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European gas market reform: Threats and opportunities for Ukraine

Gas production in the Norwegian part of the North Sea. Photo: Ole Jørgen Bratland / Equinor ASA

Gas production in the Norwegian part of the North Sea. Photo: Ole Jørgen Bratland / Equinor ASA

European Union countries failed to agree on a common response to rising energy prices at an emergency meeting of Ministers of Energy on October 26.

The following opinions were expressed:

  • Spain, France, the Czech Republic, and Greece believe that the current rise in gas prices constitutes grounds for major changes in the work of the EU energy markets;
  • nine countries, including Germany, believe that the price rise does not indicate the need to reform the EU's energy market.

Note that Ukraine supports the current configuration of the European energy market, national legislation and market infrastructure have been brought in line with EU norms. Our country is in favor of the Europeans themselves strictly following their laws, especially in relation to the Russian Gazprom and its projects.

But the changes in the European gas market increase risks and create new opportunities for Ukraine (we will explain this in more detail below).

EU response to energy crisis

The meeting of the EU Ministers was held less than a week before the international summit on climate change. Negotiations on new policies to tackle climate change, including higher tax rates on polluting fuels, are ahead.

Until there is a common solution at the EU level, many EU countries have taken emergency measures, such as price caps and subsidies, to cut consumers' electricity bills.

The European Commission analyzes the structure of the European electricity market and collects evidence of market manipulation by the gas suppliers.

Practically the only such manipulation is Gazprom's unwillingness to increase gas supplies to Europe if the Nord Stream 2 gas pipeline is not put into commercial operation.

And Gazprom's pressure on Moldova is an example of the use of gas as a weapon. As in the case with Ukraine, Gazprom offers Chisinau cheap gas in exchange for refusal of European integration and energy market reform.

Amid a sharp rise in gas prices in Europe, the Norwegian company Equinor has increased the export of natural gas for the continent by 2 billion cubic meters since October 1. This company is the second largest gas supplier to Europe after Gazprom.

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Norwegian gas exports via pipelines to Europe

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EU energy strategy will not change

EU Commissioner for Energy Kadri Simson states that Brussels continues to consider the EU's transition to renewable energy sources as a solution to all its energy problems. At the same time, she acknowledges that the EU will also need nuclear energy, as well as continue to use natural gas as a transition fuel.

At the same time, the EU intends to phase out the use of natural gas, gradually switching to hydrogen, and will reorient the EU gas transmission infrastructure to the use of hydrogen.

The European Commission intends to present a strategy for the switching from natural gas consumption to hydrogen at the EU summit in December.

Structure of the pipeline gas imports to Europe in 2020

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Impact of new gas pipeline Baltic Pipe on European market

It is expected that in the near future gas from Norway will begin to flow to Poland via the Baltic Pipe gas pipeline. The project investors are Poland and Denmark, but the Poles are the main project initiators.

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The idea of building the Baltic Pipe fits into the Polish concept for constructing the gas North Gate. According to it, Poland should become completely independent from the Russian gas supplies due to the construction of a liquefied natural gas (LNG) terminal in Świnoujście (it is in operation), Baltic Pipe and an LNG terminal in the Gdańsk Bay (it is planned).

Poland will get 10 billion cubic meters of gas per year through the new gas pipeline—the same amount it received from Gazprom under a contract that has expired. This will cover half of the country's gas needs. Note that gas in Norway is partially produced by the Polish company PGNiG.

Baltic Pipe is part of a major project—the so-called North—South Corridor. It provides for the creation of international connections and pipelines allowing the free flow of gas in the territories from the Baltic Sea to the Croatian coast, where the LNG terminal was launched.

This concept is based on the desire to break the Russian monopoly on gas supplies to Central Europe, and to enable Poland, Slovakia, and Ukraine to diversify supplies.

Risks and opportunities for Ukraine

The Nord Stream 2 launch may lead to the fact that after the current contract expires in 2024, Gazprom will stop the gas transit to Europe through Ukraine. In this regard, the question arises of what to do with the gas transmission system (GTS) of Ukraine.

We will not have to cut it into scrap metal, Sergiy Makogon, the Head of the Ukrainian GTS Operator, assures.

Why the Ukrainian GTS will be maintained:

  • it will be used to supply gas to Ukrainian consumers (about 10 billion cubic meters per year);
  • opportunities for the gas supply from Poland will increase;
  • the issue of hydrogen supply via the Ukrainian GTS to Europe is being considered. Germany is interested in such supplies and is ready to take part in financing the project.

In addition, the likelihood of concluding a new transit contract with Gazprom remains. Publicly the Kremlin says that the only problem is the price that Ukraine will request for transit.

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