Nord Stream threat 2: Ukraine and EU neighbors must expand border infrastructure

A road sign directs traffic to the entrance to the Nord Stream 2 landing facility in Lubmin, Germany. (REUTERS / Hannibal Hanschke)

Although eagerly awaited, the sanctions against Russia adopted by the United States in April did not include restrictions on Nord Stream 2. The project, a highly controversial Russian gas corridor designed to divert transit flows from Ukraine to Germany has aroused discontent on both sides of the Atlantic.

US Secretary of State Antony Blinken has described as a geopolitical project intended to weaken Europe, while the European Parliament adopted a resolution calling for it to be stopped immediately.

While it is clear that, at least rhetorically, there is strong opposition to Nord Stream 2, it is less certain that concrete steps are taken to stop it altogether. So far, the delays have worked in Russia’s favor. The Kremlin is continuing to lay pipelines in the Baltic Sea and could complete the project before the end of the year if no new curbs are adopted.

If the pipeline is completed and becomes operational, the prospects for Ukraine and the wider European gas markets will give rise to concern. This is not only for the reasons that have been cited repeatedly, such as the loss of transit income from Ukraine and greater exposure to possible Russian military aggression, but also because of fears about the supply of the domestic market of Ukraine and the ability of European companies to access Ukrainian storage. facilities.

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Since 2015, Ukraine has relied on the reverse flows of Hungary, Poland and Slovakia to cover a third of its domestic demand after Kiev completely halted imports of Russian gas. These volumes were in fact Russian gas transited through Ukraine to the three neighboring countries where, according to EU rules, they changed title and were partially reversed as gas of Hungarian, Slovak or Polish origin. in Ukraine depending on domestic demand.

The quantities were initially physically redirected. Later, as Ukraine’s old transit agreement with Gazprom expired in 2019 and new contracts were signed with the Russian producer and supply-dependent countries, the Ukrainian gas network operator GTSO and its Hungarian and Polish counterparts have agreed to introduce virtual interconnection points to help streamline operations.

This meant that instead of exporting Ukrainian gas to Hungary or Poland and then re-importing physical molecules, the volumes would be deducted so that Ukraine would keep some of the quantities for its own needs and transit the rest to the states. neighbors. There are no similar agreements with neighboring Romania and Slovakia, the latter still physically exporting gas to Ukraine.

If Nord Stream 2 becomes operational and shipments are diverted to this new corridor, Ukraine’s existing arrangements for physical and virtual reverse flows with Hungary and Poland should be reviewed. Virtual reverse flows can only be applied if physical gas is shipped through the pipeline.

Meanwhile, in the case of Hungary and Poland, the available border capacity is interruptible, which means that constant exports to Ukraine may not be guaranteed. In the case of Slovakia, the daily interconnection capacity is firm, allowing Ukraine to access a guaranteed border import capacity of 27 million cubic meters / day. While Ukraine has the ability to import nearly 10 billion cubic meters of gas from Slovakia annually, it cannot rely on a single route to meet domestic demand.

Lack of capacity at the borders can also be a source of problems for European companies, which injected 10 billion cubic meters into Ukrainian storage facilities last year as demand collapsed and EU countries were facing an oversupply. Ukraine has become Europe’s safety valve, with more than 100 EU-based companies able to use its vast underground facilities precisely because they had access to the transport capacity of Hungary, from the Poland and Slovakia to ship gas to the country.

If Nord Stream 2 is completed and transit is diverted from Ukraine, the available border capacity between Ukraine and neighboring EU states could decrease, limiting the possibility for European companies to import and store fuel. gas in Ukraine.

A USAID Report published in March 2021 revealed that Ukraine and Poland could integrate their markets and recommended the establishment of a firm capacity at the border from 2023, when the Russian supply contract for Poland ends. The report noted that subject to investment, the GTSO would be able to withdraw 6 billion cubic meters / year. This would allow Ukraine to access Polish natural gas from either LNG or pipeline.

Ukrainian grid operator GTSO plans to carry out reconstruction works on the Polish cross-border point of Drozdovichi and the Komarno compressor station to allow a firm entry capacity of up to 20.5 mcm / day. This work should be reciprocal on the Polish side to allow two-way business flows and help remove existing congestion. However, the report found that there was no obvious plan from Polish network operator Gaz-System to establish firm capacity at the border with Ukraine.

Ukraine is also in talks with the Hungarian operator of the gas network FGSZ, hoping to establish a firm border capacity this would allow the creation of a corridor connecting the Croat LNG terminal in Krk to Ukraine, but concrete measures have not yet been announced.

Neighboring Romania could provide sufficient border capacity, as the country has no less than five interconnection points with Ukraine. However, the transmission system operator, Transgaz, has so far agreed to sign only one interconnection agreement with GTSO and has delayed making similar arrangements for the other four.

Romania paid the highest price for Russian gas imports into the EU last year and is counting premium market in 2021 when internal production is down and its import capacity is limited. Additional border capacity would work in favor of both countries.

In 2020, ten companies from Hungary, Moldova, Poland and Slovakia injected gas into Ukrainian storage facilities, along with dozens of others registered in the EU. The expansion of border capacities between these countries and Ukraine would bring even more flexibility to the European market while increasing revenues from capacity charges reserved for transport operators.

Working with Ukraine now to expand and secure firm capabilities at the country’s borders with all EU member states, whatever the fate of the Nord Stream 2 project, should be a priority not only for Kiev, but also for Europe as a whole.

Dr Aura Sabadus is an energy journalist who writes on Eastern Europe, Turkey and Ukraine for Independent Commodity Intelligence Services (ICIS), a global provider of information and data in the energy and petrochemicals markets based in London. You can follow her on Twitter @ASabadus.

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