As Ukraine unbundles its gas system, the architect speaks

Unbundling the gas transmission system of Ukraine will become effective on 1 January 2020. This is a major milestone following years of internal bickering, as well as obstructions from the Russian side. EURACTIV spoke to chief unbundling architect, Clare Spottiswoode.

Ukraine is a party to the Energy Community Treaty and has an Association Agreement with the EU. Both require aligning legislation in the energy field with the EU acquis, namely with the rules on the internal electricity and gas market in the Third energy package.

On 17 November, the long awaited “Unbundling Law’ came into force after being passed by the Parliament on 31 October. The Energy Community commented that “following years of inertia and political infighting, the adoption of the Law removes one of the main obstacles to compliance in the country’s gas sector and for the continuation of long-term gas transits from Russia”.

There were obstructions from Moscow – as a party to the existing gas transit agreement between Naftogaz and Gazprom, consent from Gazprom was needed to transfer rights/obligations under the existing contract to a new independent GTS Ukrainian operator (Ukrtransgaz (UTG).

UTG, a subsidiary of Naftogaz, has already reassigned nearly 10,000 employees involved in gas transmission and ensured that all necessary business processes and IT-systems are in place. The dispatching centre, the heart of the transmission operation, is fully transferred to the Transmission System operator (TSO).

The Russia-Ukraine gas contract contract expires on 1 January, and this is also the day when UTGis ceding the TSO to Mahistralni Gazoprovody Ukrainy (MGU), a state-owned company, which is independent from Naftogaz group.

Along with the handover of the TSO ownership to MGU, the government will transfer the gas transmission system under full operational control of the new TSO, led by CEO Sergiy Makogon.

The control over the MGU itself is transferred to the Ukrainian Ministry of Finance. According to law, no interference from their side is possible into the operational/investment activities of the TSO.

“We just had a long meeting with the MGU, the supervisory board, and we were just confirming that making sure that everything was fine. They were happy that they had all the skills and the people they needed to run the unbundling from 1 January”, said Spottiswoode, speaking on the phone from Kyiv on 18 December. She has the title of chairwoman of the supervisory board of Naftogaz.

Spottiswoode paid tribute to the Naftogaz CEO Andriy Kobolyev, who has run the state company since the 2014 Ukrainian revolution, when he was chosen as an outsider untainted by the corruption of the regime of Viktor Yanukovych.

“Andryi and I promised that we would deliver on bundling and I think many people just didn’t believe us. They were very sceptical. But […] it’s all done and it will be delivered”, she said.

Spottiswoode came on board Naftogaz in January 2018. She explains:

“One of the reasons I was appointed is because I did the first ever unbundling in the whole world in the UK. Because we were introducing competition, and in order to create vibrant competition, we had to separate out the monopoly parts, which is the network, the pipes. And so I had to work out a design for unbundling our pipelines to ensure that we could get competition. So we did that in the UK. So it’s somewhat of a surprise to me when I came back to this job in Ukraine that the European Commission has adopted a model for unbundling which is identical to what I designed all those years ago. So it’s very familiar to me, the whole process of unbundling and how to do it”, she said.

Asked about the Russian obstructions, Spottiswoode said that unbundling was a complicated and time-consuming task.

“To me, 1 January 2020 was actually quite a quick date to deliver everything you need to do to get unbundling done. So to me, [the deadline with the expiry of the Russian gaz contract] has never been a constraint”, she said.

Asked what the difference between unbundling in the UK and in Ukraine was, she said the task in the UK had been greater.

“We had to unbundle the pipelines, not just the national pipelines that we’re doing here, but also the tiny pipes going into each individual premises, each individual house. So our task was far bigger than what we’re doing here. And also it has never been done before, so we had to work out from scratch, what model to use and what was important, how to make sure that we had the computer systems in place. And that was 1996, a long time ago. Computers were far less powerful then. I think that was a far, far more difficult process”, she said.

She also said that in the UK, the political circumstances had been easier, while in Ukraine, there was “another set of complexities”, with a change of administration halfway through, and international implications with Russia and the EU.

Regarding relations with Russia, she mentioned another Ukrainian request for the Arbitration Institute of the Stockholm Chamber of Commerce to rule on a $12 billion claim against Gazprom. Ukraine already won one such legal battle to the tune of $2.5 billion.

Asked to explain this claim of huge dimensions, she said:

“Andriy [Kobolyev] described it to the British ambassador really well, he said just imagine you’ve got a $1000 iPhone and you lease to someone for a year, but they give it back to you after six months having paid you half the lease, and then you lose out on money because that iPhone isn’t worth the same to you, particularly if they’ve locked it and you can’t use it.” She continued:

“So what we are doing here is we’re saying to Gazprom, we have all these pipelines that were designed specifically for you. We can’t use them for any other purpose, you are now not providing us with any transit. Therefore, you should pay for the value of those assets that you are forcing us never to be able to use. They were built for you. They are designed purely for your system, we can’t use them in any other way. Therefore, you owe us for the value that you are depriving us of and there are also legal reasons why that is money owed to us.”

Asked if the Russians accept this narrative, she replied “Of course not”.

Asked about the ongoing talks with Russia to possibly continue gas transit via Ukraine, in which the Stockholm arbitration appears to be a bargaining chip, she said it didn’t make sense for Ukraine “to throw away” the value of the Stockholm arbitration.

Asked what would happen on 1 January in the absence of an agreement, if Russia continues to pump gas in Ukraine, as an expert recently ventured to imagine, Spottiswoode said that firstly, Russia would be “stupid” to do that.

“If they did that, we would just say, right well, that’s unknown gas, it has no owner, it is ours thank you very much. If they proved it was Russian gas, then we will say right, we’ll take those assets because you have owe us a lot of money. So we’re restraining your assets around the world in order to get paid the debt that you owe us from Stockholm. So, I mean, Russia might do that, but I don’t know why they would. I mean, you never know.”

And she added:

“But I don’t know what the TSO will do, it’s possible they will just shut down the valves anyways, so that they can’t send gas. Because if there’s no transit agreement, and there’s no interconnection agreement, then why would they not close down the valves?”

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