring European TSOs because of their current arrangements with Gazprom. This situation is rooted in Soviet-era practices and does not meet the current legislation of the Energy Community, of which Ukraine is a member.

In particular, Gazprom provides neither Naftogaz nor Ukrtransgaz with shipping code pairs, or information about specific batches of gas, which are being transported through Ukrainian territory. At the gas metering stations on the western border of Ukraine all volumes of gas are transferred to Gazprom Export, a subsidiary of Gazprom. After that Gazprom Export transfers this gas to TSOs of neighboring EU member-states, disclosing the shipping code pairs to them.

Thus, Gazprom has taken on a number of important TSO functions, which is a violation of European energy legislation, as this situation creates artificial limitations for full cooperation between TSOs of neighboring countries on the territory of the Energy Community.

Interconnection agreements are the only legal basis for cooperation between operators of adjacent TSOs in Energy Community member countries. Such agreements provide the basis for exchange of information on gas flows, directions, volumes, times, customers, and recipients. Without such an agreement, exchange of information is not possible.

Thus, Hungary has become the first country in the European Union to eliminate this barrier to comprehensive integration of the Ukrainian gas transport system in the European gas market.

Work is in continuing on concluding similar agreements between Ukrtransgaz and Slovak, Polish and Romanian TSOs.

Full cooperation between Ukrainian and EU operators will eliminate infrastructure constraints on gas import volumes from the EU and will open the Ukrainian gas transportation system to European consumers

Naftogaz CEO Andriy Kobolyev commented: "Full cooperation with European TSOs is an important condition for Ukraine to be able to import sufficient gas volumes from Europe. The huge potential value to European companies from utilizing the spare capacity of Ukraine’s gas transportation system and underground storages also depends on full cooperation between Ukrainian TSO and its EU counterparts. Achieving this is a challenging task, but we keep progressing. We would like to thank the European Commission, the Energy Community Secretariat and our partners in European gas industry for their support and commitment to resolving this issue.”

Such cooperation between TSOs includes, in particular, virtual natural gas substitution (known as “backhaul”). These operations are performed automatically by TSOs in the EU, thus eliminating the needless investment in physical expansion of gas transmission facilities. This common EU practice allows for the most efficient use of the available gas transmission infrastructure, making the gas market more competitive, which ultimately leads to the most favorable conditions for natural gas consumers.

The signing of the agreement is the result of a lengthy preparatory process

Naftogaz in April 2014 asked the European Commission to help bring Ukrtransgaz’ relations with neighboring TSOs in line with relevant energy legislation. Since that, certain intermediate milestones have been achieved making the signing of the agreement with FGSZ possible.

In particular, last September, at a ministerial meeting of member countries of the Energy Community in Kyiv, an official explanation was adopted according to which the energy legislation applying to the relations between EU member states should also apply to interconnectors between the EU and Ukraine. After that, a series of meetings, consultations and negotiations at different levels were held to develop this landmark interconnection agreement.

Steps to ensure full cooperation between the GTS operators of Ukraine and the EU: obtaining information from Gazprom and changes in Ukrainian legislation

The signing of interconnection agreements with European operators is a necessary step to bring Ukraine-EU energy relations into conformity with European legislation. Gazprom must provide information to Ukrtransgaz about gas flows through Ukraine to Europe (shipping code pairs) to enable comprehensive cooperation between neighboring TSOs.

Naftogaz CEO Andriy Kobolyev commented: "We hope that Gazprom will fulfill the requirements of European legislation and start providing shipping code pairs. For the case this does not happen, we are considering the possibility of filing a formal complaint with the European Commission's Directorate-General for Competition, which is already conducting an antitrust investigation against Gazprom."
The second condition to enable full-scale cooperation, including backhaul, between Ukraine and the EU is making certain amendments to Ukrainian legislation. The signing of the interconnection agreement between Ukrtransgaz and FGSZ opens way for an approval by the Cabinet of Ministers and Parliament of Ukraine of relevant legislative initiatives which have already been prepared by Naftogaz for their review.

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