Ukraine is concerned that it has no guarantee for natural gas transit through its transport system either from Russia as seller or the European Union as buyer.

“There are no guarantees either from Europe or from Russia even for 2012,” the deputy chief of national oil and gas company Naftogaz Ukrainy Vadim Chuprun said at a December 14 press conference in Kiev. “In order to put together long-term modernization programs, the prospects need to be understood,” he said.

Chuprun also expressed concern over the passivity of European banks in regards to lending for the modernization of Ukraine’s gas transport system, even though preliminary financial support agreements had been struck several months ago.

Ukraine has already begun modernizing the system with its own monies, and this process will take $5.3 billion over 5-7 years, he said.

“Europe has proposed, and these were its initiatives, to take part in the modernization, effectively invest funds, and receive the corresponding finances from transit,” Chuprun said, expressing hope that a first tranche of $308 million will be extended in the first quarter of next year.

The chief engineer at Ukrtransgaz, Ihor Lokhman, said that investment in the modernization of Ukraine’s trunk gas pipelines would make it possible to decrease the cost of transport services by improving the efficiency of the system’s operation.

“There are no claims against our system. On the contrary, it has been said that its prospects today, and in the distant future, have been provided for; the corresponding funds for this were offered. In order to maintain it in the condition required by world standards, with all the economy and operational indicators, the corresponding funds need to be put in,” Chuprun said.

Ukraine officially announced the commencement of gas transport system modernization this summer. The first phase of the reconstruction, to be undertaken with the involvement of international financial organizations, will be the overhaul of the Urengoi-Pomary-Uzhgorod gas pipeline, which involves the reconstruction of Ukraine’s section of the pipeline and should take three years. Investment in this phase will be $538.87 million, including $230.87 million from Naftogaz Ukrainy’s coffers and $154 million each from the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank.

Ukraine’s gas transport system has throughput capacity of 288 billion cubic meters (bcm) at intake and 178.5 bcm at outtake, including 142.5 bcm to countries in Europe and 3.5 bcm to Moldova.Last year, 98.602 bcm of gas transited Ukraine bound for countries in Europe and the Commonwealth of Independent States, which was 2.9% more than the year before.

Ukraine is also critical of the European Union’s position on Russia’s building the South Stream gas pipeline, Chuprun said.

The recent commissioning of the Banatski Dvor underground gas storage facility in Serbia is an important part of the South Stream project, Chuprun said. “It surprises us that European officials have not reacted to this, and we regard their silence as a sign of agreement. That’s why such a position doesn’t make sense to us, especially knowing that the position was straightforward: the European route is the Nabucco gas pipeline. Even European Energy Commissioner Gunther Oettinger talked about this. And now there is silence,” he said.

South Stream is a direct competitor to Ukraine’s gas transport system, Chuprun said. The cost of building it is quite a lot more than investments that might be made in the Ukrainian system to increase its throughput capacity for gas destined for Europe, he said.

“The cost of South Stream today looms at $27 billion. For the sake of the short term, this may be beneficial for individual European countries, since they could receive preferences on gas prices today. But we need to remember that within five years they will need to pay transport costs for South Stream – I’m afraid to even name a figure for the cost of gas,” he said.

“The Ukrainian side has put forth its proposal regarding the efficient use of the southern direction with the Ukrainian gas transport system. With the Ukrtransgaz system’s existing infrastructure and minor capital investments, we are capable of providing up to 45 bcm of natural gas to countries in the Balkans area. This is a more economically beneficial transit corridor than to build the main South Stream gas pipeline at the bottom of the Black Sea for quite a lot of money,” Ukrtransgaz’s senior engineer Ihor Lokhman said.

The official launch ceremony of Banatski Dvor was held in Serbia on November 22, two months after it was physically commissioned on October 1. At the ceremony, Gazprom CEO Alexei Miller said that “essentially, the commissioning of the Banatski Dvor gas storage facility is the launch of the first facility in the framework of the South Stream project.” Miller and Serb President Boris Tadic discussed the prospects for implementing the project during Miller’s visit to Serbia.

Banatski Dvor is one of the major gas storage facilities in South-Eastern Europe. It actively stores 450 million cubic meters of gas, with a maximum daily send-out capacity of 5 million cubic meters per day. The storage facility also has the potential for future expansion. It provides additional security for Russian gas deliveries to Hungary, Serbia, and Bosnia and Herzegovina.

In order to diversify natural gas exports routes, Gazprom plans to construct a gas pipeline – South Stream – through the waters of the Black Sea to countries in South and Central Europe. Intergovernmental agreements have already been signed with Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia, and Austria on the land section of the project.

Gazprom and Italy’s Eni initiated the South Stream project. France’s EDF and Germany’s BASF/Wintershall also joined the project. A new shareholder agreement was signed in Sochi on September 16. EDG and BASF each hold 15% in the project, Eni 20% and Gazprom 50%.