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31 December 2019: What Happens If the Gas Stop Flowing? - İrem Ayça Aykın

Ukraine has counted on Russia for decades. The year 2014 marks the drastic change in relations between these two states. Russia’s struggle to keep Ukraine alienated and US’s low priced liquified natural gas (LNG) remains as two fixed variables that affect the mood of the region. US has become highly competitive about its LNG as opposed to Russian gas. As of 2020 US boosted its export capacity to Europe to 112 bcm/y, more than doubling capacity in 18 months. According to the International Energy Agency, Europe has saved $8 billion due to US LNG import. The imports of LNG are expected to increase gradually.

Russia claims that the process for liquefaction is costly and not sustainable. Russian strategy of having a long-term contract for pipeline gas is in a state of total disorder as importers seek LNG. The expiration date of the 10-year-long agreement between Ukraine and Russia is getting closer, and there are doubts if the Nord Stream 2 and Turkish Stream can replace Ukraine transit. Nord Stream 2 will not be complete until 2020, even if it is operational Ukraine transit would be needed. This expiration date marked the day as “the day gas will stop flowing.” In other words, a remake of the 2009 winter crisis when reportedly 11 people died. In the absence of an agreement, on January 1st, gas will stop flowing to Europe. Europe has reported that their gas storages are full, and the consequence would not be as heavy as 2009, but still could be crucial. Depending on the length of disruption, European demand for LNG could peak.

To be prepared, Ukraine does not rely on only one option. From the Soviet era, Ukraine inherited huge underground gas storages (UGS), which is the largest in Europe, and it is located close to Poland, Slovakia, Hungary, and Romania. These UGS, has the capacity of 31 bcm, can store gas from the Baltic Pipe and LNG terminal in Poland. Ten bcm of these storage units are not utilized due to hampers created by Russian owned Gazprom. Putting them into utilization makes extra 10 bcm storages available. Ukraine is planning to accumulate gas when the prices are low and sell it to EU importers during prices are increased. The role of Ukrainian UGSs gets crucial as LNG is getting more and more popular in Europe. Not only for European clients, but also Ukranian UGSs can hold gas for distant clients as well as there is a great profitable market in Asia.

Despite the tense relations between Russia and Ukraine after 2014, Ukraine remains a vital transit route for Russia. The gas transit contract between Gazprom and Naftogaz expires on December 31st, 2019. Still, it is expected a five-year extension contract on the same conditions as the current energy minister Orzhel suggests. The deal is expected to be signed by the end of 2019.


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