Johannes Baur: European partners could help manage Ukraine’s GTS

What progress have you seen in Ukraine’s energy sector in the last few years?

In general, Ukraine has made huge progress in reforming the energy sector since the Maidan and has definitely improved its energy security. For one thing, it no longer depends on gas inputs from Russia and the country is now much more closely linked to the EU gas market. This is major progress. Another thing is Naftogaz of Ukraine, which was a huge loss-making company and contributed to the country’s economic problems since 2014. Today, it is a profitable company and it is much better managed.

In addition, a number of important laws have been adopted, including specifically the gas law of 2015, which is fully compliant with EU requirements. Now the issue is implementation and, unfortunately, there we have seen a slowdown in activity over the last one or two years now, especially with unbundling Naftogaz and the retail markets. An unbundling decision was made in 2016, but it hasn’t really been implemented. The Stockholm arbitration was one factor that contributed to this slowdown. But there were also other factors. Now it’s urgent to complete the process or actually to start it.

What’s very important is that by January 1, 2020, the old transit contract with Russia ends and we hope that we will have a new transit contract between Russia and Ukraine for the transmission of gas to the European Union and that an independent gas transmission system operator will be in place. This is should already be established as a separate entity. What happens between now and January 1, 2020, is not yet fully clear. We have a proposal from Naftogaz for a road map, but this needs to be confirmed. We need a decision from the Government to set clear milestones in order to allow this unbundling to take place. Unbundling also means certifying the new independent GTS operator. This certification has to be done by the Ukrainian energy regulator and to be confirmed by the Energy Community secretariat. And this is, a step that is still to be prepared and the necessary decisions taken.

Given Germany’s unwavering position in support of Nord Stream II, how important is it to the EU that Ukraine continue to deliver substantial volumes of natural gas?

I think it’s in the interests of the EU that Ukraine remains an important transit country with significant volumes. It is also clear that, whatever happens to Nord Stream II, it will most probably not be in place on January 1, 2020, so a solution has to be found for that period, no matter what. We hope very much and we’re working hard to make sure there is a new transit contract and that it will be fully in line with European rules. That’s the agreement – and a very positive agreement – that was reached already at the first trilateral talks between Russia, Ukraine and the EU in July.

We would like to set up the next new political meeting of the trilateral group as soon as possible, possibly in November, to see what progress can be made. On the Ukrainian side, it’s important – and this is also a subject of reports in the trilateral group – that there is a clear view of how the unbundling will be done and that there will be an independent pipeline operator. The transit rate offered by this new GTS operator has to be economically advantageous. This is important, because if the transit rate is too high, Gazprom will use it as an easy excuse not to transit through Ukraine.

What can the EU do to bring Russia to the table on this?

We can’t give any guarantees, of course. This is ultimately a decision that will be made in Moscow, but, as I said, we’re working very hard under the leadership of Vice President Sefcovic. Through Ms. Merkel, we have a commitment from Mr. Putin that this will be seriously considered. This is all at the political level and we will ask the Russian side to honor this political commitment.

The position of the European Commission and EU delegation is that Nord Stream II is not a project that is in the interests of the European Union. As such, there have been a number of political statements by Vice President Sefcovic and the Commission has made proposals to have some influence over how Nord Stream will be operated in order to increase the security of supplies for the EU. We think that transit through Ukraine is in the interests of EU and want this transit to continue – among others because it is the shortest route to a number of EU countries, in particular in southern and southeastern Europe, and even to such important markets as Italy and Austria.

How will further decisions be made, given that this project represents Russia’s influence over the European gas market?

Inside the EU, decisions on the energy mix are not the competence of the EU, but belong to member states. They can decide to build a pipeline or not to build a pipeline. There are just a number of conditions that need to be met in terms of environmental law and other matters, and European law has to be respected. This is current legal situation that we face which the EU Commission would like to change. Legal questions are one thing, political questions are another, and the discussions continue. Some member states support Nord Stream II, others are against. But, everyone agrees on the importance of keeping Ukrainian transit coming from Russia.

Given that it will affect Russia’s Nord Stream II plans, how likely is it that amendments to the EU gas directive will be adopted to make all pipelines supplying the Union, including foreign ones, subject to EU law?

The discussions are still ongoing and some member states still have to be convinced that this is a good proposition. We are obviously in favor and we hope that it can be adopted. Of course, we also have to realize that the European Parliament has an election coming up next year in May and the Parliament will stop its activities a few weeks before that. So there is really not much time left to agree to such a proposal. Some basic principles of European law should apply – not all laws or very detailed rules, such as those governing network codes, for instance, but some basic things should apply to all pipelines in order to increase the security of supplies for all members of the EU.

How likely is it that European companies involved in the construction of Nord Stream II will walk away from the project if the US threatens them with sanctions?

This is still an open question. There hasn’t been any decision yet from the US government, and this is not an easy decision, I suspect. As far as I’ve been informed, though, European companies have already left and don’t have any further financial interests in Nord Stream II. Some of them are still members of the consortium. The economic reality is that there’s still some economic interest in the EU for this pipeline.

How are things going with getting European partners involved in managing Ukraine’s GTS?

There’s serious interest among European companies and we are in contact with various companies that have expressed interest. Obviously, there is interest among some of Ukraine’s immediate neighbors, for example Slovakia’s Eustream, to keep the transit flows, as this is essential for them. So there is also huge interest among experienced pipeline operators in the European Union. But, indeed, now we need a decision from the Government about what happens with the unbundling – will they do that properly? – and then this can all go ahead.

The overall political situation is, of course, difficult. We are in a pre-election period. We already took note of some comments on this issue and, of course, it’s unfortunate that this is very much a politicized discussion. I think it’s in the interests of Ukraine to continue the unbundling and, if possible, to involve trusted European partners in the management of the pipeline system. I think European partners do not necessarily want to “take over” the property. That’s not their intention. They want to help Ukraine operate and properly manage its pipeline system and to increase trust among European traders operating in Ukraine and trust towards Gazprom – because many of these European operators are, of course, working with Gazprom to ship Russian gas within the European Union.

Whatever is decided on Nord Stream II, unbundling Naftogaz and establishing a proper delivery system in line with EU laws is something that has to be done, no matter what. I also think it’s the best thing that can be done to keep Ukraine involved in transit.