Burgess COMMENTARY

Peter Burgess

Ukraine-Russia gas conflict flares ... Ukraine is holding out for a discounted gas price, something that Russia is not prepared to give, leading to a cut-off in gas shipments.

Ukraine has stopped buying Russian natural gas and Russia halted shipments to Ukraine the two sides said in tit-for-tat comments Wednesday, following the expiration of an interim agreement on gas supplies and prices with Russia’s Gazprom.

Gazprom said it cut off gas supplies to Ukraine because Kiev has not paid its bills. “Gazprom will not supply Ukraine under any gas price if there is no prepayment,” the company’s CEO Alexei Miller said, according to Russian media.

Ukraine’s state gas company Naftogaz said it would resume imports only when a new longer-term supply deal was agreed with Russia that would run at least up to the end of March 2016, after the peak winter heating season.

The decision came after the failure of Tuesday’s EU-brokered talks in Vienna between Russia and Ukraine on a new supply accord. The main sticking point was the size of Ukraine’s gas price discount, said an EU source. “As the meeting has shown today, the parties are still far apart,” Maroš Šefčovič, the Commission’s vice president for the energy union and the EU’s main negotiator, said after the talks.

He was not happy about the outcome. “You see my frustration, I am not hiding it,” he said. “What we saw in the end was a lack of the political will” on both sides.

Naftogaz stressed that Russian gas shipments to Europe and Turkey wouldn’t be affected, and it would honor existing transit contracts.

“Gas deliveries to Ukraine and transit to EU are not endangered,” Šefčovič said.

Ukraine is a major transit route for Russian gas shipments to Europe. Russian imports account for around one-third of the bloc’s gas, and about half that crosses Ukrainian territory. Ukraine now needs to fill its underground storage in the summer to reach around 19 billion cubic meters before the heating season starts in October to ensure stable supply in winter.

While Ukraine used to be almost completely dependent on Russian gas, it has spent the last year frantically expanding its gas connections with EU countries to its west. That is a result of hostility with Russia following Moscow’s annexation of Crimea and its support for separatists waging war in the east of the country.

Now Ukraine can receive sufficient gas supplies from Slovakia, Hungary and Poland to make up for the missing 7 billion cubic meters of Russian gas it needs between now and October. “Today we have a strong mechanism of reverse flows, much better prepared in terms of energy supplies,” said Šefčovič. “We have the capacity, the time and the gas, to make sure there is adequate supply.”

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But the country will need Russian gas imports to cover its winter needs, an EU source said. That is also why the EU is keen to have a package in place before then, to ensure stable supplies between the countries.

Failing to reach a deal Tuesday also means that gas relations between Russia and Ukraine are again governed by a controversial 2009 supply contract whose terms are being looked at by the International Arbitration Court in Stockholm. Under that contract, Ukraine would now have to pay $291 per thousand cubic meters, said an EU source.

Gas price, a sticking point

Russia’s Prime Minister Dmitry Medvedev revised his position on the discussions a day before going into the trilateral talks, saying on Monday that Moscow had agreed to offer an extension of the current price of $247 per thousand cubic meters including a $40 discount, until September. This came days after Russia had suggested there wouldn’t be a similar discount in the next quarter, and that the new gas price would be around $287.

The Ukrainian side expected a lower price than the $247 it has paid until now.

“The discount on gas for Ukraine is in line with the prices that are in place in countries and territories around Ukraine. The Ukrainian side said today that it counted on a larger discount of around 30 percent,” Russia’s Energy Minister Alexander Novak said on Rossiya-24 television Tuesday evening. “In our opinion this is a completely groundless expectation.”

The European Commission is now preparing the next steps, including the duration of a deal, volume needs for storage and financing mechanisms for cash-strapped Ukraine. While Brussels has been keen to get a longer-term agreement that would cover the whole winter, Russia has held on to a quarterly revision based on market developments.

Another meeting among the parties could take place in September.

Šefčovič warned that both Ukraine and Russia are responsible for reliable transit of gas to the EU. “Unfortunately the gas supply got the image of being something you have to be concerned about,” he said, adding “I don’t think it’s good for the image of Russia, which wants to have the image of a reliable supplier, and not conducive to the image of Ukraine, which wants to remain and have the image of a reliable transit country.”