Commission sheds light on trilateral gas talks with Ukraine, Russia

Maroš Šef?ovi? will chair the trilaterals [European Parliament]

Maroš Šef?ovi? [European Parliament]

The European Commission aims at concluding an agreement to supply Ukraine with Russian gas until Fall 2016, when an international court will issue a ruling on Moscow’s pricing regime, a Commission official said.

Speaking to the press ahead of the trilateral gas talks due tomorrow (20 March), a Commission official who asked not to be named said that Russian Minister of Energy Alexander Novak, his and Ukrainian colleague, Volodymyr Demchyshyn, had confirmed participation. Vice-President for Energy Union Maroš Šef?ovi? will chair the talks.

The talks, starting in the afternoon, will be preceded by two bilaterals, one between the European Commission and Russia, and the second between the Commission and Ukraine.

On his last day in office as Energy Commissioner last November, together with his Russian and Ukrainian counterparts, Günther Oettinger signed a “winter package”, ensuring prepaid gas to Ukraine until 31 March (see background).

Now, instead of a “summer package”, the Commission wants a longer-term deal, although the official recognized that the positions of Ukraine and of Russia were not yet known.

The official explained that an arbitration court in Stockholm would decide over the pricing dispute between Russia and Ukraine, and that its decision was not expected until the Fall of 2016.

The dispute concerns Russian gas delivered to Ukraine, but the transit to EU countries may be affected, because as the official explained, in 2009, when Gazprom stopped deliveries to Kyiv, the country used gas destined for Europe for its domestic consumption.

Though we are entering spring, in gas terms, we are already entering next winter. The underground gas storage of Ukraine needs to be filled by April, and the filling may go into mid-October, the official explained, adding that the underground gas storage was needed not ony for domestic consumption, but for ensuring the transit.

This is why finding a solution to the problem was rather urgent, the European Commission official said.

He recognized that the situation this year was better than the previous year, because there were regular reverse gas flows, especially from Slovakia to Ukraine. The other reverse flows are from Poland and Hungary, but the official called the flows from Hungary “ridiculously low”, and said that those from Poland were not used.

But without Russian supplies the necessary 18-19 billion cubic meters (bcm) of gas in the underground storages could not be ensured, he said. The current level is 7.4 billion, of which 5 billion was technical gas, which is very low, and this level is still going down. At the end of this month, the figure could be of 6.5 bcm.

If reverse flows are used at 100% of capacity, this could add 1.8 bcm per month to the underground gas storages, which would be very close to the necessary levels, the official said. But he recognized that past experience has shown that only the Slovak flow had been relatively stable.

“Our estimation is that 4 to 6 bcm direct imports [from Russia to Ukraine] might be needed,” the official said.

He added that tomorrow’s meeting was only a kick-off meeting for the negotiations, which should agree on all the points that should be addressed in the future talks, and hopefully on a timetable, and that no breaking news should be expected at this stage.

The official also explained that all the figures he mentioned were Commission estimates, and that he had no idea if they were shared by the Ukrainian and by the Russian side.

Last but not least, there was also the issue of the price and the take-or pay clause. Russia had agreed on a $100 discount per thousand cubic metres (tcm) for the winter package, but there was no certainty if such a discount would still stand, the official said.

Regarding the take-or-pay clause, Russia had agreed to suspend it for the winter package, but its position has yet to be clarified.

The European Commission official also said that the issue of gas supply to the Ukraine regions of Donetsk and Luhansk should be dealt with separately, in the framework of the Minsk agreement implementation.

Financing gap

Asked by EURACTIV if Ukraine had the capacity to pay, the official said that this was not on the agenda of the trilaterals, but recognized that this was an issue the Commission would need to follow up with the Ukrainians, who in his words have already indicated that they may have a financing gap of $2.6 billion.

“Because if they now buy gas and put it into the storage, they can only sell it from mid-October, so the revenue will come later. And as they are under per-payment conditions, both from the Russian side and from European companies, this is according to their estimates $3.3 billion minus the transit fees, so we have a financing gap of $2.6 billion for the next storage replenishment.”

Asked about reverse flows from Hungary, the official said that there was some “legal vacuum” regarding this transaction between Budapest and Kyiv, and that the Commission was throwing its weight so that an agreement would be signed very soon.

Ukraine, Russia and the European Union signed a deal on 30 October that allowed Moscow resume vital supplies of gas to its ex-Soviet neighbour over the winter in return for payments funded in part by Kyiv's Western creditors.

>> Read: EU unblocks ‘unprecedented levels’ of cash to secure gas for Ukraine

Worth $4.6 billion in total, the package calls for Ukraine to pay $3.1 billion (€2.46 billion) in two tranches by the end of the year to cover debts for previous supplies from Russia's Gazprom, and Kyiv will have $1.5 billion (€1.19 billion), some from existing accords with the EU and IMF, to pay for about 4 billion cubic metres of new gas until March, for which Russia is insisting on cash up front.

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