Russia and Ukraine settle winter gas supply price

By bne IntelliNews September 28, 2015

bne IntelliNews -

 

Ukraine will pay $227.36 per 1,000 cubic metres of natural gas from Russia's Gazprom in the fourth quarter of 2015, Ukrainian energy minister Volodymyr Demchyshyn said on September 28, after trilateral talks with the European Commission in Brussels resolved weeks of wrangling over terms.

Agreed in a period of high political tensions between Moscow and Kyiv over the conflict in eastern Ukraine, the price for Russia's neighbour will be "in the region of $230 dollars, plus or minus, Demchyshyn's Russian counterpart Aleksander Novak said immediately after the talks on September 25, adding that this included a discount.

The agreement puts an end to the intergovernmental tussle over prices, with Ukraine demanding a preferential rate and Russia reminding that times have changed. The reported new price is a slight improvement on the $247 per thousand cubic metres that Ukraine paid in the second quarter of 2015, the last quarter in which it purchased Russian gas.
 
While higher than the $220 price Kyiv had sought, it is still below the $235-$242 Russia has said is the average for its long-term European customers in 2015.
 
Russia and Ukraine still have to sign the agreement on winter gas supplies and gas transit. Demchyshin said the signing was now just a technical matter and would happen "in the nearest future," and that Kyiv planned to resume gas imports from Russia from October 1. Ukraine will buy 2bn cubic metres of gas from Gazprom, according to the minister.
 
Footing the bill
 
The European Commission has been trying to ease the deal on the new winter gas package for Ukraine after the framework of a deal was put in place in talks in September in Vienna between the two energy ministers and Gazprom CEO Alexei Miller. However, to be fully prepared for the winter, Ukraine needs to increase its gas stockpiles by around 4bn cubic metres (cm) from the existing reserves of around 15bn cm.
 
"For a trouble-free winter, Ukraine needs to have 19bn cubic meters of gas in its underground storage facilities," Miller said on the Rossiya 24 TV channel after the Brussels meeting. But the country currently looked like it would only boost reserves by 2bn cm, the Gazprom chief said, adding that it was also still not assured that Ukraine will be able to pay for the supplies.
 
Ukraine's natural gas monopoly Naftogaz has received $500mn from international financial institutions to purchase natural gas from Russia, the company's chief Andriy Kobolev told journalists in Kyiv on September 28. "The money is in the account of Naftogaz... There it is reserved for gas purchases from Gazprom. We'll spend the funds gradually, as necessary," Kobolev said, according to local media.
 
The country needs more than $1bn to buy 5bn-6bn cm, and the Kyiv government is mainly relying on financial support from international financial institutions. The governor of the National Bank of Ukraine (NBU), Valeriya Gontareva, said the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC) will only be able to allocate up to $500mn to Naftogaz to buy Russian gas.
 
According to a resolution of the Russian government, Moscow would grant the gas discount to Ukraine by reducing export duty. The government previously stated that the new gas price for Ukraine had been set at the levels of its neighbouring countries.
 
The Russian government offered a $40 per 1,000 cm (14%) discount for its gas to Ukraine for Q3 (resulting in a net price of $247 per 1,000 cm), while Ukraine refused to buy at that price. The Ukrainian side had been expecting a net price of $201 per 1,000 cm, which was based on the rules that were applied since 2010 and assume a discount to the benchmark price of 30%.

Ukraine currently imports natural gas from Russian clients in Europe, primarily Slovakia and Poland, by reverse flow.

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