Russia, Ukraine strike new payment deal to maintain gas supply

By EWA KRUKOWSKA and ELENA MAZNEVA
Bloomberg

The risk of Russia cutting off natural gas supplies to Ukraine this month diminished after the countries agreed on prepayment conditions in talks brokered by the European Union.

Russian Energy Minister Alexander Novak and his Ukrainian counterpart Volodymyr Demchyshyn met late Monday in Brussels after a dispute over deliveries to rebel-held regions in the east of Ukraine threatened to disrupt gas flows.

Ukraine confirmed at the talks it will continue paying for the fuel in advance under an interim deal signed in October, Novak said. Russia agreed for now not to charge for gas delivered directly by OAO Gazprom this month to the conflict zones in Ukraine, he said.

“The risk of gas shortages is temporarily removed,” said Alexander Paraschiy, an analyst at Concorde Capital in Kiev. “But it’s clear that uncertainty about further gas ‘‘packages’’ is quite large.”

Ukraine is the transit country for more than 10% of European gas. “I’m reassured that the supply of gas to the EU markets remains secure,” said EU energy union chief Maros Sefcovic, who presided over the talks.

The EU would seek a new gas accord between the former Soviet allies at talks later this month, Sefcovic told reporters in Brussels on Tuesday. That deal should last until a final arbitration ruling on the Russia-Ukraine gas contract, which runs through 2019, according to Sefcovic. Gazprom sees the ruling by the middle of next year.

Gas Prices

“Once the winter package is concluded what remains in place is the standing long-term contract between Ukraine and Russia,” Sefcovic said.

UK gas for April delivery declined as much as 2.2% to the lowest since Feb. 24 on the ICE Futures Europe exchange in London.

While Ukraine cut its reliance on Russian gas to 34% from 51% during the last year, the fuel remains a powerful weapon amid an 11-month insurgency by pro-Moscow rebels. Russia cut gas flows to Ukraine for six months in June after a dispute over unpaid bills. A temporary deal brokered by the EU in October allowed supplies to be restored for the cold season, before expiring at the end of this month.

A new dispute reignited when Gazprom started deliveries to pro-Russian rebels in east Ukraine on Feb. 19, saying people are freezing there after state-run Naftogaz halted supplies. The Moscow-based exporter demanded Ukraine pay extra to meet the cost of shipments, while Naftogaz refused and alleged Russia was failing to meet its fuel requests.

Ukraine Prepayments

The parties agreed that the Ukrainian prepayments will cover only volumes supplied through mutually agreed entry points, Naftogaz said in an e-mailed statement after the talks. Under the deal, direct supplies by Gazprom through other delivery points to the self-proclaimed Luhansk and Donetsk republics will be discussed separately.

“We didn’t sign any documents today because there was no need,” Novak said in televised comments after the meeting. “We currently have agreements in place since October 2014 and nobody’s canceled them. They are in effect until the end of March.”

The countries plan to discuss who will pay for the rebels’ gas later, while Gazprom will calculate the bill using prices it charges Naftogaz, Novak said in an interview with state television broadcast on Tuesday. The bill may reach $900 million by the end of the year, VTB Capital analysts in Moscow wrote in an e-mailed note.

Next Season

“This is an important development as supply from Russia is key in order to refill Ukrainian storages ahead of winter,” May Mannes, Stavanger, Norway-based head of gas and LNG analysis at Eclipse Energy Group, said by e-mail Tuesday. “Even importing the maximum throughout summer, utilizing all available capacity from the West, Ukraine will not be able to refill to the levels seen ahead of last winter without Russian supply.”

Negotiators agreed to continue the three-way talks on further supplies by the end of this month. They may run over and, like last year, continue through the next heating season, Paraschiy said.

Ukraine needs as much as 20 billion cubic meters of gas in its underground storage before the winter to boost domestic supply security and ensure EU-bound fuel isn’t threatened, according to Sefcovic. That’s equal to the country’s total gas imports last year, with about two-thirds delivered from Russia.

EU Imports

Ukraine may import as much as 90% of the gas it needs from the EU this year, if there’s no price agreement with Gazprom, Naftogaz head Andriy Kobolyev said in January.

Russia is ready to consider keeping a current price discount for Ukraine, while the smaller country still owes Gazprom about $2.4 billion for past deliveries, including penalties, Novak said.

Demchyshyn told reporters his country is in a “sufficiently strong position” to cope without Russian gas until the next heating season. During the first 20 days of February, Ukraine cut gas consumption by almost 15% from a year earlier.

“There is no critical need for Ukraine to reach a quick deal, and Gazprom understands that too,” according to Demchyshyn, who said gas shipments from Europe are sufficient and demand is declining.

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