Ukraine cancels gas supplies from Russia in pricing row

By bne IntelliNews July 2, 2015

bne IntelliNews -


Ukraine suspended Russian natural gas purchases on July 1, citing its inability to secure from Gazprom a heavily discounted price for the third quarter of the year. Henceforth, the country's state-owned monopoly Naftogaz will rely on supplies from the European Union, and claims that volumes bought from EU neighbours will suffice for the coming winter.

In a June 30 statement, Naftogaz announced the suspension of gas purchases following the expiration of the second quarter package of terms set in April due to the "absence of agreed supply conditions for the upcoming periods". This followed EU-Russia-Ukraine negotiations held in Vienna earlier that day. Transit supplies to Europe are unaffected by the move by Gazprom, which has said it will bypass Ukraine entirely by 2020 in its EU supply operations.

Gazprom offered a gas price package of $247 per 1,000 cubic metres, which represented a $40 discount on the contractual price. However, Kyiv was not satisfied with that proposal, insisting on the extension of the $100 discount it had received from the second quarter of this year, Energy Minister Volodymyr Demchyshyn said.

According to the Kyiv-based Concorde Capital, that discount had appeared from a reduction by Russia in the export duty to 16% or $46 per 1,000 cubic metres from 30% or $86 per 1,000 cubic metres.

'Political reasons'

"The Russian government’s intention to charge $46 in duties per 1,000 cubic metres of gas supplied to Ukraine is hard to accept for the Ukrainian government for political reasons," Alexander Paraschiy at Concorde Capital said in a note to clients. "The idea of Ukrainian gas consumers directly financing the aggressor state's budget looks to be a provocation."

The previous gas package envisaged a down payment for Russian gas, and Gazprom's reaction to Kyiv's decision to suspend purchases was quite moderate. "Gazprom will not supply gas to Ukraine at any price if there is no prepayment," the company's CEO Alexei Miller said in a statement published on July 1.

Russian Energy Minister Alexander Novak described the suspension of Russian gas purchases as "political decisions because there are no economic reasons behind them", the Russian state news agency Sputnik  reported.

"Naftogaz is ready to renew gas purchases from Gazprom after a comprehensive temporary agreement has been reached between the parties," the Ukrainian company added in a statement, pointing out that such an agreement should cover all unresolved issues related to the disputed gas supply contract "at least until 31 March 2016".

What's next?

Despite Kyiv's move to halt gas purchases, Russian gas transit via Ukraine to the EU has been unaffected for now. "Starting today, Ukraine does not receive gas from Russia. Transit supplies are as normal," Ukrtransgaz spokesman Maksim Belyavsky said, as quoted by Reuters.

Previously, Naftogaz assured in its statement that the delivery of Russian gas via Ukraine to Gazprom's clients in the EU and Turkey "will continue in full in accordance with the existing transit contract." The Russian gas company accounts for a third of Europe's gas needs and around half of these volumes is pumped via Ukraine.

At the moment, Ukraine's gas inflows are limited only by supplies from Slovakia. "Gas is not being supplied via other routes for the needs of Ukrainian consumers," Belyavsky told Interfax news agency on July 1.

According to Ukrtransgaz's statistics, the reverse gas import from Europe increased 10.5-fold y/y to 6.3bn cubic metres in January-June. The largest gas volumes, 716mn cubic metres, were imported from Slovakia. At the same time, Ukraine reduced natural gas imports from Russia by 73.4% y/y to 3.7bn cubic metres in the first half of the year.

In its efforts to replace its dependency on direct Russian gas supplies, Ukraine has been importing reverse gas volumes from Slovakia, Hungary and Poland.

Alexander Kornilov, a Moscow-based analyst at Alfa Bank, believes Kyiv will continue to follow this strategy, with more reverse gas purchases from neighbouring countries, rather than directly buying from Russia. "Even if Naftogaz stops buying gas from Gazprom this summer, Gazprom will not be affected, as it will simply ship the extra gas Eastern Europe would need for reverse flows to Ukraine," Kornilov said in a note to clients.

Meanwhile, Concorde's Paraschiy underlined that Ukraine and Russia expressed their intention to come back to their talks in late August. Accordingly, "we will see a repetition of the last year’s saga, when an interim gas deal between Ukraine and Russia was signed in late October", he forecast.

"Ukraine does not need much Russian gas in the summer, meaning that the trilateral gas talks will likely remain muted until autumn, at which time we believe they will intensify as the heating season approaches, and European customers start to worry about the reliability of Russian gas supplied through Ukraine," agreed Alfa Bank's Kornilov.

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