Give and Take

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The outlook for flows of Russian natural gas into Europe has taken a couple of dramatic twists and turns in recent days, courtesy of the US' decision to impose sanctions on Gazprom's controversial Nord Stream 2 pipeline, and the surprise last-minute transit deal agreed between Moscow and Ukraine. The net effect of the uncertainty surrounding Nord Stream 2 -- and, for different reasons, the Turk Stream pipeline -- and the sudden certainty over the continuation of supplies via Ukraine is undisputedly positive for European gas consumers, averting a repeat of the supply crunches endured in 2006 and 2009. Since the start of the year, Ukrainian gas officials, as well as independent experts, had expected Russian gas to stop crossing Ukraine on Jan. 1, 2020, after the two sides' 10-year contract ended. But Moscow and Kiev, making the most of a thaw in bilateral relations, have agreed a protocol for a five-year deal addressing volumes, price and duration, as well as outstanding legal claims. The final contract, which should be signed this week, represents nothing less than a new page in gas relations. Gazprom has agreed, on a ship-or-pay basis, to deliver to Europe via Ukraine 65 billion cubic meters in 2020 and 40 Bcm/yr over 2021-24 -- a total 225 Bcm over five years. The Russian gas giant had shipped some 420 Bcm via Ukraine over the prior five years, underlining that the new deal is a compromise. Moscow had proposed a one-year agreement, giving it time to complete the new export pipelines and ramp them up to capacity, while Kiev, backed by the EU, had aimed for a 10-year deal at a minimum 60 Bcm/yr. But with both Nord Stream 2 and Turk Stream facing problems, Ukraine could end up handling a lot more Russian gas. The 65 Bcm stipulated in the new contract for 2020 assumes that Gazprom has an outlet to ship the remaining 25 Bcm that would have otherwise crossed Ukraine. But with Swiss contractor Allseas suspending pipelaying work in the Baltic Sea over the weekend in response to US sanctions, it is not clear when Nord Stream 2 might start operations. Gazprom has yet to reveal any Plan B for completing the pipeline's remaining 160 kilometers, and finding a replacement for Allseas could prefigure several months of delay, observers suggest. The 31.5 Bcm/yr Turk Stream pipeline, meanwhile, is expected to start on Jan. 8, but there is no clarity on how much gas it will actually pipe in 2020, as Turkey's imports from Russia are falling and construction of the pipeline's onshore extension in Bulgaria is proceeding slowly. Add to this complications over finalizing a new transit deal with Poland, which handles about 23 Bcm/yr of Russian gas bound for Germany, and Gazprom looks woefully short of problem-free transit routes. If it wants to maintain its sacred 200 Bcm/yr of supplies to Europe and Turkey and fend off competition from cheap US LNG, the Russian gas giant has for the moment no choice but to depend on Ukraine's pipelines.

Gas Supply, Gas Pipelines, Sanctions
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