Ukraine to reduce EU gas imports as Russian prices drop

By ISIS ALMEIDA and ANNA SHIRYAEVSKAYA
Bloomberg

Ukraine will reduce natural gas purchases from the European Union as a drop in oil prices and the removal of export tariffs cut the price of Russian fuel, according to state-run company NAK Naftogaz Ukrainy.

Imports through Slovakia may decline by about 30% from January levels and flows from Poland and Hungary could halt, Yuriy Vitrenko, managing director of international business at Naftogaz, said in an interview at the Flame gas conference in Amsterdam. Ukraine was using maximum capacity from Slovakia earlier this year as Russian prices were higher.

A 46% decline in oil prices since June is starting to filter into long-term European gas contracts, which are usually indexed to crude with a six- to nine-month lag. The extension last month of a winter package brokered last year by the European Union also means cheaper Russian gas, with the export tax removed, he said.

“We don’t need to buy as much gas from the West as we needed to buy, for purely commercial reasons,” Vitrenko said Wednesday. “Now we have some flexibility, and every time I negotiate with suppliers, they understand that if the price is not attractive I won’t be buying volumes this month or maybe even next month.”

While Ukraine cut its reliance on Russian gas to 34 percent from 51% during the last year, the fuel remains a powerful weapon amid an insurgency by pro-Moscow rebels. Flows from European nations started last year after OAO Gazprom cut supplies to its former Soviet neighbor for about six months from June. Slovakia, Poland and Hungary are able to ship gas to Ukraine from the EU, with about 10 different companies selling the fuel to Naftogaz each month.

EU Supplies

Europe can provide about 10 billion cubic meters (350 billion cubic feet) of gas per year to Ukraine through firm capacity and another 10 billion using so-called interruptible supplies, Vitrenko said. While flows from Slovakia are reliable, they are less so from other nations. Imports from Hungary stopped this month due to price, he said.

Naftogaz executives expected to meet Gazprom representatives on Thursday to try to extend the agreement beyond the second quarter to ensure injections for the summer, Vitrenko said. The talks won’t take place, he said in Amsterdam on Thursday. Gazprom said Wednesday no talks are planned this week.

The Ukrainian company is seeking to extend the current supply agreement, which ends in June, until a court in Stockholm has made a decision on an arbitration case between the two companies, according to Vitrenko. That decision is expected in 2016. Russia is prepared to offer Ukraine the discount until the court ruling, Energy Minister Alexander Novak said Monday.

Storage Injections

“I would say we are positive,” he said. “There are some details that should still be agreed, but there is some common ground in terms of understanding of the situation.”

Naftogaz plans to have 15 billion to 16 billion cubic meters of gas in storage by next winter, about the same level as last year, Vitrenko said. Inventories could even be as high as 17 billion. While the company needs to inject about 8 billion cubic meters this summer, it doesn’t have to start now. Storage can be filled in about two to three months, he said.

Ukraine could fill its storage sites with cheaper gas in the third and fourth quarters, when Russian supplies would be cheaper, Vitrenko said. That would depend on whether the current agreement with Gazprom is extended and the export tariffs are still suspended, he said.

Summer Injections

“Because of this uncertainty it’s rather difficult for us to finalize our plans for injection for the summer,” he said. “According to the contract, and the formula in the contract, this price should be lower in the third and fourth quarters, so from a purely commercial point, we should not be buying now.”

While Ukraine doesn’t plan to buy “significant volumes of gas either from Russia or Europe for now, it will still ensure security of supply,” Vitrenko said. Naftogaz will “monitor” Ukraine’s relationship with Russia to get an indication on whether it needs to step up purchases from EU nations, he said.

“If the war situation in Ukraine escalates, then we will be more driven by security of supply reasons,” he said. “We will have some supply from the West. We still understand we need to diversify.”

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