EU silent as Russia gears up for third gas war against Ukraine

January 2006 and 2009 made headlines thanks to two gas wars between Russia and Ukraine. Now we know that they were part of Russia’s use of non-military instruments in new generation wars, which went basically unnoticed by the outside world.ga Both gas wars were started and controlled by the Kremlin with the purpose of increasing Ukraine’s energy dependence on Russia, thereby increasing its economic and political dependence as well. It also demonstrated to Europe the need to undertake its own projects because Ukraine was being made to look like an unreliable transit link. Now, in 2017, the Kremlin is close to launching a third gas conflict.

The first signs of a new conflict

In 2014, Russia attacked Ukraine’s energy sector through a gas blockade and by creating shortages of anthracite coal and power. In mid-June 2014, as the "Novorossiya" project went into full swing and Russian-backed separatists were waging a full-fledged war against the ramshackle Ukrainian army and volunteer battalions, Russia launched a gas blockade against Ukraine. Gazprom completely stopped supplying the country with natural gas and when it resumed in December, under pressure from the European Commission, it still kept gas deliveries to the EU to an absolute minimum in the first quarter of 2015 in order to avoid the reverse supply of gas to Ukraine. Ukraine’s main pipeline, Uhrengoi-Pomary-Uzhhorod, also suffered from several attempts at sabotage. The idea was that all of this would first force Kyiv to capitulate on energy, and eventually lead to a military and political capitulation. Ukraine's radical reduction in domestic gas consumption and the success of reverse deliveries as world prices for hydrocarbons went into a tailspin, coupled with imports of anthracite from non-Russian sources, and growing deliveries of nuclear fuel from alternate suppliers, all cut into Russia’s ability to use the energy component in its hybrid war against Ukraine. Then, the Unified Energy System (UES) of Ukraine came under attack. Even after Ukraine managed to bring its imports of Russian gas down to zero, Russia keeps trying to use energy in its hybrid war.

The Gazprom's new scenario

At the end of summer 2016, it was clear that Russia was preparing an artificial provocation to start a third gas war.

We see this in pulsations of the operating pressure of gas coming into Ukraine’s trunk lines that move gas from Russia to the EU. Obviously, the Russians are counting on Ukrtransgaz to distribute the gas to European consumers with the same pulsations.

Needless to say, this would not please EU companies and, as a consequence, Gazprom’s insistence that Nord Stream 2 pipeline was necessary because of “depreciation and proneness to accidents at the Ukrainian Gas Transportation System” would appear to be justified and would achieve its objective. By maximizing deliveries to the EU primarily by transiting through Ukraine in October-December of 2016, Gazprom can easily minimize it at some point in January-March 2017, the way it did in 2015. The objective here is that should Ukrtransgaz take additional fuel gas from the transit stream to provide the necessary technical conditions to compensate for the pulsating working pressure of the pipelines, Gazprom will accuse Ukraine of “stealing transit gas” designated for consumers in the EU. Thus, the groundwork is laid for the next propaganda campaign: Ukraine steals gas because it did not reserve enough in its underground gas storage (UGS) and refused to buy additional volume from Gazprom, so Russia cannot continue to transit gas through Ukraine because Ukraine siphons off gas from the transit stream. And Gazprom stops all transit through Ukraine.

Ukraine's underground gas storage supplies: propaganda and reality

Propaganda-style media claims prepared in the Russian Federation to provoke a gas crisis have been forthcoming both at the corporate level and at the diplomatic and political levels. First, claims about the low levels in Ukraine's underground gas storage system and Ukraine's supposed subsequent unsanctioned siphoning of Russian gas had been expressed by specialized officials. But starting from 14 December 2016, Russian President Vladimir Putin joined the propaganda campaign. “Putin expressed concern that the Ukrainian side is not upholding the agreement regarding the purchase of gas in this winter season. It was pointed out that this creates the risk to the transit of gas to Europe,” said a Kremlin press release after a telephone conversation with German Chancellor Angela Merkel. And on December 19, Gazprom boss Alexei Miller himself stated openly: “Gazprom sees clear risks for transit gas going through Ukraine to Europe and should there be illegal siphoning of gas by Ukraine, we may have to disrupt gas deliveries to Europe.” These examples of Russia's large-scale political and propaganda activity demonstrate its Do these claims correspond to reality? This season, Ukraine's UGS was filled based on estimates of internal gas consumption in Ukraine, transit volumes, and capacity for gas imports. This means that even in the case of abnormally low temperatures, Ukraine can live through the heating season, albeit with minimal comfort. The media storm over Ukraine’s supposed shortage of reserves in the UGS has been based on three main points:

• This year the heating season began somewhat earlier than in 2015-16 and could be more intense, given that the weather forecast is for a colder winter. In 2016, Ukraine stopped pumping gas into its UGS by October 16, and total reserves stand at 14.7bn cu m.
• In previous years, the volume of gas stored in the UGS was higher than in 2016: in 2015, gas stopped being pumped in only on October 31 and reserves stood at 17.05bn cu m, while in 2014, it stopped being pumped in on October 21 and aggregate reserves stood at 16.73bn cu m.
• NJSC Naftogaz of Ukraine pumped only 6.4bn cu m in 2016, which appears to be an unprecedentedly low volume in absolute terms.

All of this is true but overlooks the fact that Ukraine has unprecedentedly low levels of consumption and transit volumes, at only 55% of capacity. The other factor being ignored is that 3.3bn cu m of unused gas remained in the system after the 2015-16 heating season ended. Changes in the gas sector In the last two years, Ukraine’s gas sector saw significant changes that have been affecting the normal passing of the heating season, as might be expected. These changes, whose dynamic is shown in retrospect in the table below, include:

• a significant reduction in domestic consumption;
• increased domestic extraction;
• minimized dependence on a single supplier of natural gas;
• reforms in Ukraine’s electricity market.

Years Indicators	2011	2012	2013	2014	2015	2016
Consumption, bn cu m/y	59.3	54.8	50.4	42.5	33.7	30.3
Extraction, bn cu m/y	20.6	20.2	21.0	20.5*	19.9*	20.3*
Imports, bn cu m/y	44.8	32.9	28.0: RF: 25.8 EU: 2.2	19.6: RF: 14.5 EU: 5.1	16.4: RF: 6.1 EU: 10.3	11.1: RF: 00.0 EU: 11.1

The reduction in domestic consumption has been primarily due, of course, to a major decline in industrial production because of Russia’s war against Ukraine. With the Russian occupation of certain regions in Donetsk and Luhansk oblasts (ORDLO), a slew of major industrial gas customers stopped operations, such as the Stirol Concern, a chemical processing company based in Horlivka. Despite the occupation of ORDLO and the difficult economic situation in the country, gas extraction was maintained without too much of a drop in output. Over the last few years, Ukraine was also able to significantly diversify its sources of natural gas, which sharply reduced the risks of political and economic blackmail on the part of its one-time monopolist supplier, Russia. Having achieved gas stability, Ukraine is still vulnerable to machinations of one kind or another on the part of Gazprom to disrupt gas supplies to the EU during the course of this winter. The European Commission has not responded to the Russian accusations so far, which suits Russia well. Most likely, should another “gas crisis” start, Russia will make use of its distant early warning system with the European Commission, hastily put together in November 2009 and meant to manipulate consumers on the part of the supplier while completely ignoring the transit country.

Winter risks and the EU's position

The main risk factor is the possibility of Gazprom increasing gas transit through Nord Stream-OPAL , bypassing the Ukrainian transit network. The European Commission already gave its permission on 28 October 2016, but soon this decision was reversed. If Gazprom does increase its transit through Nord Stream,  Ukraine’s GTS [gas transport system] could end up functioning in an unstable manner for technical reasons. A similar situation was observed in summer 2015, when Gazprom didn't provide the necessary incoming pressure, and Ukrtransgaz was forced to cover the low pressure from the Russian tubes with its own gas. Moreover, Naftogaz is not a third party to bilateral contracts between Gazprom and its European customers. In making its decision to increase Gazprom’s use of OPAL, the European Commission essentially provided Gazprom with a legal basis for manipulating the directions and volumes of its deliveries of gas to Europe, which could lead to greater turbulence on the EU gas market. But is the EU able to operatively react to Gazprom's provocations? As we saw in 2009, the European Commission is incapable of quickly identifying the guilty party in hostile actions. This inability or reluctance on the part of official Brussels to issue a verdict as to what happened in January 2009—did Ukraine disrupt transit deliveries or did Russia disrupt incoming supplies?—encourages the Russians to repeat these kinds of “gas crises.” And this kind of crisis is the very thing to force the Commission into agreeing to Nord Stream 2, because, so Gazprom insists, “Ukraine is an unreliable transit link.” In addition, the Commission’s decision and the way the Germans have ignored the European Court’s December 23 decision about shutting down the project are disrupting reforms to the oil and gas sector in Ukraine, especially the unbundling of Naftogaz of Ukraine. The October 28 decision has obviously reduced transit through Ukraine’s GTS. In this context, if the European Commission decides to also wash its hands of the Nord Stream 2 issue, then it will be not so much Gazprom as the Europeans who will have left Ukraine’s system without transit gas. Under these circumstances, the Ukrainians need to consider the option of suspending—not ending!—the kind of unbundling that will predictably lead to further losses for Ukraine. They must immediately consult with the European Commission. In short, if the Commission agrees to compensate Ukraine for the losses due to its decision to allow Gazprom to maximize its throughput via OPAL pipeline, then it will be possible to talk about further steps to reorganize Naftogaz.

Conclusions and recommendations

Given all the conditions and circumstances outlined here, it is possible to draw a number of conclusions. Ukraine’s GTS and UGS were and remain a key element in ensuring the uninterrupted delivery of natural gas to Europe. Despite the many years of systematic accusations by the Russian Federation that gas has been stolen or disappeared on Ukrainian territory, there has been no legal confirmation of such incidents, notwithstanding countless attempts by Gazprom to present these accusations as proven facts. Every heating season in the last decade has been used as a means to discredit Ukraine through deliberate propaganda campaigns that underpin Gazprom’s provocative technical manipulations and Russian media speculation in the European Union. This kind of propaganda has been one of the factors that fostered the building of Nord Stream 1 pipeline and continues to be used to promote its second branch and undermine Ukraine’s efforts to reform its national gas market. The most obvious proof of Ukraine’s reliability as a transit link to the EU is that it has maintained uninterrupted delivery of gas despite an armed conflict with Russia and the unprecedented economic and political crises of 2014. And here the European Commission has done the opposite by granting Russia greater access to the OPAL pipeline—a move that has been properly assessed as a violation of bilateral commitments in the Association Agreement between Ukraine and the EU, specifically Article 274. Meanwhile, Russia continues to make use of all possible political, economic and informational instruments to cause Ukraine harm, specifically by: violating the technical conditions for the GTS to operate properly by reducing volumes and pressure on incoming gas; harming Ukraine economically by cutting into its income from transit; and damaging political dialog with the EU by continuing to foster negative actions or inaction in Brussels. Given the loss of support in the EU in the confrontation of Russia’s bypass pipeline networks and the threat of serious reductions or even termination of transit through Ukraine’s territory, the country needs to:

• expand domestic extraction of natural gas to bring down the need for imported gas altogether to zero;
• promote as much as possible the building of a Ukraine-Poland gas interconnector to provide diversified options for importing gas;
• make financing and implementing energy-efficiency and energy-saving measures a top priority.

Ukraine also needs to improve and devote specific attention to cybersecurity on critical energy infrastructure: the UES, GTS and PTS and all the technical communication links. Finally, Ukraine needs to become more active in foreign relations and the provision of information in order to reduce the risks of the GTS becoming unbalanced as gas transit volumes go down, and to ensure its further stable operation. This means:

• consolidating efforts with interested partners to maintain and use the transit lines available on Ukrainian territory;
• instituting the post of Government Ombudsman for Energy Security with the necessary authority to coordinate the efforts of various ministries and agencies;
• oppose, in concert with other stakeholders, the implementation of Nord Stream 2 and Turkish Stream;
• increase efforts to set up an Eastern European gas hub based on specific underground gas storage system in Ukraine;
• mobilize international pressure on Russia to ensure free access to the Russian GTS by independent gas extracting companies and transit gas from Central Asia to Europe.

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