Ukrainian Prime Minister Arseniy Yatsenyuk has called on EU member states to invest in the Ukrainian gas transport system (GTS) as Kiev’s cash crisis deepens.

Ukraine would like European purchasers of Russian gas to buy it at the Russian-Ukrainian frontier, rather than at Ukraine’s western border. This could pave the way for direct European investment in Ukraine’s GTS.

“On behalf of the government, I am addressing our European friends so that the EU member states start investing in the Ukrainian GTS,” Yatsenyuk said at the launch ceremony of the Vojany-Uzhgorod pipeline in Velke Kapusany, Slovakia, on Tuesday.

He pointed out that the Ukrainian parliament – the Verkhovna Rada – had passed legislation allowing only European and United States companies to obtain stakes in a company managing and operating the Ukrainian GTS and gas storage facilities.

This prevents Russia’s Gazprom from taking a stake. The Russian company is the main supplier of Ukraine’s gas and the source of large volumes that cross Ukraine from east to west.

A total of 86 billion cubic metres of gas passed through Ukraine in 2013, according to Ukrainian pipeline operator Ukrtransgaz.

Ukrainian state oil and gas company Naftogaz Ukrainy said in August that if European companies buy gas at the Ukrainian-Russian border this could avoid the risk of disruption – such as in 2009, when transit via Ukraine came to a halt.

Naftogaz said the current situation, in which European companies buy gas at Ukraine’s western border, is unstable for several reasons. Firstly, an agreement to balance gas supplies between Ukrtransgaz and Gazprom was terminated by Russia on 17 June, which means Gazprom will not be able to use the gas in Ukraine’s underground gas storage facilities to cover peak consumption in the EU.

Secondly, there are no interconnection agreements between Ukrtransgaz and the GTS operators of neighbouring European countries, which makes standard balancing in gas transit impossible.

“In transferring its gas to buyers at the border with Ukraine, Gazprom is stripped of the opportunity to threaten Europeans that it will cut off supplies, using unfounded accusations that Ukraine withdrew more gas than sanctioned by the contract,” Naftogaz said in a statement.

The company said changing the sales point would also lower the risk of Ukraine imposing sanctions against Gazprom. “Purchasing Russian gas at [the Russia-Ukraine] border will present European gas companies with the opportunity to control their gas on Ukrainian territory, including through the use of the significant capacity of underground gas storage facilities in the west of our country,” Naftogaz Chief Executive Andriy Kobolev said in a statement. “Ukraine will in turn receive a direct connection with European gas network operators. This type of transit structure is advantageous for both parties,” he added.

Cash required

Yatsenyuk’s call for direct European involvement comes as the country faces an acute cash crisis and is considering significant reforms of its gas sector. “The new Ukrainian legislation… opens investment in [the system by] up to 49% for EU and US investors – should anyone want to join, of course, which is a big ask at this point,” IHS Global Insight analyst Andrew Neff told Interfax.

“The Ukrainian sanctions on Russia seem to be a back-door way of conducting energy reform and incentivising European buyers of Russian gas to take transit matters into their own hands,” he said.

“My understanding is that western utilities are not especially attracted by this option – the German companies in particular – so I think it is difficult to say at this stage just how feasible this is,” John Lough, an associate fellow at Chatham House, told Interfax.

Ante Batovic, an analyst with Global Risk Insights, agreed. “Neither the Russians nor the EU are keen to support the move, as it would mean changing the existing transit contracts. In addition, considering that Ukraine now depends on gas deliveries from Poland, Hungary and Slovakia, any disruption in gas deliveries to Europe would automatically mean cutting these off – and that is something that Ukraine will most certainly try to avoid,” he said.

Considerable investment could be required to modernise Ukraine’s GTS. Ukrtransgaz, which operates Ukraine’s trunk gas pipeline system and 12 of its underground storage facilities, has suggested increasing its 2013 capital investments by 120% to UAH 1.9 billion ($238 million).

Capital investments in 2012 amounted to UAH 872 million, 10% more than in 2011.

By Tom Washington and Elena Opimakh