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Fresh Russia-Ukraine Talks On New Gas Transit Deal Inconclusive

Ukrainian Energy Minister Oleksiy Orzhe after gas talks in Brussels on September 19.
Ukrainian Energy Minister Oleksiy Orzhe after gas talks in Brussels on September 19.

With winter approaching, Russia and Ukraine have held a third round of European Union-mediated talks in Brussels about the transit of Russian natural gas to Europe.

Moscow and Kyiv are negotiating a new long-term agreement on gas flows upon which the EU partially relies on, before the current deal expires in January.

After the September 19 meeting, attended by the Ukrainian and Russian energy ministers and the heads of their biggest gas companies, EU Energy Commissioner Maros Sefcovic said that “a certain sense of urgency was really present in the room.”

Sefcovic said the sides had “agreed in principle that the future contract will be based on EU law and on EU rules.”

Agreement must still be found on the duration of the contract, transit volumes, and tariffs, according to the EU official.

At stake is about $3 billion in annual gas transit fees that Ukraine usually gets from Russia for transmitting gas to EU countries.

However, these flows could diminish or stop altogether as Moscow pursues the Nord Stream 2 project to build a pipeline under the Baltic Sea, bypassing Ukraine, that could go online as soon as spring 2020.

Kyiv entered the gas talks in Brussels supporting the EU’s proposal to receive at least 60 billion cubic meters (bcm) of flows a year, or about 75 percent of what Russia sent through Ukraine last year.

The meeting came a day after the Ukrainian government passed a resolution to separate the country’s 38,000-kilometer gas-pipeline network from state-run oil and gas conglomerate Naftogaz.

From January 1, a new state-owned entity will handle gas transit through Ukraine to eliminate possible conflicts of interest and increase transparency on the energy market.

As a member of the EU’s Energy Community, Ukraine is committed to abide by EU energy regulations.

“We have created an independent operator in full compliance with European [Union] legislation,” Ukrainian Prime Minister Oleksiy Honcharuk said on social media on September 18. “This will open up the opportunity to attract investment in the Ukrainian gas transmission system.”

Naftogaz will retain gas storage facilities and a financial interest in the new gas transit operator.

As part of the sale, Nagtogaz will receive installments from the new operator over the next 10-15 years.

Last year, Ukraine’s gas transit operator accounted for 45 percent of Naftogaz’s operating cash flows, or nearly $1 billion. It is connected to pipeline systems in neighboring Russia, Belarus, Slovakia, Poland, Hungary, Romania, and Moldova.

Kyiv also came to Brussels in a better negotiating position having stored nearly 20 bcm of natural gas in preparation for winter.

Kyiv hasn’t bought gas directly from Russia since 2015 after Moscow the previous year sent troops into Ukraine’s Crimean Peninsula and subsequently took it over while backing separatists in eastern Ukraine.

Instead, Ukraine relies on home-produced gas and so-called reverse flows from Europe that is essentially Russian gas that Ukraine sends and buys back.

Last week, the EU’s top court ruled that Russia can only use half of OPAL, a German pipeline through which gas flows from the Baltic Sea to the Czech Republic.

The ruling makes Russia more dependent on Ukraine for supplying gas to Europe.

After the talks in Brussels, the energy ministers of Russia and Ukraine, Aleksandr Novak and Oleksiy Orzhel, said the sides had agreed to meet again by the end of October.

“I hope we will have much more progress achieved on the issues that we put on the table today," Sefcovic said.

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