Why is Brussels less concerned about the impact of Brexit on the EU gas market than the future Ukrexit?
 

The European Union has always attached importance to the development of the UK energy sector. It is enough to mention that in 2014, total European Investment Bank (EIB) investments in the UK economy came to 7 billion euros and energy projects accounted for 50 per cent of this amount.  

  Brexit: the last EU gas exporter is leaving

Before Brexit, the UK was the only EU member state, producing and delivering gas to other EU countries, mostly to Belgium. A short list of the EU gas exporting countries is vanishing before our eyes, as the Netherlands - the leader in gas production in the EU - changes from a net gas exporting country to a net gas importing country.

According to the BP Statistical Review of World Energy, June 2016, gas exports from the UK to the EU market amounted to 13.4 bcm in 2015. On the one hand, it would seem quite insignificant amount compared to the annual gas consumption in the EU, which reached 426.3 bcm in 2015. However, it depends how you look at it, because, on the other hand, it could be compared with considerable efforts made by the EU to support the projects of the Southern Corridor, aiming at an even smaller annual volume of gas imports than from the UK - only 10 bcm.

The global trend should be obvious for all of us - in the long-term energy resources do not become cheaper, but quite the contrary. This should make everybody realize a high value of every bcm of gas supplied to our market by different routes, the choice of which is necessary to maintain competition.

In that regard, the British National Balancing Point (NBP) secession from the EU market can hardly benefit competition on the EU gas market. Before 2014, the NBP hub had been at the forefront of gas market development and then the Dutch Title Transfer Facility (TTF) overtook NBP as Europe's most liquid gas hub. For many years these two European gas hubs – the UK's NBP and the Dutch TTF - together conducted more than 80% of transactions, significantly outperforming its competitors on the spot market of gas in the EU. The NBP secession nominally reduces a number a virtual trading locations for sale, purchase and exchange of natural gas on the EU market. It will considerably enhance the TTF competitive position that can influence trends of spot gas prices not in favor of consumers in the EU market.

It is expected that there will be new problems not only for gas consumers but for European energy companies too. According to Reuters, Royal Dutch Shell's chief executive, Ben van Beurden told that Britain's decision to exit the EU could slow its 30 billion USD asset sale plan, especially in the North Sea.

Ultimately, with the Brexit vote the EU is losing an important participant of the Energy Union project. However, neither parting with the last EU gas exporter and one of leading gas trading hubs nor rising financial and investment complexities for energy companies of course are not the only consequences of the Brexit vote, which in general significantly increases an uncertainty and will lead to further problems.

The issue of the Brexit economic impact is becoming therefore a source of grave concern to European energy companies and gas consumers in the EU. But strangely enough, despite all alarming signals, the European Commission has been slow to focus on the Brexit energy implications. As before, Brussels takes much greater interest in eastern energy policy aimed at substantially reducing and even for some member states eliminating imports of Russian gas by the early 2020s. At the same time, there has been an ongoing attempt somehow to weaken the Ukraine crisis, which, in particular, in gas sector leads to "Ukrexit".
 

A major question remains as to whether such in essence geopolitical goals of the European Commission conform to the interests of the EU gas market participants.

The Ukrexit: who would be in favour of an exit, and who would want to remain?

Let us first define that in the context "Ukrexit" means a serious limitation of the Ukraine's gas transit and thus the Ukraine's exit from a group of countries mainly providing transportation of gas to the EU market. Now we could imagine a voting script, which is disclosed by actions and positions taken by stakeholders.

At first about Ukraine's position that opposes vigorously a reduction of gas transit services because if it happens the country annually will lose budget revenues of around 2.0 billion USD.

Moreover, the gas transit is of particular importance to Ukraine that has since been trying to cut its dependence on Russian gas. Indeed Ukraine has not bought gas from Russia since November 25, 2015. Since then and up to the present time the country imported Russian gas only by means of reverse operations from the Eastern European countries - Slovakia, Poland and Hungary. The scheme of reverse supplies to Ukraine have been widely discussed in the past few years.

It is well known that European companies sell to Ukraine gas previously purchased from Russia and returned by reverse to the territory of Ukraine. Nevertheless, even in the case of physical reverse when it is necessary to spend money to pump gas back and forth across the border, anyway it is cheaper than, for example, to pump Norwegian gas for a distance exceeding 2.5 thousand km. In fact, without the transit of Russian gas European suppliers would have to look for other, more expensive sources of supply to Ukraine instead of reverse gas.

However, Ukraine is not satisfied with the existing financial returns from operations with Russian gas reverse that is seemingly unique for its benefits. Ukraine tries not only to keep its transit status, but also to increase significantly gas transportation services revenues. So far, the rate of transit tariff is determined under the long-term contract between Naftogaz and Gazprom that is in force from 2009 to 2019. The rate is calculated based on a formula linked to the fuel cost factor and inflation rate in Europe. In 2015, the gas transit rate through the territory of Ukraine was 2.73 USD per 1,000 cubic meters per 100 kilometers. Meanwhile Kiev has intended to raise it to 4.9 USD counting on Ukraine's geographic location on the gas transit route to Europe may be able to earn very high returns.
 

It is clear that such intentions of Ukraine only further strengthen Russia's determination to abandon the Ukrainian transit that would be Ukrexit implementation in practice.
 

Suppose, gas consumers in the EU would vote Ukrexit. In principle, Europeans should not really care where gas comes from to their houses and offices. The most important thing that European gas supplying companies are aware of very well is that their customers are expecting stable gas supplies at competitive prices.

One cannot merely fail to notice that Ukrainian transit is not capable to meet these expectations of Europeans. Who still doubts that the Ukraine's gas route has no future? Facts speak for themselves: the gas delivery costs grow so fast, the Ukraine's gas transportation system, on the whole, has become more and more old, its technical conditions and ecological characteristics have even more dramatically worsened in recent years, and the Ukrainian economy, which subsists primarily on the IBRD and IMF loans but still continues to drown in debt.

In 2015, the transit of Russian gas through Ukraine amounted to 67.1 bcm or about 16 percent of an annual gas consumption in the EU countries. Now it is in a high-risk area that raises the alarming prospect and may become a real source of major concern for Europeans.

Europe’s choice: The Ukrexit and Nord Stream 2
 

Pursuant to the common business guidelines, European energy companies are assuming the primary responsibility for meeting the expectations of gas consumers. It is quite natural that companies take into account the interests of consumers in seeking the most profitable and reliable partners and suppliers. When Russia put forward an idea of new more economical route for EU imports of gas through Nord Stream 2 as an alternative to the Ukrainian transit five leading European energy companies supported the initiative.

Participation of E.ON Global Commodities SE, Engie SA, OMV Nord Stream II Holding AG, Shell Exploration and Production (LXXI) B.V., Wintershall Nederland B.V. in a joint project Nord Stream 2 together with Russian company Gazprom can be regarded as an accomplished fact of voting for Ukrexit. Due to Nord Stream 2, the annual capacity of the direct offshore pipeline between Russia and Germany will increase from 55 bcm to 110 bcm by 2019 that will make possible largely to bypass the Ukraine's transit.

Many opponents in the EU are seriously engaging in attempts to find any economic competitive disadvantages of the new gas route but there is no any convincing arguments yet to be presented. "The tariff for transporting gas by Nord stream – 2 will be half cheaper than through the territory of Ukraine", said the financial Director of Nord Stream 2 Paul Corcoran.

The tariff for gas transport via the existing Nord Stream is set at 2.1 USD per 1,000 cubic meters per 100 kilometers, which is 20% below the current tariff for transit through the territory of Ukraine. According to Financial Times, Alexei Miller, chief executive of Gazprom, said in a speech at the St Petersburg International Economic Forum in June that the company would plan to tap fields in the Yamal Peninsula, meaning that gas delivered to Germany via the Nord Stream 2 route would travel 4,166km compared with 6,051km via Ukraine. Therefore thanks to decreased operating costs and a shorter route the total costs of gas delivery from Russia’s North to Germany via the Nord Stream will be about 1.6 times lower than for transportation through the territory of Ukraine even at the current transit tariff.

Mr. Miller also said that transit through Ukraine would fall to 10-15 bcm per year after 2020, when Gazprom’s contract with Ukraine expired and Nord Stream 2 was set to start operations.

"We cannot worry each summer what will happen in the winter"

This is an extract from the speech made by Vice-President of the European Commission for the Energy Union Maroš Šefčovič at the Energy Security Summit of Frankfurter Allgemeine Forum and the Munich Security Conference last year in Berlin. It was hoped that Mr. Šefčovič meant Brussel’s reluctance to experience further the risk of disruption to gas supplies from Russia by the transit route through Ukraine and that it was time to choose an alternative and more reliable route but that was not the case.

The European Commission persistently confronts the process of Ukrexit despite the fact that given the status of the Ukraine's gas transport system its future is doomed because of a number of obvious reasons. Meanwhile, Brussels is not only trying to impose a direct relationship between the approvals of Nord Stream 2 with the further fate of the Ukrainian transit but is continuing to spend the EU funds for the latter "resuscitation".

The EU promises to consider a possibility to grant 100 mln Euro to support the Energy Efficiency Fund in Ukraine. It was announced on July 19 at a meeting of Vice-President of the European Commission for Energy Union Maroš Šefčovič with Prime Minister of Ukraine Volodymyr Groysman.

Brussels should finally pay attention to a growing number of people in Europe who would vote for Ukrexit, who do realize the futility of such financial droppers and other attempts to preserve the gas transit function and the physically worn out and over age gas pipes for artificial breathing of the Ukrainian economy.

A new study "Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe and the UK" written by Andreas Goldthau for the European Centre for Energy and Resource Security and the Russia Institute of King’s College London has concluded, "As the case of Nord Stream 2 demonstrates, the EU therefore needs to take choices on a central question: is the Commission a regulator (hence neutral) or a political animal?"

Why not admit that neither any consideration of geopolitical nature given by the European Commission nor least of all a constant Trans-Atlantic preaching may affect the real market competitiveness of the Ukrainian transit? Only people who actually pay for gas in Europe should vote Ukrexit.