European Union officials are meeting Russian and Ukrainian counterparts for their first three-way meeting to resolve a natural-gas pricing dispute before escalating tensions disrupt EU energy supplies.
Energy officials from the three powers are gathering in Warsaw today as Russian gas exporter OAO Gazprom claims Ukraine owes $14.9billion and threatens to move its cash-strapped neighbor to prepayments. The talks will focus on settling the gas debt given Ukraine’s financial and economic situation, Russia’s Energy Ministry said in an e-mailed comment.
Europe imports about 30% of its gas from Russia, half of which crosses Ukraine in Soviet-era pipelines, making the transit country a linchpin in the EU’s energy security. Ukraine, which won a pledge of $27billion in international aid, depends on Russia for half of its gas consumption.
“The gas issue between our countries is too politicized,” Andriy Kobolyev, the head of state-run oil and gas company NAK Naftogaz Ukrainy, said in an interview in Kiev before the meeting.
“We can expect anything from Russia.”
The former Soviet republics have fought over gas prices for years, and disputes in 2006 and 2009 led to disruptions in Europe-bound flows during freezing temperatures.
Ukraine defied calls by President Vladimir Putin to withdraw troops from the largely Russian-speaking east, starting a special operation today to dislodge pro-separatist forces in Slovyansk in the Donetsk region. The EU and U.S. have blamed Putin for fomenting unrest and are threatening to expand sanctions against Russia, as the eastern Donetsk and Luhansk regions slip out of the Ukrainian goverment’s control.
The International Monetary Fund, which approved a $17billion bailout for Ukraine this week, urged the country to reach a gas agreement with Russia by end-September, when it is going to complete the aid program review. The IMF approval makes $3.2billion available to Ukraine immediately while the rest is a subject to “frequent reviews”, according to IMF website. Part is earmarked to repay previous IMF debt.
“Naftogaz needs to clear its 2013 arrears to Gazprom and remain current on its 2014 bills,” the IMF said in a report.
Russia has provided Ukraine’s economy with $35.4billion of gas subsidies in the past four years, Putin wrote earlier this month in a letter to the heads of 18 European gas-buying nations. Gazprom sent Ukraine a bill for part of that amount, $11.4billion, for gas it said Naftogaz was obliged to buy under a take-or-pay contract, an arrangement the Ukrainian government called unjust.
Russia doesn’t believe that Naftogaz can pay the bill and is using it a a negotiating point, said a Russian government official involved in discussions, asking not to be identified because talks aren’t public. Ukraine must resolve its debt for fuel already supplied by Gazprom and future payments for gas to be pumped into the underground storage facilities before the heating season to ensure transit to Europe, the official said.
Putin warned Ukraine on April 17 that it has one month to start payments to Gazprom or it will have to pay for the fuel in advance, saying that may lead to disruptions in EU transit.
Gazprom estimated Ukraine owes $3.5billion for gas shipped since last year, it said April 30. Of that, $2.2billion is overdue payments for supplies last year and through March. The rest refers to deliveries in April at an increased price that Ukraine has refused to pay.
Russia almost doubled what it charges Ukraine to $485 per 1,000 cubic meters on April 1, more than any EU country pays, from $268.50 in the first quarter after ending all discounts that it had granted Ukraine in 2010 and 2013. Ukraine’s leaders had been seeking to renegotiate their 2009 contract, signed to resolve a price dispute, even before protesters in the capital, Kiev, ousted Kremlin-backed President Viktor Yanukovych in February and Russia annexed the Crimean peninsula a month later.
Ukraine “has questions” about the debt claims because it disputes the price, said Kobolyev. “We find this part is doubtful. We think it might and must be lower,” he said. Still, he said, “we are ready to repay $2.2billion to stabilize the situation and prevent a gas cut off.”
The only demand Ukraine has is to return to a “fair” fuel price, such as in the first-quarter, he said.
Ukraine is able to buy gas in EU at price between $350 and $400, European and Ukrainian officials have said.
The country needs to import 30billion cubic meters of gas this year, “plus or minus 2billion to 3billion,” said Kobolyev. “The volume of gas imports from Russia will heavily depend on talks in Warsaw.”
Ukraine has received 8.7billion cubic meters this year, almost all from Russia. Imports in April rose to the most in five months after Putin threatened Ukraine with prepayments, according to Bloomberg calculations based on data from Russian and Ukrainian energy ministries.
European countries — Poland, Slovakia and Hungary — may supply Ukraine as much as 8 billion cubic meters this year, using pipelines in reverse, according to data compiled by Bloomberg from European pipeline operators.
The smaller country will still have to buy 10 billion to 16 billion cubic meters of fuel from Russia this year, most for storage before the winter starts. That would cost as much as $8billion at Gazprom’s current price.
Storage facilities, located near Ukraine’s western border, feed Europe during the winter while most of gas supplied from Russia in the east, goes toward Ukrainian consumption.
Naftogaz has proposed European companies pump 12billion cubic meters of gas into Ukrainian storage themselves, using their contracts and their gas prices, to avoid transit risks in the winter of 2014-2015, Kobolyev said. The companies said they aren’t able, according to Kobolyev.
“They say: ‘We can’t supply gas for storage through reverse flows from Slovakia, and Gazprom refuses to sell us the necessary volumes on Ukraine’s eastern border,’” he said.
Naftogaz sent Gazprom a pre-arbitration proposal to review their 2009 gas supply contract, which expires in 2019, the Ukrainian company said yesterday. Naftogaz plans to turn to Stockholm arbitration if no agreement is reached within 30 days.
Ukraine still faces risks, Kobolyev said. “When we are talking about Gazprom, I assume everything is possible. They may use any trick,” he said.
Gazprom maintains it has the right, under their contract, to raise the price and move Naftogaz to prepayments.
“Naftogaz isn’t paying at either the new price or the old, including periods when there weren’t any controversial issues — February and March,” Sergei Kupriyanov, Gazprom’s spokesman said today by phone. “Payment deadlines have passed, so we had the right to move Ukraine to prepayments long ago.”
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