Russia seen needing Ukraine's gas pipelines to Europe after 2019

Moscow-based Gazprom PJSC will need Ukraine’s gas system, a key route for supplies of Siberian fuel to Europe, well beyond 2019 when the existing transit agreement expires, said Andriy Kobolyev, CEO of NJSC Naftogaz of Ukraine. The two sides have a strained relationship, with Gazprom seeking to end the current accord early after losing a multi-billion-dollar arbitration case to its Kiev-based counterpart.

How to arrange Russian gas flows to Europe via Ukraine will be among the key topics in talks between the two companies later this month in Europe, according to Kobolyev. Other issues include the payment schedule of the $2.6 billion Naftogaz won in the arbitration.

The remarks come at a time of soured relations between Europe and Russia, which supplies a third of the region’s gas. The political standoff over the poisoning of a former spy and his daughter in the UK has led to Prime Minister Theresa May calling for alternatives to Russian fuel.

“Gazprom will not be able to cope without the Ukrainian gas transportation system after 2019, so they will need to sign a new contract with us,” Kobolyev said in an interview in London.

Gazprom declined to comment. Earlier this week, Russian Energy Minister Alexander Novak said his country doesn’t reject cooperation with Ukraine on gas shipments but seeks “competitive” terms.

Russia has a history of disputes with Ukraine on gas and is seeking to further reduce its dependence on its neighbor for transport to Europe, including by expanding the Nord Stream pipeline under the Baltic Sea directly to Germany. Ukraine, which earns about $2 billion of transit revenue from Russian gas passing through its territory, is seeking support from allies including Poland and the U.S. to stop the new link.

Gazprom plans to start Nord Stream 2 late in 2019. Even if it starts building the link now, it won’t be able to finish by the end of 2019, Kobolyev said. And Europe would lose out as it doesn’t add to the diversity of supplies to the region, he said.

Russia is using gas as a political tool, Kobolyev said.

“Russia is totally unwilling to separate gas and politics -- from their perspective it’s the same and gas plays a very important instrument in achieving a wider geopolitical agenda,” he said in a Bloomberg Television interview earlier Wednesday.

Russia is meanwhile boosting its shipments to the continent to record volumes, taking advantage of a recent cold snap that sent prices to record levels. As it plans other pipelines including TurkStream across Turkey, it may not be able to reroute sufficient gas outside Ukraine.

“Even with these various projects Gazprom is still nowhere near being able to replace all of the 80 Bcm a year or so of flows that currently go through Ukraine,” Energy Aspects Ltd., a London-based consultant, said in an emailed note dated March 16. “So the threat to cancel the transit contracts should be seen as gaining leverage to renegotiate a more favorable transit deal.”