Hopes rise for Russia-Ukraine gas deal

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The long-running dispute over gas payment and pricing between Russia and Ukraine may be coming to and end – or at least a period of respite while the Stockholm International Arbitration Court comes a decision. The news will be welcomed by gas consumers in Ukraine and the rest of Europe who otherwise face a worrying winter of supply insecurity. The Stockholm court is not expected to make a decision before next year.

Following a trilateral meeting on 26 September between Russia’s energy minister Alexander Novak, Ukraine’s energy minister Yuri Prodan, and Günther Oettinger, vice-president of the European Commission and the European Union’s energy commissioner, Oettinger said: “This could be a fair deal for both sides to break the deadlock and ensure that gas supply to Ukraine and the EU is assured for the coming winter.”

“Frozen conflict”: The prospects of a deal are helped by the ceasefire that was agreed between Russia, Ukraine and rebels in eastern Ukraine early in September. Though there are still outbreaks of fighting and shelling, the violence is much less intense than during August, before the ceasefire came into effect. Some observers are now describing the situation as a “frozen conflict”.

Under the terms of the trilateral deal agreed on the 26 September, Ukraine would settle its debts at a preliminary price of $268.5/Mcm by making two payments: $2 billion by the end of October and $1.1 billion by the end of the year. Gazprom and Naftogaz – Ukraine’s state-owned energy company – agree that at least 5 Bcm, priced at $385/Mcm, will be delivered to Ukraine over the coming winter, with the option for Naftogaz to order more gas if needed. Ukraine considers 5 Bcm to be the minimum volume it will need over the coming winter.

Russia currently accounts for almost a third of gas imports into Europe and more than half the volumes still flow through Ukraine, despite its efforts to develop alternative export routes such as Nord Stream .

Russia stopped supplying gas to Ukraine in June – leaving Ukraine largely dependent on storage and reverse flows from its European neighbours for its supply – when Gazprom announced that it would only supply gas to Naftogaz if payment was made in advance.

Both parties at the same time initiated legal proceedings at the Stockholm International Arbitration Court. Gazprom is seeking to recover $4.5 billion of debt; Naftogaz is seeking $6 billion in compensation for over-priced gas supplied since 2010 and a fair price for future supplies.

At the same time, transit volumes of gas bound for markets in Europe have continued to flow uninterrupted through Ukraine. However, as winter approaches, Ukraine will find it increasingly tempting to access some of this gas as its storage volumes run low. Russia also appears to have been putting pressure on Ukraine’s European neighbours to refrain from making gas available to Ukraine through reverse flows.

The trilateral meeting on 26 September followed a meeting in Moscow at the end of August  when Oettinger and Novak agreed that an interim solution to the dispute should include an interim price, the fulfilment of all supply and transit obligations, a repayment plan for the unpaid bills, and the use of the OPAL pipeline.

The details of the latest proposal will now be discussed by the governments of Ukraine and Russia, following which another round of trilateral talks is expected.

Looking to US LNG: Meanwhile, political pressure is intensifying for Europe to wean itself off Russian gas over time, perhaps by looking to LNG exports from the US. That said, US LNG exports will not begin until  2016 and will not reach the kind of volumes that would make a significant impact until into the 2020s.

Moreover, US LNG exporters are primarily targeting markets in Asia Pacific where the price of gas is still largely determined by linkage to oil prices. In Europe more gas is now traded at hub-based prices than at oil-linked ones.

By Alex Forbes

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