Naftogaz Seeks Stronger Sanctions on Russia to Stop Pipeline

  • Naftogaz seeks sanctions to kill Nord Stream 2 gas pipeline
  • CEO says fracking may erase Ukraine’s need for gas imports

The U.S. and the European Union should impose stronger sanctions against Russia to kill the country’s plan for a natural gas pipeline supplying Germany because it would raise prices for consumers and jeopardize energy security, said Andriy Kobolyev, chief executive officer of National JSC Naftogaz of Ukraine.

Naftogaz, Ukraine’s state oil and gas company, is calling on the U.S. to increase sanctions on Russia to halt work on the Nord Stream 2 twin-pipeline system led by Moscow-based Gazprom PJSC. The 28-nation EU should investigate whether the project, which would link Russia’s gas supplies to Germany via the Baltic Sea, violates the trading bloc’s energy-market legislation, Kobolyev said during an interview at Bloomberg’s Washington offices.

Andriy Kobolyev

Photographer: Simon Dawson/Bloomberg

“We believe Nord Stream 2 should have financial sanctions so they will not be able to draw financing from an international bank,” he said. “You are killing other routes in exchange for the route which will go through Germany.”

Complex Relationship

The dispute lays bare the complex relationship between Ukraine and Russia, which has been particularly tense since Russia invaded Ukraine and annexed the Crimea region following pro-European demonstrations in Kiev in 2014. While confronting Russia -- the world’s largest natural-gas supplier -- over the Baltic pipeline, Ukraine is also negotiating with Gazprom for potential supplies of the heating fuel for delivery later this year.

In addition to Gazprom, shareholders in Nord Stream 2 AG, the company developing the pipeline system, include Netherlands-based Royal Dutch Shell Plc and France’s Engie SA. The group in March announced suppliers for the pipes, and Gazprom is expected to hold its tender for pipe-laying soon.

“Nord Stream 2 completely complies with national law and international law, including EU legislation,” Jens Mueller, a spokesman for the project, said in a phone interview. He said the infrastructure work is needed for energy security and that it falls outside of the scope of sanctions. It meets the permitting requirements of five countries, Mueller said.

Cheap Route

Russia may limit natural gas transit through Ukraine after the Nord Stream 2 project is complete because it would provide the cheapest and most direct route to European consumers, Gazprom Chief Executive Officer Alexey Miller said in St. Petersburg on Thursday.

“The United States is deeply concerned about the Nord Stream 2 proposal as it goes against the principle of EU Energy Union and energy security," Amos Hochstein, the U.S. State Department’s special envoy for international energy affairs, said in a statement. "I think we’ve made clear that we do not believe this is an economically motivated project."

The pipeline system would probably harm countries including Ukraine and Slovakia economically, Hochstein said. The U.S. prefers the development of a southern pipeline route and liquefied natural gas supply options, he said.

If built, Nord Stream 2 must operate within a legal framework that takes into account EU energy-market rules, European Commission Vice President Maros Sefcovic said in Brussels on April 6.

‘Important Asset’

Nord Stream 2 is probably Russia’s “most important asset” for access to the European market, Ira Joseph, head of global gas and power at PIRA Energy in New York, said in a phone interview. “The more gas that Russia can reroute around Ukraine, the more vulnerable position Ukraine is in.”

Naftogaz will decide by the end of June whether to obtain supplies for delivery later this year from either Russia or Europe, and European suppliers have offered to sell the power plant fuel for $170 per thousand cubic meters, according to Kobolyev.

“So Gazprom will need to be competitive with this,” he said. Kobolyev declined to comment on the identity of potential European suppliers and possible purchase and storage amounts.

Ukraine’s storage facilities were 31 percent full as of June 16, compared with a two-year average of 39 percent, according to Gas Infrastructure Europe in Brussels.

Naftogaz is looking to horizontal drilling and hydraulic fracturing, or “fracking,” as a way to reduce Ukraine’s dependence on imports in general. The company is seeking to attract foreign investment to provide technical drilling assistance and may conduct as many as 100 fracking exercises this year, according to Kobolyev.

“By 2020 Ukraine can become self-sufficient in terms of gas production” with the help of fracking, he said.

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