June 16, 2016 / 9:31 AM / 3 years ago

Gazprom warns of steep gas transit cuts via Ukraine after 2020

ST PETERSBURG, Russia (Reuters) - Russian gas transit to Europe via Ukraine will fall steeply after 2020 once state gas giant Gazprom has built a new pipeline under the Baltic Sea, Gazprom head Alexei Miller said on Thursday.

CEO of Russia's state gas giant Gazprom Alexei Miller attends a session of the St. Petersburg International Economic Forum 2016 (SPIEF 2016) in St. Petersburg, Russia, June 16, 2016. REUTERS/Sergei Karpukhin

Ukraine has been the main transit route for Russian gas to central and Western Europe since Soviet times, delivering more than 100 billion cubic meters (bcm) or over a quarter of the continent’s needs during peak years.

Pricing disputes with Ukraine have prompted Gazprom to build new lines including via Belarus and under the Baltic Sea to Germany, reducing transit via Ukraine to 50-70 bcm a year in recent years.

Russia’s annexation of Crimea from Ukraine and support for separatists in eastern Ukraine have sent relations between Moscow and Kiev to an all-time low. Russia has cut gas supplies to Ukraine and threatened to reduce transit by rerouting gas.

Miller, speaking at an economic forum in St Petersburg, said transit would fall to 10-15 bcm a year, which would be only a tenth of the existing capacity and less than a quarter of transit volumes in recent years.

The move would allow Gazprom to save $1.6 billion a year by not investing in maintaining old pipelines transiting Ukraine, Miller said.

Gas will instead be delivered via the second leg of the Nord Stream pipeline under the Baltic Sea to Germany, which Gazprom wants to build with European companies such as Royal Dutch Shell despite opposition from some European Union countries.

Miller said pipe-laying for Nord Stream would start in early 2018. He defended the project as the most efficient and ecologically friendly given that it would be a much shorter route to deliver gas from Arctic fields to European customers.

Last year, Gazprom signed a shareholders’ agreement on Nord Stream-2 with E.ON, BASF/Wintershall, OMV, ENGIE and Shell with the aim to start supplies at the end of the decade.

The United States criticized the project, saying it was more about politics than economics as it would allow Gazprom to cut off Ukraine and would have a devastating impact on the country while damaging Eastern Europe’s energy security.

Gazprom is fighting to defend market share in Europe in the face of oversupply, betting on rising long-term demand as Europe’s own gas output declines and as the United States plans to start large-scale exports of liquefied natural gas.

Gazprom has put the cost of Nord Stream-2 at up to 9.9 billion euros ($11.2 billion), with the consortium planning to build a third and fourth pipeline to transport up to 55 billion additional cubic meters of gas a year.

It would double the capacity of lines 1 and 2, which take the same route. The new pipelines are due to start transporting gas in 2019.

Reporting by Dmitry Zhdannikov and Denis Pinchuk; Editing by Jack Stubbs and Dale Hudson

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