Ukraine’s Gas Transmission System: Problems and Prospects
Pyotr VOROBYOV | 02.07.2015 | WORLD | BUSINESS

Ukraine’s Gas Transmission System: Problems and Prospects

It is widely believed that the Ukrainian gas transmission system has the greatest capacity in the world to make the owner a full-blown global actor. It’s partially true if one forgets that the system is supplied with Russian gas extracted many thousands of miles away from the Ukrainian border to be transported through long-distance routes.

The first attempt to connect Russian gas fields to European pipelines was undertaken in 1960. Large diameter pipes were needed and Germany was the only country to supply them. In 1963 under the pressure of Coordinating Committee for Multilateral Export Controls (CoCom) Chancellor Konrad Adenauer vetoed the deal. To explain his decision he cited national security concerns. As a result, German economy was deprived of a chance to sign a 200 million Deutsche Mark deal while the ruling Christian Democratic Union lost the support of big industrial producers. 

The Social–liberal governmental coalition, formed by the Social Democratic Party of Germany (SPD) and the Free Democratic Party (FDP), came to power in 1969 to endorse a “gas for pipes” deal to result in the construction of gas transmission system going through Ukraine to Germany and other countries in Europe. 

The Soviet Soyuz natural gasnetwork was constructed to include Orenburg-Western Border, Urengoy-Uzhgorod and Yamburg-Western Border branches with overall capacity of 80 billion cubic meters a year. The length of transition system has been increased since 1970 from 11, 5 to 37, 1 thousand km. The throughput capacity of the Ukrainian gas transportation is 288 billion cubic metres system at the entrance and 178.5 billion cubic meters at the exit, including 142.5 billion cubic metres to European countries and 3.5 billion cubic metres to Moldova. 

Gas storage capacity was needed to compensate demand peaks and guarantee stable supplies at any time. First UGS (underground gas storage facility) were built in Ukraine in the 1960s. Underground storage infrastructure is highly important for Ukraine as a natural gas transit country and for end-users. The Ukraine’s underground gas storage network includes a number of gas storage facilities built in the 1970-1980s: West Ukrainian, Kiev, Donetsk, South Ukrainian, with working capacity of 32 billion cubic meters, as well as the largest facility in Europe - “Bilche- Volitsko-Uherske” UGS with the capacity of 17 billion cubic meters. 

After the Crimea joined Russia in the spring of 2014 the South Ukrainian complex became Russian too. The facility in Donetsk is located in the vicinity of combat area to complicate its use. It’s just a part of the problem faced by Ukrainian gas transmission system. As the USSR collapsed 24-25 years ago, the transmission system owners tried to get high profits at any cost. They wanted more money and never bothered about the system’s upgrade to keep it running smoothly. There were no modernization plans and no investments. The gas “kings” and “queens” invented schemes to launder money and make profit reselling to Europeans the gas received from Russia at discount prices. As a result, the Ukrainian gas transition system has been degrading.

Why hinder stable gas supplies from Russia? To go to the root of the problem one has to remember the Adenauer’s times. His government blocked the deal citing national and allies’ security concerns as a reason. The government of Willy Brandt came under heavy US pressure. The United States was extremely reluctant to face the prospect of Germany, a NATO ally, cooperating with the Soviet Union. Some of the arguments put forward were really absurd. It was seriously asserted that the pipelines could be used for providing Soviet military with fuel in case of war. Just imagine getting fuel right straight from the pipelines! 

Until 2005 Ukraine had been charged $50 per 1,000 cm – a discount price. The cost of transit was paid in the form of additional supplies. Victor Yushenko, the henchman of Americans, came to power to demand a switch to transactions on commercial basis. As a result, Ukraine lost a lot. Even with the discount in force, the prices increased three times at a time.

There was more to it. Some time before the “orange revolution” Leonid Kuchma, the Yushenko predecessor, had made a deal with Moscow to preserve a fantastically low price in exchange for creating a joint Russia-Ukraine consortium to operate the transit system. Having come to power, Yushenko declared the agreement a betrayal of national interests. He did it under US pressure. As a result, the plans for upgrading transit system were foiled.

The Russian gas supplies became dependent on the whims of unfriendly Ukrainian leadership. As a result, Russia took a decision to build gas routes going around Ukraine. After the North Stream pipeline was built, the amount of gas transported through Ukraine has been significantly reduced. In 2011 the transit was 101 billion cubic meters to fall down to 84, 3 billion in 2012. It was as low as only 58, 8 billion in 2014.

If modernized, the Ukrainian gas transit system could continue deliveries to Europe even with the plans to construct the South Stream around the Ukraine’s territory. A few years ago Russian Gasprom and Ukrainian Naftogas launched new talks on the ways to operate the gas transit system. Russian President Vladimir Putin and the Ukraine’s President Victor Yanukovych agreed to suspend the construction of new gas pipeline in case the gas system was modernized and a tripartite EU-Russia-Ukraine consortium were created to operate it just the way Europe wanted it to be. Russia was ready to allocate $4, 5 billion for the purpose. Ukraine would have remained the main transit country. The February 2014 coup in Kiev put an end to all these plans. The new rulers strongly opposed the idea to create a gas consortium with Russia. But they immediately agreed to create one with the United States.

Ukraine became a nationalist dictatorship hostile to Russia. As a result, Gasprom took a decision to ultimately refuse the transit through the Ukraine’s territory after having built the Turkish Stream going to Turkey across the Black Sea.

It can be said that the Ukraine’s route is not politically secure. Besides, it’s not safe. The danger of accident is real. Even if truce is observed in the Donbass region, Kiev has no money for maintenance. In 2007 accidents interrupted the functioning of the Urengoy - Pomara - Uzhgorod pipeline. On 7 May 2007, the pipeline exploded near the village of Luka. The explosion damaged 30 meters of the pipeline. A second explosion happened on 6 December 2007 near the village of Tiahun. 

Alexander Todiyuk, the head of experts group overseeing the implementation of Energy Memorandum between the European Union and Ukraine, said the reason was wear and tear of equipment. According to him, the system needed urgent upgrade to guarantee stability of operation. Ukraine failed to come up with money. The things continued to get worse. The last accident happened a year ago. 

In 2019 the contracts on gas supplies will expire and the giant transit system built by the Soviet Union, an asset that was valued from 4 to 200 billion dollars at different times, will become a metal pile of scrap.

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