Russia-Ukraine gas dispute escalates

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The ongoing gas payment and pricing dispute between Russia and Ukraine escalated to worrying levels in mid-June, when Gazprom announced that it would cease supplying gas to Naftogaz – Ukraine’s state-owned energy company – unless 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.

No immediate disruption: For now, gas continues to transit Ukraine to Russia’s markets in Europe and there appears to be no immediate threat of interruption. Ukraine currently claims to have around 14 Bcm of gas in storage – enough to see it through until the winter – and European Union storage levels are high enough for markets in Europe to cope with a prolonged disruption. Moreover, with Europe now in the summer season, demand is much lower than during winter.

This is unlike the situation in 2009, when Russia ceased delivering gas to Ukraine at the height of winter, causing major energy supply issues in a number of European countries, especially in the south-east.

Europe is not as dependent as it was back then on gas transited through Ukraine, partly because new alternative supply routes such as the Nord Stream pipeline have begun operation, and partly because it is now much easier to move gas around EU networks to where it is needed – largely a consequence of the policy response to the 2009 crisis. Around a third of Europe’s gas comes from Russia and today only half of that comes through Ukraine, compared with around four-fifths back in 2009.

Transit warning: Gazprom has warned Naftogaz that it should not take gas that has entered the Ukraine gas network for transit to other markets, while Naftogaz has insisted that it intends to play fair in this regard. However, were the dispute to continue into the winter – and it is hard at the moment to envisage how it might be resolved – both sides would be facing tough choices.

The language being used by both sides does not offer much comfort that a deal will be reached any time soon.

In a transcript published on Gazprom’s web-site of a meeting between Russian Prime Minister Dmitry Medvedev, Energy Minister Alexander Novak and Gazprom Chairman Alexey Miller on 16th June, the day that the dispute escalated, Miller accused Ukraine of “open blackmail”.

Referring to the EU-brokered talks conducted with Ukraine, he said: “The Ukrainian government and the prime minister stated that Gazprom and Russia had to provide extra-low prices for Ukraine, almost level with those of the Eurasian Economic Union. Otherwise, if Ukraine were not granted such prices, it would not settle the debt for gas supply and would take our gas for free in the amount Ukraine wanted.”

Referring to Gazprom’s decision to file a lawsuit in the Stockholm court, he added: “It is not impossible that in the nearest future we will file new law suits.”

Meanwhile, Ukraine, which said it had enough gas to meet its needs until December, has also been talking tough. In a report in the Financial Times, Arseniy Yatseniuk, the country’s prime minister, is quoted as saying that Gazprom’s move was “part of the general plan of Russia to destroy Ukraine”. He is reported to have added: “Ukrainians will not pull $5 billion out of their pockets so that Russia can use this money to buy arms, tanks and planes and bomb Ukrainian territory.”

Economic challenge: A crucial question is how Ukraine will find the money that Gazprom is demanding, given its precarious economic and financial situation. Yet in their 16th June meeting, Medvedev, Novak and Miller were adamant that talks with Ukraine would only be resumed if the gas debt is settled in full.

Gazprom says that Ukraine owes it $1.451 billion for gas supplied in November and December and $3.007 billion for April and May – a total of $4.458 billion. Moreover, no payments have yet been received for a “proforma invoice” for June.

Price remains a matter of fierce dispute between the two sides. Before April Naftogaz had been paying $268.50/Mcm but the price was hiked to $485/Mcm from April, when two negotiated discounts were cancelled because of persistent non-payment. Gazprom has offered to lower the price to $385/Mcm, along with a range of other concessions, such as removing take-or-pay conditions for 2014 – but Naftogaz turned these down.

“The current economic situation in Ukraine is really grave,” said Miller, “and we understand that it is not easy or even just impossible for Naftogaz of Ukraine to provide for off-taking our gas in the minimal annual contracted volume of 41.6 Bcm.

“At first we told them it could be 34 Bcm, then 27 Bcm and in the end we suggested that in 2014 the Ukrainian party should withdraw the volume it found comfortable at the price of $385/Mcm. Certainly, there were no such conditions for gas supply during Yanukovich’s presidency.”