Former head of GTS Operator on why Ukraine must halt Russian gas and oil transit

Sergiy Makogon headed the Gas Transmission System Operator of Ukraine (GTSOU) from its inception in 2019 until September 2022. In December 2019, he participated in the signing of the current transit agreement between Naftogaz and Gazprom as part of the Ukrainian delegation.

That contract for the transit of Russian gas was signed for five years and is due to expire on January 1, 2025. Makogon has consistently advocated for the termination of gas transit through the Ukrainian GTS, even if the contract is signed not with Russian Gazprom but with Azerbaijan's SOCAR or another contractor. In fact, Ukraine will continue to pump Russian gas, no matter who owns it on paper.

The same applies to the transit of Russian oil through the southern branch of the Druzhba pipeline, which passes through Ukraine. Makogon suggests stopping it or exchanging the preservation of transit for strategic concessions from Russia. After all, it is Russia that has a vested interest in maintaining oil and gas transit through Ukraine in order to maintain access to the European market.

In an interview with LIGA.net, Makogon outlined his arguments for stopping transit, contrary to the position of Ukraine's political leadership, voiced by Naftogaz Group CEO Oleksiy Chernyshov. This position is that gas transit should be preserved.

On gas transit

LIGA.net: In an interview with LIGA.net, Oleksiy Chernyshov, Chairman of the Board of Naftogaz of Ukraine, outlined his arguments for continuing transit through the Ukrainian gas transportation system. Firstly, we need to ensure the operation of the GTS financially. Second, we want to maintain the transit capacity of the GTS to remain a player on the European energy map. You systematically call for stopping transit. What are your counterarguments?

Sergiy Makogon: I am not criticizing Chernyshov personally. I understand that Naftogaz has a management board and a supervisory board. And Mr. Chernyshov is obviously expressing the company's position.

As for transit, I consider myself entitled to criticize this position. I was involved in the process of signing the transit contract in 2019. Let me remind you of the difference between the situation in 2019 and now.

Back then, we – the government and Naftogaz – tried to prove to the Europeans that the construction of bypass pipelines – two branches of Nord Stream and TurkStream – was carried out by the Russian Federation in order to bypass our GTS. Why? To launch an invasion without any consequences for hydrocarbon trade.

Even Merkel (Angela Merkel, Chancellor of Germany in 2005-2021 – ed.) agreed then that it was necessary to preserve the transit of 40 billion cubic meters of gas through Ukraine. This deterred Russia from full-scale aggression.

Let me remind you that in 2019, the Russian Federation, without all the necessary permits, almost completed Nord Stream 2 (NS2). A few kilometers remained to be completed. But the Donald Trump administration imposed sanctions. After that, the Russians spent almost a year bringing in pipelayers from Kamchatka to complete the construction.

Back then, we believed that as long as there was transit, there would be no invasion.

LIGA.net: And in the current situation...

S.M.: The war has already begun. Last year, the GTS Operator (GTSOU) received about $800 million for transit. However, the GTSOU uses most of these funds for transit: purchasing fuel gas, maintaining compressor stations, repairing and maintaining the GTS at the level required for transit.

The budget receives less than $300 million because the transit tariff does not provide for any excess profits. It is designed to provide transportation. At the same time, Gazprom receives about $5 billion from the sale of gas pumped through the Ukrainian GTS. I do not understand this situation. To me, the disparity in benefits is obvious.

How much does it cost to maintain the GTS if there is zero transit?

What is a GTS? It is about 30,000 kilometers of pipes and 74 compressor stations (CS). 30 of them have not been used for 15-20 years. Back in 2020-2021, when I was in charge of the GTSOU, we drew up a 10-year development plan, which stated that 35 stations needed to be written off.

If transit is zero or minimal, we will need up to 10 stations. The maximum is 12 out of the 74 that are currently being maintained. People work there regardless of whether a compressor station is operating or not. In total, GTSOU employs 11,000 people. This is a very large number of staff.

Getting back to your question. It all depends on how quickly this system can be optimized: something can be simply eliminated, something can be decommissioned, something can be frozen. But this is difficult to do.

When I headed the GTSOU, we announced 4 or 5 tenders for the CS closure. We made a feasibility study (FS). But at that time, we were unable to obtain all the documents necessary to start this process. Let me remind you that the pipes are the property of the state represented by the Ministry of Energy. GTSOU is an operator that has obligations to maintain this infrastructure.

Therefore, if GTSOU decides to close a certain number of compressor stations, the prosecutor's office will come and say: "Wow! What have you done here? You have damaged state property!"

When I was still working at the GTSOU, we initiated draft law No. 6133, which provided for simplifying the procedure for decommissioning certain equipment. But it has not yet been adopted.

Let me phrase the question differently. How much will gas prices rise for domestic consumers if transit is stopped? After all, we know that transit fees partially cover the GTSOU's costs of supplying gas to Ukrainian consumers.

This is a good question. Currently, gas transportation in the domestic system costs about 0.2 hryvnias ($0.005) per cubic meter. According to my calculations, in the case of zero transit, this figure will increase to no more than 0.6 hryvnias ($0.015) per cubic meter.

When we have a market price for gas of 12 hryvnias ($0.29) per cubic meter (for commercial consumers – ed.), its growth by 40 kopecks, which is less than 3%, will not create problems for consumers. In the summer, the market price of electricity increased by 60%. If the final price of gas increases by 5-10%, I think nothing bad will happen. But, of course, we need to optimize the GTS very quickly so as not to pass on the entire cost of maintaining the excess capacity of the GTS to the population.

Let me remind you that our GTS was built with the capacity to transport 145 billion cubic meters per year. Now it is only transporting 14 billion cubic meters a year. And nothing has been done to optimize it. And here I do not blame the current management of GTSOU. I myself ran the company for three years. And I was not able to close a single compressor station, let alone a gas distribution station.

There is a government decree No. 209 of March 2018, which approved the Procedure for decommissioning main pipelines. It was written in such a stupid way that you need to collect documents alone for five years. For example, you need a permit from the State Nuclear Regulatory Inspectorate. What does it have to do with the GTS? Or you need to hold public hearings. You need a lot of certificates.

In the end, nothing happened, and the Ministry of Energy told us unofficially: "You know, there is this government now, and then there will be another one. And when there is another one, the prosecutor will come to us and ask: why did you allow our powerful GTS to be destroyed?"

Returning to the question: prices for domestic transportation will rise, but not critically. Of course, we need to optimize the system. I had a plan: at the first stage, we would re-profile it. Gas generation can be installed at unnecessary compressor stations. There is gas there, there is a line to supply electricity, there is a free site – everything you need.

The second step is optimization. This means closing down unnecessary compressor stations. And the third step is to modernize the 10-12 stations that will be in operation. These machines were built in the ‘70s and ‘80s. They mostly require Russian spare parts.

In general, the GTS is working now only because there are donor compressors that are being dismantled for spare parts. Before the war, we launched tenders for the reconstruction of four compressor stations. But due to the outbreak of the invasion, we were forced to postpone these projects.

Let's assume that someday the government in Russia will change. Wouldn't it be useful to keep a powerful gas transportation system in order to make money on gas transit in the future?

Nothing has changed there for 25 years. So, should we wait for another 25 years, keep this system with 145 billion cubic meters of transit, hoping that something will change someday? In the meantime, they will be earning $5 billion a year, throwing Shahed drones and missiles at our heads.

In addition, the whole world is moving away from hydrocarbons. Europe is actively switching to renewable energy sources and plans to abandon Russian gas altogether starting in 2027.

If something changes, no one is stopping us from building new compressor stations. It takes two years to build a new compressor station. We will build and transit more. Secondly, no one is going to dig up the pipes. They have been diagnosed and hydraulically tested. They can serve for a long time.

And let's not forget that the NS1, NS2, Yamal-Europe gas pipelines have already been built and are not in use. If the government in Russia changes, no one will use the full capacity of Ukraine's GTS, no matter how much we want to.

Naftogaz also talks about the need to preserve the GTS in case of possible gas exports from Ukraine in the future.

Firstly, stopping transit will not prevent us from exporting gas when the opportunity arises. Second, I don't understand why Naftogaz is commenting on transit. In 2019, we had unbundling (separation of supply from transportation – ed.). Either GTSOU or the Ministry of Energy can comment on transit. Naftogaz has some phantom pains.

But it was Naftogaz that signed the current transit contract on the Ukrainian side.

Why did this happen? I was a participant in those events in December 2019. Imagine the situation. A few days before the end of the year, when transit is supposed to stop. There is panic. Our president is pressing: let's sign because the Russians had to pay $3 billion, which they lost in arbitration. The Europeans are pressing because it is winter and there is no gas. 

There was supposed to be a contract either directly between GTSOU and Gazprom Export or between GTSOU and another European company. But at the last minute, this European company changed its mind. And then the Russians began to insist that the contract be signed with Naftogaz.

Miller (Gazprom CEO Alexey Miller – ed.) started saying in my presence that they did not know GTSOU – the company had just been established, but they knew Naftogaz. And so they agreed, because there was no time to look for other options.

Of course, if there were no war, we would be interested in maintaining transit. But there is a war going on. We understand that we will lose something, but the sacrifice on the Russian side will be much greater. We are attacking Russian refineries. This causes hundreds of millions of dollars in losses to Russia. And here, officially, without any special operations, we can cause Russia losses of $11 billion a year if we refuse to transit their gas and oil. That is why I am categorically against the extension of transit.

Could you tell us whether the termination of transit will be critical for the European countries that receive Russian gas through our GTS? Currently, these are Austria, Slovakia, and Moldova.

As for Moldova, only the unrecognized Transnistrian Moldovan Republic (TMR) receives Russian gas. The right bank of the Dniester receives gas from Europe. Partly through Romania, partly through Ukraine. But this is not Russian gas. There are no problems there.

And even for the Transnistrian region, where the Cuciurgan Power Station is located, there is a solution: they can receive Russian gas through Turkiye, Romania, and Ukraine at the very end of the route. All they need to do is book the capacity.

I should mention Hungary here. It receives the bulk of its gas from Russia through the TurkStream. It also buys some gas from Slovakia that is transited through us. But we have not been supplying them with gas directly since 2021.

As for Austria and Slovakia, I would like to remind you that since 2020, both of these countries have been planning to receive gas from Nord Stream 2 through Germany. Additional gas pipelines were built from Germany. In 2019, neither Austria nor Slovakia voiced the need to preserve transit through Ukraine because they had some difficulties. Therefore, there are no technical problems to reorient to other sources.

Austria has never said that they have any problems replacing Russian gas. They said something else: that they have an agreement with Gazprom under which they are obliged to buy this Russian gas until 2040. That is, Gazprom is obliged to supply it, and Austrian companies are obliged to buy it. The head of the Austrian company OMV recently spoke about this in an interview.

So, if Ukraine does not extend the transit, Austria will find other sources and tell Gazprom that it cannot fulfill the contract due to force majeure?

Moreover, they will say: "Gazprom, it's your responsibility to deliver gas to the central European gas hub in Baumgarten, pay the penalties."

Moldova as a whole, including the TMR, consumes about 3 billion cubic meters of gas per year. How much do Austria and Slovakia consume?

Slovakia – 5 billion cubic meters per year. Austria – up to 7 billion cubic meters. These are not very serious volumes. In general, there is no problem to replace such volumes.

Let me explain what Slovakia's interest is. First, they have a Russian gas transit agreement with Gazprom. It is the same as ours. It is valid until 2028. Gazprom pays them $600-700 million annually for capacity. Second, Slovakia buys Russian gas and resells it to other countries with a margin. It makes good money on this.

Eustream, the Slovak gas transmission system operator, makes money on transit, and their largest trader, SPP, makes money on resale. I estimate the annual total earnings of these two Slovak companies from operations with Russian gas at $1.2 to $1.5 billion. This is very significant money for Slovakia, which is why Robert Fico's government is fighting so hard for it.

Do you know at what prices Slovak or Hungarian companies buy gas?

No, we don't. This is a commercial secret. Gas supplies from Russia have always been an element of politics. We can only guess how many kickbacks the Russians give to lobby pro-Russian politicians in these countries. This is outright political corruption. We can see that these two countries are now undermining European unity with the Kremlin's money.

Let me remind you that these two countries are NATO members. And they send more than $10 billion a year to Russia and at the same time expect NATO to protect them from Russia in case of any problems.

Azerbaijani President Ilham Aliyev, who has declared his readiness to sell gas to Europe through Ukraine, says that this year he will supply 13 billion cubic meters of gas to the EU through Turkiye. Is it possible that he will redirect part of this volume through Ukraine?

First, through Russia. And only then – through Ukraine. What for? So that Russia can block this export route at any time? In addition, the Azerbaijani state-owned company SOCAR has invested in the construction of the TANAP gas pipeline (Trans-Anatolian Natural Gas Pipeline Project from Azerbaijan through Georgia and Turkiye to Europe – ed.)

So SOCAR has invested in TANAP, and now it will say to itself: let this TANAP go bankrupt, we'd rather sell through Russia, which can stop this transit at any time?

TANAP's current capacity is 16.2 billion cubic meters of gas per year. But technically, it can be easily expanded to 31 billion cubic meters per year. This would require the construction of four compressor stations. This construction project is estimated at $1.3 billion.

Therefore, it makes no sense for Aliyev to supply his own gas to Europe through Russia and Ukraine. There is only one sense in such a scheme – when there will be a substitution. That is, the same Russian gas will be transported by Ukraine under the guise of Azerbaijani gas.

Again: Azerbaijan and Russia are competitors in gas supplies to the EU. Even if Aliyev had additional physical volumes of gas, which he does not objectively have now, he would never supply them through the territory of the Russian Federation.

If you read in full what Aliyev said at the Forum in Shusha, Azerbaijan, on July 20, where he stated that the EU and Ukraine had asked for gas transit, he had a broader message for Europe. He complained that Europeans do not want to sign long-term contracts for the purchase of gas, so Azerbaijan cannot invest in the development of its gas fields.

Do you have any information on whether Brussels supports the continuation of Russian gas transit through Ukraine?

I was in Brussels a month ago. I talked to my colleagues with whom I maintain relations for old times' sake. I tried to find out who from the European Commission (EC) supports this project? I can say that there is not a single person in the EC who deals with this issue. They say it's a manipulation.

If you look at Aliyev's statement, he said that he was approached by "the leadership of the EU countries." Perhaps he meant the leadership of Slovakia and Hungary.

Moreover, there was an official announcement from the European Commission that Europe would not have any problems if transit through Ukraine was stopped.

Chernyshov hinted that the Azerbaijani project is not the only alternative to extend transit. Can we think of other possible projects? Gas from Turkmenistan? Gas from Kazakhstan?

Let's talk about it. Kazakhstan is importing gas from Russia right now. Uzbekistan also imports gas from Russia. Indeed, Turkmenistan, which produces a lot of gas, is possible. But let me remind you that they used to supply gas to Russia for resale. But in 2009, a gas pipeline in Turkmenistan unexpectedly exploded. Therefore, Turkmenistan is now focused on supplying gas to China. They have already played these games with Russia.

And if it is a swap (replacement) scheme, then it can be gas from Liechtenstein, from China, from Singapore, from anywhere. But the Russians will receive the money.

Before the war, I consistently supported the preservation of transit. But under European rules. To do this, Russia needs to unbundle the GTS operator from its suppliers and deprive Gazprom of its monopoly on gas exports via pipelines. But there is a war going on. It makes no sense for us.

Gazprom's losses in the first half of 2004 amounted to 480 billion rubles ($5.5 billion). The Russian economy is very bad. They are already discussing raising gas prices for domestic consumers at forums. For Gazprom, supplies to the domestic market have always been unprofitable. Previously, it had funds to compensate for this from exports. Now they don't. We need to put pressure on them.

On oil transit

The tightening of sanctions against Lukoil by the National Security and Defense Council (NSDC), which was introduced by a presidential decree on June 24, has not affected the physical volume of oil transit through the Ukrainian part of the Druzhba pipeline. Do you have any idea why Ukraine's political leadership took this step?

I don't know for sure. I have two theories. The first is our stupidity. It happens that we make some decisions and do not understand what the consequences will be.

If you remember, a year ago, a deputy energy minister prepared a decision to introduce certificates of origin for autogas to prevent imports of Russian autogas to Ukraine. But then this resolution was amended to include regular gas. As a result, gas imports to the UGS facilities stopped because customs began to require such certificates (Cabinet of Ministers Resolution No. 459 of May 2023 – ed.)

The Europeans were very surprised: where can we get certificates of origin if we bought gas on a European exchange? Because of this decision, the customs completely stopped gas imports to Ukraine for three weeks (until the Cabinet of Ministers canceled this requirement by Resolution No. 577 – ed.)

Therefore, the "idiot factor" in Ukrainian politics cannot be ruled out.

What is the second assumption?

The second theory is more conspiratorial. The so-called soft reprivatization is underway in Russia. Many assets that were acquired back in the ‘90s are changing owners. And Lukoil has become one of these companies. Its owner, Vagit Alekperov, was kicked out as president of the company back in April 2022. Instead, Vadim Vorobyov was appointed as the head of the company. He is a former aide to Sergei Kiriyenko, Putin's deputy chief of staff.

Lukoil has been undergoing personnel changes. And over the past couple of years, five top managers of Lukoil have died in one way or another. Someone hanged himself, someone fell out of a hospital window, someone died of a heart attack.

But now Lukoil is slowly being dismantled as promising fields are being taken away from it. There are two oil and gas whales in the Russian Federation – Rosneft's Igor Sechin and Gazprom's Alexei Miller. Now that Gazprom has large gas losses, it is very actively developing Gazprom Neft. Some of Lukoil's fields were transferred to this company.

It is interesting to see who has replaced Lukoil's volumes in our pipeline. If it was Gazprom Neft that took away Lukoil's export revenues, then the Kremlin may have needed such a decision regarding Lukoil.

But this assumption does not fit with the fact that the prime ministers of Hungary and Slovakia, Viktor Orbán and Robert Fico, threw a tantrum after this decision, even though the transit volumes did not change.

Indeed, this is an interesting phenomenon. Let's talk about it. Technically speaking, the problem with sanctions against Lukoil could have been resolved in two calls. Lukoil should have called Tatneft or Rosneft and said: guys, let's make an oil swap – we will give you our oil at the entrance to Ukraine, and you will return it to us at the exit. In other words, these sanctions have not created any problems for anyone.

But we were set up, and the Kremlin sent instructions to our Slovak and Hungarian "friends". And this hysteria began. If you read the Hungarian media, there is an "oil crisis" and "only a few days' worth of reserves left". I believe that the Kremlin, Orbán and Fico used this situation.

They are showing their voters that we should be friends with Russia because we get cheap oil and gas from them.

How important is the volume of oil supplied through Ukraine to European countries for Europe?

More than 14 million tons of Russian oil are still supplied through the Druzhba pipeline, which we maintain, per year. This brings us about $250 million a year for transit. And the Russians get at least $6 billion a year.

There are four oil refineries on this pipeline. Two are in Hungary, one in Slovakia, owned by the Hungarian company MOL, and one in the Czech Republic, owned by the Polish company Orlen.

We can see different approaches. The Czechs have announced that they will completely abandon Russian oil from 2025. They have expanded the Transalpine oil pipeline TAL and are pumping oil from Italian ports. They have purchased Kazakh oil, which will go through the CPC (Caspian Pipeline Consortium – ed.), then through the Black Sea and the Mediterranean to Italy. They are also discussing a project to join the German pipeline system to receive oil from the Baltic ports of Germany and Poland. That is, the problem is being solved.

But there are two countries that pretend that nothing is happening around them. Although EU sanctions on Russian oil were announced in June 2022. They made an exception for several landlocked countries, such as the Czech Republic, Slovakia, and Hungary.

Normal countries are working to get resources from alternative sources. There are solutions for Hungary and Slovakia, too. It is possible to expand the Adriatic oil pipeline from Croatia to Hungary relatively quickly and inexpensively and supply their refineries with oil from the Mediterranean. But no one has done anything for two years.

And when Fico says that Ukraine is jeopardizing his country's energy security by its actions, this is hypocritical nonsense. It is he, as prime minister, who puts his country at risk by doing nothing to diversify oil sources during the two years of war.

Transit can stop at any time, regardless of Ukraine's desire. We are constantly being bombed, we have large-scale power outages. And the oil pipeline is powered by electricity. We can shut down electric pumping stations simply because people are left without electricity for half a day at a time.

Apart from political reasons, are there any other reasons why Hungary and Slovakia are so keen on Russian oil from Druzhba?

The Hungarian budget receives additional funds from this. They have introduced an additional tax on MOL. It is calculated as the difference between the prices of Brent and Urals oil. That is, the Hungarian government fills the budget by buying cheaper Russian oil from a private company.

Then the question arises: why can they do this and we can't? Why don't we introduce an additional tax on transit? If we cannot stop transit because of some obligations to the EU, no one is stopping us from increasing the cost of transit. It would be transparent and understandable.

I have repeatedly spoken about my plan. Given that the Russians are very interested in extending oil and gas transit through Ukraine, we need to exchange it for three things: de-occupation of Zaporizhzhia NPP, cessation of attacks on the energy sector, and an increase in the cost of transit through the introduction of a tax.