EU gas flows to Ukraine too small to cope with Russian disruption

Thu Mar 6, 2014 10:59am EST

* EU reverse flows to Ukraine likely to be below 10 bcm/year

* Russia supplies over half of Ukraine's gas

* Europe also may have insufficient reserve gas for Ukraine

By Michael Kahn and Henning Gloystein

PRAGUE/LONDON, March 6 (Reuters) - Directing natural gas from the European Union to Ukraine if Russia stops supplying its western neighbour would fail to keep up with demand for long as capacity between the EU and Ukraine is too small, analysts said on Thursday.

Ukraine last year imported around 28 billion cubic metres (bcm) of natural gas from Russia, which wants to maintain its influence over the former Soviet republic and fend off EU efforts to limit Moscow's sway.

Disputes between Russia and Ukraine, which consumes more than 50 bcm of gas a year, have previously led to supply cuts for the EU, including in 2009 when hundreds of thousands of homes in southeast Europe went without heat in winter.

So far, Russia's state-controlled Gazprom, which supplies around 30 percent of the EU's gas needs and sends a third of that gas through Ukraine, has maintained supplies to Ukraine during a crisis in which Russian forces have effectively seized Ukraine's Crimea region.

But to prepare for a possible cut-off, the European Union has plans to send gas from its own storage facilities to Ukraine.

"The country (Ukraine) has sufficient gas storage to hold it through a few months, and could also turn to neighbours for additional gas supplies via reverse flows on pipelines that could bring up to 10 bcm (per year) of gas from Germany and Hungary through Poland and Slovakia," political risk consultancy Eurasia Group said in a report this week.

Many other analysts say the available capacity to pump gas from the EU to Ukraine is well below 10 bcm, and Eurasia Group also warned that Ukraine would be likely to receive less.

"If gas supplies to Europe are already compromised by an ongoing conflict, Ukraine may find its neighbours increasingly unwilling to provide this stopgap supply," it added.

NOT ENOUGH GAS?

One of the EU's key plans to support Kiev in case of a supply cut by Russia is to use reverse flows to send gas to Ukraine, but at the moment the capacity to do so is limited.

Ukraine began importing gas through reverse flows from Poland and Hungary in 2012 but analysts said the amounts so far have been equivalent to a mere 2 bcm a year.

According to consulting group Wood Mackenzie, Poland has a reverse capacity of 1.5 bcm to Ukraine while Hungary is able to send 3.5 bcm. Romania has the potential for 1.8 bcm but there has been no firm agreement on its use, the consultancy said.

The biggest opportunity would be pumping gas through Slovakia, the EU gateway for Ukrainian supplies, which has more than 20 bcm of reverse capability.

The problem is that such flows from Europe to Ukraine, which would largely send Russian imports into the EU back east, require contractual agreements between the governments of countries through which the gas passes.

While there have been talks, no deal has been finalised, although sources at the European Commission said it was working to get the reverse-flow arrangement finalised quickly.

Despite these efforts, one source said it would take another six months for gas to flow from Slovakia to Ukraine, too late to address any imminent disruptions, and the link could initially carry only 6 bcm per year.

The real issue, however, might not be Ukraine but Europe itself. Wood Mackenzie estimated Europe would need more than 160 bcm of Russian gas in 2014.

While Russia has enough gas and can reroute some flows from Ukraine to the Yamal Europe and Nord Stream pipelines, which supply Germany, the consultancy said these alternatives would still leave Europe needing more than 30 bcm of gas via Ukraine.

"Moscow does not shy away from sanctions against Ukraine, it has made this clear in the last few days," German consultancy Ispex said. "The question is what will happen to the transit gas destined for western Europe should Moscow stop deliveries to Ukraine."

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