EU Ups the Ante, Offers To Upgrade Ukrainian Gas Transit System, Dismisses Russian South Stream

[This is a repost, since the original article disappeared, somehow.  I hope it is almost equal to the original.--Peter]

[EU negotiators are continuing to play their cards in a very calculated, shrewd manner, emulating their gambling American benefactors by seeming to "bet the house" on their latest hand.  The EU offer to modernize the leaky Ukrainian pipeline system is intended to give the impression that South Stream is just a Russian bluff.  Just days ago, European energy giant BP proposed a new southern pipeline from the Azeri gas fields to Turkey and onward.  The EU's diplomatic blitz to push trough plans for the the Turkmenistan-Azeribaijan Pipeline (TAP) as a means to obtain Turkmen gas, despite Iranian and Russian roadblocks to Caspian delimitation, is a major bluff in itself.  The entire pipeline war scheme could be put into question if Polish shale gas explorations (SEE:  Exxon to Proceed with Hydraulic Fracturing in Poland) prove to be as extensive as preliminary tests indicate, or if the massive Israeli Leviathan gas find, or any new finds around Cyprus or Turkey, become destined for Europe.]

EU assures Ukraine of key gas shipping role for years to come

Kiev (Platts)–30Sep2011/519 am EDT/919 GMT

The European Union assured Ukraine on Thursday that it will continue to be the main transit route for Russian natural gas supplies to Europe, and agreed to disburse $308 million to upgrade its gas pipeline system.

EU energy commissioner Gunther Oettinger late Thursday met Ukrainian Energy and Coal Industry Minister Yuriy Boyko to discuss the plans, and said the money will be disbursed to make sure modernization of the system begins in 2012.

Ukraine will continue to be the most important country for transit of Russian gas to the European Union, Oettinger said at a joint press conference with Boyko late Thursday.

Oettinger said the money will be discussed in detail next week at a meeting involving officials of the World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank.

The comment comes less than two weeks after Prime Minister Mykola Azarov warned the EU and Russia that Ukraine may start dismantling its gas pipeline system if Russia keeps building bypassing pipelines.

Azarov, who was reacting to the launch of Nord Stream, a pipeline linking Germany and Russia via the Baltic Sea, said the EU and Russia must let Ukraine know if they still need the Ukrainian system.

Nord Stream, which is currently being filled with gas, will be able to ship up to 28 Bcm/year of gas from Yuzhnorusskoye gas field in Yamal region of Russia.

KEY SHIPPER

Ukraine operates one of the world’s largest natural gas transportation systems and is responsible for shipments of 110 Bcm of gas annually, or up to 80% of Russia’s Europe-bound gas supplies.

Ukraine earns about $2.7 billion annually from rendering gas transportation services to Gazprom of Russia, but those earnings would come under threat if Russia continues to build bypassing pipelines.

One such planned pipeline is South Stream, a pipeline that would link Russia and Bulgaria via the Black Sea. The pipeline’s construction hasn’t yet been started, but Ukraine fears the project, if completed, would undermine its role as a gas shipper.

Oettinger argued that Ukraine will continue to play the major role as a gas shipper even with the launch of Nord Stream because the EU’s gas demand is expected to increase.

He said the EU’s annual demand for gas is expected to increase to about 600 Bcm/year within years, up from about 500 Bcm/year currently, and that will be enough to keep the Ukrainian gas pipelines busy.

Yuriy Korolchuk, a senior analyst at the Kiev-based independent Energy Research Institute, agreed that Ukraine will continue to play the key role as the gas shipper.

“Ukraine will continue to be the main transit nation for Russian gas to the EU for a long time to come,” Korolchuk said.

Russia is expected to deliver 155 Bcm of gas to Europe in 2011, of which 110 Bcm will be shipped via Ukraine, Korolchuk said.

Korolchuk estimated that Europe’s gas demand is expected to increase to up to 700 Bcm/year by 2020, up from 530 Bcm/year in 2010.

–Alexander Bor, newsdesk@platts.com

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