Ukraine claims Gazprom gas deal with Hungary is “use of gas as a weapon”, demands sanctions

Ukraine claims Gazprom gas deal with Hungary is “use of gas as a weapon”, demands sanctions
Russia's Gazprom switched its delivery of gas to Hungary from using the Ukrainian pipes to TurkStream instead. Kyiv protested that this was using gas as a "weapon" and is demanding the US and EU impose sanctions on Gazprom. / wiki
By Ben Aris in Berlin October 2, 2021

Ukraine’s national gas company Naftogaz and the pipeline operator Gas Transmission System Operator of Ukraine (GTSOU) claimed on October 1 that last week’s deal by Russia’s Gazprom to supply Hungary and reduce gas supplies to Ukraine was the “use of gas as a weapon”, and have demanded the US and EU impose sanctions as promised.

“Whether Germany acknowledges it or not, Russia has aimed its energy weapon at all of the EU. The threats to punish Russia at some future date no longer suffice. The very credibility of the Western deterrents is on the line and the time to respond is now,” Ukraine’s national gas transport company said in tweet from its corporate account the same day.

The controversial deal with Hungary will see Gazprom supply Hungary with 4.5bn cubic metres of gas per year, but it will be delivered via the newly opened TurkStream southern pipeline route that went live in January. Previously Russia’s delivery of gas to Hungary had been sent through the Ukrainian pipeline network.

Earlier this year US President Joe Biden backed off sanctions on the Nord Stream 2 gas pipeline, which he admitted was a fait accompli, provided Russia refrained from using “gas as a weapon.”

For its part Gazprom says it has been sticking scrupulously to the terms of its new transit deal signed at the last minute with Ukraine in December 2019 that commits the Russian gas giant to send 40 bcm via Ukraine’s Druzhba pipeline until 2024. Gazprom says it is free to deliver gas to Hungary via any route it wants.

The US and EU have yet to respond to the Ukraine’s demands; however, last week EU officials called for an investigation into Gazprom as gas prices soared over $1,200 per thousand cubic metres, breaking all previous records.

Gazprom may be sticking to its transit deal with Ukraine, but it has not been buying extra capacity offered by GTSOU and Europe is facing possible fuel shortages if this winter is a cold one. Pundits have claimed that Gazprom is deliberately restricting gas deliveries to Europe, despite the record prices and demand, as a way of exerting pressure on the EU to accelerate the process of granting an operating permit for Nord Stream 2, which was completed in September but still doesn't have permission to operate.

The EU governing authority said last month that the permits may be issued as late as January. Amongst the issues on the table are Europe’s third energy package rules, which may force Gazprom to share half the pipeline’s capacity with other “independent” operators. Russian oil major Rosneft has already said it is willing to be that other operator. Currently under Russian law Gazprom has a monopoly over gas exports from Russia.

The row comes in the context of a growing crisis as EU countries prepare for the looming heating season. Although there is already enough gas in storage to get through the winter, there is little marginal extra gas, which is making governments nervous. As bne IntelliNews recently featured, analysts say that without Nord Stream 2 Gazprom’s ability to increase production and exports is already running up against its maximum; Nord Stream 2 connects Russian gas in the Yamal fields to Europe, but that gas cannot be sent via Ukraine because the interconnecting pipelines are already at full capacity.

Gazprom had planned to send 5.6 bcm of gas to Europe via its newly built Nord Stream 2, which was supposed to come online over a year ago.

Gas prices took another step up on October 1 to $1,200 per thousand cubic metres after supplies in the Yamal-Europe pipeline, which traverses Poland, fell by 77% from the day before. Gazprom said the fall was due to one large customer taking the gas. Gas prices are up 400% year to date (ytd).

The Kremlin reiterated the same day that Gazprom, whose gas exports outside the former Soviet Union rose 15.3% y/y in the first nine months of 2021, was meeting all its contract obligations in full.

"Gazprom is supplying gas in accordance with customers' requests under contract obligations," the company said in emailed comments to Reuters.

In her last month in office German Chancellor Angela Merkel has trying to cut an almost impossible energy deal that will allow Germany to receive gas from Russia’s new Nord Stream 2 but keep some gas flowing through Ukraine’s Druzhba gas pipelines. During a meeting in Moscow last month Russian President Vladimir Putin told Merkel that Russia was open to sending gas via Ukraine, provided the EU was prepared to sign off on long-term supply contracts, something that Europe is reluctant to do, but Hungary was less hesitant over.

Ukrainian protests

Under the terms of a long-term supply deal with Budapest that kicked in on October 1, Gazprom halted gas supplies to Hungary via Ukraine and started to send them via Serbia and Austria instead using the new TurkStream pipeline. Previously the Ukrainian transit route would have typically transported 24.6mn cubic metres of natural gas per day.

“Supplies via this route have become possible thanks to the construction of a new trunk gas pipeline of the company FGSZ Ltd on the territory of Hungary and completion of an expansion of the national gas transportation systems in Bulgaria and Serbia, where the operators Bulgartransgaz EAD and GASTRANS d.o.o. Novi Sad have commissioned compressor stations,” Gazprom said in a statement announcing the change of route.

The new deal will further deprive Ukraine of transit revenues and also means it can no longer import reverse flow gas via Hungary, which it has been doing since 2015 when Ukraine stopped importing gas for its own use from Russia.

The Hungarian deal makes use of the new TurkStream pipeline to the south that went live in January. Ukraine has already lost $1bn from the circa $3bn it used to make in transit fees as more gas to Europe that used to transit via Ukraine is now being sent through the new southern spur to Gazprom’s trident of pipeline networks serving customers in Europe.

On the same day the head of Ukraine's Naftogaz, Yuriy Vitrenko, called on Washington and Germany to honour what he said were pledges to impose sanctions on Gazprom if gas was used as a weapon against Ukraine. Vitrenko has also been warning that if Nord Stream 2 is put into operation there is a chance that Russia will invade Ukraine.

"The Kremlin is doing this on purpose. It's not even sabre rattling; it's the obvious use of gas as a weapon," Vitrenko said on Facebook. "A joint statement from the United States and Germany said that if the Kremlin used gas as a weapon, there would be an appropriate response. We are now waiting for the imposition of sanctions on a 100% subsidiary of Gazprom, the operator of Nord Stream 2."

However, Vitrenko admits that Gazprom has the right to stop gas transit through Ukraine but as the terms of the transit deal are “take-or-pay”, if Gazprom sends less gas via Ukraine to Hungary it still has to pay for the capacity booked this year even if it doesn't use it.

Sergei Makogon, the head of the GTSOU, in a press release on October 1 said that Hungary has been receiving gas through Ukraine for decades, and the Ukrainian side has never violated its obligations.

“The monopolisation of gas routes by Gazprom, which we are currently witnessing, raises questions about the fundamental principles of the functioning of EU gas markets – competitiveness and transparency,” Makogon added as cited by the Kyiv Post.

“Today, Gazprom stopped transit of #natgas through Ukraine in the direction of Hungary, GTSOU said on its company twitter account. “GTSOU has not received a request for transit, despite the fact that the capacity from Ukraine to enter Hungary is contracted for the next 12 months in the amount of 24.6 mcm per day.”

“The monopolisation of gas routes by Gazprom, which we are currently witnessing, raises questions about the basic principles of functioning of EU gas markets – competitiveness and transparency,” GTSOU added. “The strengthening of the dominance of one player and their use of levers of influence for obvious political purposes against the background of the shocking price hikes must be stopped.”

The Ukrainian foreign minister also complained, saying that sending the gas via Ukraine was the most economically efficient option as it is the shortest route.

Ukraine considers the deal a “purely political, economically unreasonable decision”, which will hurt Ukraine’s national security and its relations with Hungary, the ministry said in a statement.

Last week Ukraine and Hungary summoned each other’s ambassadors because of the deal. Hungarian Foreign Minister Péter Szijjártó called Ukraine’s appeal to the European Commission “deeply outrageous” and a “serious violation of our sovereignty and national security interests.”

Hungary has been one of Russia’s supporters in the EU. It also ordered a lot of the Russian Sputnik V vaccine during the worst of the pandemic, despite the fact the vaccine had still not been approved for use in the EU.