Naftogaz of Ukraine estimates that delivery of Russian gas to the EU via the Direct Stream (the traditional route across Ukraine) will be several times more cost effective in 2020 than via the planned Nord Stream 2 pipeline.
If the capacity is booked at the present level of 110 bcm the delivery via this route will be 4 times cheaper than via the Nord Stream 2. At 70 bcm of booked capacity, transit costs are expected to be 3 times lower compared to the Nord Stream 2 option.
Effect of accelerated amortization on the transmission tariff
Since 2014, the Russian officials have repeatedly announced their intention to discontinue gas transit across Ukraine starting from 2020. Gazprom conducts activities aimed at creating a redundant pipeline to circumvent the conventional route. Naftogaz, in its turn, continues to diligently maintain the 110 bcm/year transmission capacity stipulated by the contract with Gazprom.
This situation forced the Ukrainian regulator to include accelerated amortization into the transmission tariff which led to more than doubling of the transmission cost to Gazprom in 2016-2019.
Starting from 2020, since the transit part of the infrastructure will be already fully depreciated, the transmission charges will drastically decrease. This will make the Direct Stream the most competitive way to deliver Russian gas to the EU.
Nord Stream 2 viability concerns
Taking into account that Russian gas currently delivered via Ukraine is destined primarily for consumers in the CEE, Southern Europe and Turkey, the Direct Stream is also the shortest of the routes.
Importantly, since this route has been serving these countries for dozens of years, sufficient transmission infrastructure exists within the EU to carry the gas to the ultimate consumers.
An attempt to deliver gas to these consumers via the Northern Germany will face severe internal capacity constraints and will result in disruptions of gas supply. A number of countries are not physically connected to the German grid within the EU and can only receive gas via Ukraine.
“Considering the ongoing arbitration proceedings in Stockholm, we are concerned with Gazprom's intentions to spend its scarce resources on economically unjustified projects. Naftogaz supports the establishment of fair, transparent, and competitive environment in the European gas market”, commented Yuriy Vitrenko, Group Chief Commercial Officer of Naftogaz.