Ukraine asks Russia to resume gas deliveries

Ukraine asks Russia to resume gas deliveries
Russian Gazpromneftegaz rig in the Pechora Sea.
By bne IntelliNews June 9, 2016

The Ukrainian government has formally requested Russia resume delivering natural gas for the first time since November 2015.

Ukraine and Russia have been at loggerheads over their gas trade for years, descending into a series of so-called 'gas wars' that resulted in Russia cutting its neighbour off several times over the last decade. But following the collapse of oil prices and a massive hike in domestic gas tariffs in May, enabling Ukraine to meet a key IMF condition for more aid, it seems that Kyiv feels it is in a position to start buying Russian gas again.

Ukrainian state-owned gas monopoly Naftogaz's deficit with the government will reach zero level in 2016, President Petro Poroshenko told a meeting of the National Council of Reforms on Energy Efficiency on June 7. "In 2014, the deficit of Naftogaz was UAH110bn ($4.405bn). I hope that we will have a zero deficit this year," Poroshenko's office quoted him as saying. "We can confidently say that we are breaking even this year."

The Ukrainian government achieved significant fiscal consolidation over the past two years under a $17.5bn support programme agreed in March 2015 with the International Monetary Fund (IMF). Specifically, the combined general government and Naftogaz deficit fell from close to 10% of GDP in 2014 to close to 3% in 2015. Poroshenko added that Ukraine received 92% of its gas from Russia in 2013, however this figure was reduced to 74% in 2014, 37% in 2015, and 0% so far in 2016.

Poroshenko was quoted by his office as saying that, "the elimination of corruption, return of state enterprises and struggle against monopolies are being continued". Poroshenko added that with a view to diversifying sources for nuclear power plants, agreements with alternative suppliers of nuclear fuel, particularly the US-based Westinghouse, have been signed.

Gazprom CEO Alexey Miller said his company had received an official request from Naftogaz to resume gas supplies to Ukraine over the next nine months. However, any deal will need to involve Gazprom agreeing to Naftogaz requests for discounts to be made on the existing contract.

Andriy Kobolyev, CEO of Naftogaz, commented that Ukraine is interested in changing the gas price formula, which is based on the European hub gas price less transportation costs.

Under the original deal signed in 2009 by then prime minister Yulia Tymoshenko, Ukraine was paying around $450 per 1,000 cubic meters (/'000 cm) for gas. However, as gas prices are linked to those of oil, gas prices have more than halved over the last year.

While European gas spot prices have been growing steadily in recent months as oil prices recover from a January low of $28 per barrel to about $50 now, gas prices are still depressed. According to Interfax, the gas spot price at the National Balancing Point in the UK exceeded $180/'000 cm this week, up from some $150/'000 cm two weeks ago, VTB Capital said in a note.

“The recent rebound in spot gas prices might have been caused by the beginning of the season for refilling gas storages in Europe,” the bank said.

The same logic is driving Ukraine’s request, as the government needs to start thinking about building up reserves ahead of the winter heating season while prices are still depressed.

And the amounts being discussed are not big. Ukraine has large storage facilities of about 20bn cm, but has requested only 4.2bn cm from Russia, according to reports.

Ukraine has not purchased gas from Gazprom since November 2015 and Gazprom stopped providing a gas discount to Ukraine, so it is difficult to estimate when the companies could reach an agreement and whether direct deliveries are to be resumed in the second half of this year, speculates VTB.

Gazprom is also likely the balk at any changes to the existing pricing formula or more discounts in any form, say analysts. In the meantime, Ukraine has reverse gas supplies from its neighbours, which also get their gas from Gazprom.