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10/12/2016

Trilateral talks on Ukraine’s gas supplies fall apart

Energy

Trilateral talks on Ukraine’s gas supplies fall apart

Maroš Šef?ovi? and Alexander Novak. January 2015. [European Commission]

Ukraine announced yesterday (30 June) the immediate suspension of all Russian gas purchases after EU-mediated negotiations broke down.

State energy company Naftogaz said it would still continue transporting Russian gas supplies westward to its other European client states.

But “since the additional agreement between Naftogaz and Gazprom is expiring on 30 June, and the terms of further Russian gas deliveries to Ukraine were not agreed at today’s trilateral talks in Vienna, Naftogaz is suspending purchases from the Russian company”, the Ukrainian firm said in a statement.

The surprising decision marks the second time in less than a year that Russian fuel supplies have stopped running to its westward-leaning former Soviet neighbour.

Moscow dramatically hiked the price it charges Ukraine in the wake of the February 2014 ouster of Kremlin-backed leader Viktor Yanukovych.

The European Union – mindful of the price battles, because Russia supplies its member nations with about a third of their natural gas needs – has since been able to broker a series of agreements that need to renewed every three months.

Kyiv is also increasingly relying on supplies from central European countries and energy-rich Norway.

Ukraine actually received more gas via pipelines running through Slovakia, than those coming from Russia in the first three weeks of June.

Gas supplies to Ukraine in summer are needed to fill its underground storage and ensure supply in winter (see background).

Russia’s Energy Minister Alexander Novak called Ukraine’s Tuesday decision “unfortunate”.

“The Ukrainian side said it was not satisfied with the price discount being offered by the Russian Federation,” Moscow’s state-run RIA Novosti news agency quoted Novak as saying in the Austrian capital.

Russia employs complex pricing formulas that vary from country to country and are loosely tied to the global price of oil.

The opaque system is being challenged both by Brussels and a growing list of EU state gas firms.

But the Kremlin denies wielding energy as a political weapon against countries – particularly those overseen by Moscow during the Cold War – that try to shake off their dependence on Russia and build closer links with the West.

‘Still far apart’

Russia had earlier offered to keep the price it charges Ukraine through the end of September at $247.18 per thousand cubic metres of gas.

That figure represents a $40 discount from the price Russia had the right to set under the terms of a prior agreement.

>> Read: Russia softens positions in Ukraine gas talks

But Novak accused Ukraine “of announcing that it wants a discount of at least 30% from the price agreed to in the contract”.

His figure suggests that Ukraine was asking for the price to be lowered by about $86 per thousand cubic metres — more than double the $40 Moscow had submitted at the talks.

The Ukrainian statement said Kyiv was actually seeking to secure a deal that would keep the price stable through the end of March 2016.

The European Commission conceded that Ukraine and Russia’s bargaining stances “are still far apart”.

“We have agreed that the Commission will put forward ideas to prepare next steps so that the next consultation could take place,” European Commission Vice President Maroš Šef?ovi? said in a statement.

Beyond 2019

This arrangement enables Ukraine’s chronically cash-strapped government to earn added income from Russian transport fees.

But it has also increasingly unsettled the Kremlin – accused by Kyiv and its Western allies of stirring up Ukraine’s bloody eastern separatist conflict in order to weaken its neighbour and eventually force it to shift back into Russia’s sphere of influence.

Gazprom had threatened to halt Ukrainian gas flows entirely when its current contract expires 2019. The state behemoth hopes to send its supplies through a new pipeline now under negotiation with Turkey.

Yet Moscow’s position has been weakened by the sharp drop in global energy prices and Ukraine-linked Western sanctions that have pushed it into recession for the first time in six years.

Gazprom chief Alexei Miller conceded that gas deliveries to EU nations via Ukraine were unlikely to stop any time soon.

“We never said that we were unwilling to negotiate a (new) Ukrainian transit contract,” Miller stated on Friday.

Background

The Russia-Ukraine gas disputes can affect the EU, because in 2009, when Gazprom stopped deliveries to Kyiv, the country used gas destined for Europe for its domestic consumption.

In the summer period, the underground gas storage of Ukraine needs to be filled, the filling usually going on until mid-October. The underground gas storage is needed not only for domestic consumption, but for ensuring the transit.

Reverse gas flows from Ukraine help fill the underground storage, but last April, a Commission official estimated that a further 4 to 6 billion cubic metres of direct imports from Russia were needed to ensure safety of transit in the winter.

>> Read: Commission sheds light on trilateral gas talks with Ukraine, Russia