Ukraine halts Russian gas purchases as talks on deal fail

7/1/2015

ELENA MAZNEVA, DARYNA KRASNOLUTSKA and ALEXANDER WEBER

KIEV, Ukraine (Bloomberg) -- Ukraine halted purchases of Russian natural gas after its bigger neighbor took away most of a price discount and declined to sign a three-way accord with the European Union through the winter heating season.

Ukraine’s gas company NAK Naftogaz Ukrainy won’t buy gas from Russia as of Wednesday and will continue purchases from the EU, Energy Minister Volodymyr Demchyshyn said.

Russia’s offer to reduce the discount Ukraine receives to contract prices by 60% in the third quarter wasn’t fair, he said by phone after talks with his Russian counterpart Alexander Novak and the European Commission’s vice president for energy union, Maros Sefcovic.

“Naftogaz halts purchase of Russian gas till supply conditions are agreed on,” the company said in a statement after the trilateral talks ended on Tuesday. “Transportation of gas through Ukraine to Gazprom’s European customers will continue in full, according to the contract terms.”

An agreement between the two former Soviet allies would reduce the risk of supply disruption for the EU, which gets 10% of its gas through pipes crossing Ukraine from Russia. Payment disputes between the two countries disrupted transit flows to Europe in 2006 and 2009 during freezing weather.

Naftogaz said purchases from Russia can resume after it reaches an agreement with OAO Gazprom on supply conditions through at least the first quarter. The company had insisted Ukraine and Russia sign a trilateral, binding intergovernmental protocol to set an interim supply framework. Russia rejected that.

Bridging Agreement

The government in Moscow agreed on Monday to lower the contract rate for Ukraine by about $40 per 1,000 cubic meters during the third quarter, less than the $100 discount in the second quarter. That would leave the price, which is linked to oil prices, unchanged against the April-June period at about $247. The offered price is close to what Poland pays Russia, Novak said.

“We are very surprised—the Ukrainian side wanted a lower price but that doesn’t correspond to the current market,” he told reporters after the talks in Vienna.

The goal for Ukraine and the EU was to reach a bridging deal that would stay in place until an arbitration court decision on a dispute between Gazprom and Naftogaz, or at least through next winter. The court in Stockholm is expected to issue its verdict in late 2016 or in 2017.

“As the meeting has shown today, the parties are still far apart,” Sefcovic said in a statement. “We have agreed that the commission will put forward ideas to prepare next steps so that the next consultation could take place.”

Interim Deals

The EU has helped broker two interim deals between the countries since October. Negotiations on the fourth-quarter gas deal should start in September, Novak said.

“There is no sort of special situation,” Novak said on Russian state television. “The situation is absolutely in working mode, normal, calm.”

While Ukraine can cope without Russian gas in the summer months starting in June, it must increase imports and spend at least two months refilling underground storage before the next cold season. At the Russian price, it would cost $1.7 billion for Ukraine to add the required 7 Bcm of gas.

Demchyshyn said his country needs about $1 billion for gas purchases needed to fill underground storage and will meet potential lenders from July 6 to July 11.

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