To Europe for Russian gas

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2014/09/29 • Economy

Article by: Svitlana Dolynchuk

Yet another round of triangular Ukraine-Russia-EU meetings is planned for today in Berlin to regulate the ‘gas’ issue. Their result will not only influence the renewal of gas supplies by Gazprom to Naftogaz in the fall and winter, but also the stable transit of the Russian fuel to EU countries. 

Arseniy Yatseniuk’s government has pessimistic prognoses regarding the possible outcomes of today’s meeting. The Minister for Energy and Coal Industry Yury Prodan stated that “the Russian side practically refuses to cooperate.” Therefore he considers it improbable that they will be able to regulate the situation which caused the suspension of Russian gas supplies to Ukraine on June 16.

Harsh season

This happened because of a conflict between Gazprom and Naftogaz over the price. Starting April the Russian monopoly increased fuel prices for Ukraine from $265 to $480 per thousand cubic meters. However, Naftogaz refused to pay this prices for the supply, considering such an offer blown out of proportion and very distant from the market situation. Therefore, in June Gazprom transferred the Ukrainian state-owned holding to advance payments (this is prescribed in the current contract between the companies signed in 2009 for a period of 10 years).

Not acknowledging the new price, Naftogaz also refused to pay their debt to Gazprom, which, according to most recent evaluations on part of the Russian supplier, has reached $5,3 billion. In order to regulate the argument, the companies filed mutual plains to the Stockholm Court. Later they were united into a single case. According to Prime Minister Arseniy Yatseniuk’s early prognoses, the court may reach a decision within a year.

However, the Cabinet of Ministers already notes that they are missing 5 billion cubic meters of Russian gas to survive the heating season comfortably, despite the attempts made to ensure the organization of alternative fuel supplies, which is being bought from European suppliers. Underground gas reservoirs in western Ukraine are also not entirely full. Therefore, there is a risk that problems might arise during transit of Russian gas to the EU and the satisfaction of the increased winter period demand of European consumers.

On the one hand, it should concern Gazprom, first and foremost. However, under the current contract, it is Naftogaz that is obliged to ensure the purchase of necessary gas volumes to pump into the UGR using their own funds, so that Gazprom is able to meet the demands of its counteragents, which provide the monopoly’s biggest currency incomes, in a timely manner.

“We see unprecedented steps being made on part of Gazprom… Even for European consumers the Russian monopolist has lowered gas consumption lower than the contract levels, which has already been confirmed by two European companies. I am saying this because the winter will be difficult from the viewpoint of gas, and we expect that Russia will employ the harshest measures possible. We expect a full disconnection of even the transit flow towards Europe, which may influence our reverse supplies. It is difficult to calculate now how much,” stated Naftogaz Chairman of the Board Andriy Kobolev.

The current situation, according to him, demand stinginess from Ukraine. “There is no other option from the perspective of gas provisions at the moment… The probability that Gazprom will stop transit through Ukraine constitutes 70%. If this happens, we will remain alone to face our problems and consumption,” concluded the head of Naftogaz.

A smart compromise

The risk of gas transit suspension through Ukraine is also considered high in Brussels. Which is why the European Union also wants to influence the regulation of the price conflict between Gazprom and Naftogaz. “We would like to come to an intermediary decision to receive gas supplies from Russia at a fair market price… Both inside the EU and outside,” stated EU Commissioner for Energy Gunther Oettinger.

According to him, the idea is to find some sort of temporary solution to the gas conflict between Ukraine and Russia, having signed a contract for a certain amount of gas, which Gazprom would be obliged to supply to Naftogaz at an ‘average price.’ This price, according to Forbes information, constitutes about $350-360 per 1000 cubic meters. Oettinger noted that such a temporary decision is necessary in order to stably survive the winter period. Russia offers to establish the temporary price at $385 per 1000 cubic meters during the period of examination of the mutual plains filed to the Stockholm Court by Gazprom and Naftogaz.

Kobolev considers the EU Commission’s initiative a “smart compromise,” however he refused to divulge the details before the meeting in Berlin. Prodan did not go into detail either. He called the EU Commission’s proposal on gas “healthy and rational,” and thinks it may guarantee energy security for both Ukraine and the EU.

Pessimistic expectations

To prepare for the winter, Naftogaz is trying to increase reverse gas supplies from Europe and increase underground gas reserves. According to Slovakian operator of magistral gas pipelines Eustream, Slovakian supplies to Ukraine through Voyany-Uzhgorod (terminal “Velke Kapushany” reached almost maximal possible capabilities on September 22: 27 million cubic meters per day with the project capacity of the gas pipeline at 27,1 million cubic meters per day. On September 23 gas reversal to Ukraine constituted 26,9 million cubic meters per day, meanwhile in the previous month this number did not surpass 26,5 million cubic meters.

According to operative data of Ukrtransgaz, Ukraine has accumulated 16,511 billion cubic meters of gas in its underground reservoirs as of September 23. According to the GSE, the Ukrainian reservoirs are 51,68% full.

Andriy Kobolev stated that in order to survive the winter, as of the beginning of October the Ukrainian underground reservoirs should hold 20 billion cubic meters of gas. However, it is obvious that Ukraine will not receive such an amount of gas on time by means of gas reversal from Europe.

“I am considering a pessimistic scenario, that we will have to survive a cold winter. This increases average fuel consumption by 5 billion cubic meters. Plus we don’t have the expected 10 billion cubic meters per year thanks to reversal, at a maximum of 5-6 billion. Here is an additional 5 billion cubic meter deficit of gas,” calculates Ivan Plachkov, head of Kyivenergo board, former Minister of Fuel and Energy.

He also draws our attention to the specific nature of the situation: Ukraine, fighting against gas dependence on Russia, has now ended up in such conditions, that in order to successfully survive the winter, it will be forced to buy coal, heavy oil from the northern neighbor and maybe even import electricity: because of the war in Donbas, which paralyzed the economy and industry in the region. The paradox is that meanwhile Prime Minister Arseniy Yatseniuk considers Russia an aggressor, who annexed Crimea and fuels the armed conflict in Donetsk and Luhansk oblasts.

The problem with Russian gas transit in case of a cold winter will lead to negative consequences in Europe, Citigroup analysts opine. They published a report in which they note that in case gas supplies to Europe are limited this winter, the reserves in the region “will be enough under normal conditions of winter,” “however in case of severe cold, the gas reserves will be exhausted.” The decrease of fuel transportation through Ukrainian territory, according to Citigroup, is “really possible,” and the lack of clarity regarding supplies from Russia supports the prices for long-term gas contracts.

Therefore in the current situation, there are no reasons for a significant decrease of gas prices according to the Gazprom-Naftogaz contract. Arseniy Yatseniuk claims that Ukraine is ready to buy it from Russia at market value. “When we get a market price, we will pay it, but we are not going to subsidize Gazprom. We are ready to make agreements with Russia, under market conditions only,” he stated.

However, the Prime Minister thinks that the Russian side is not interested in renewing market relations in the gas issue with Ukraine.

Translated by: Mariya Shcherbinina
Source: Forbes.ua

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