Russian demand for more cash re-ignites Ukraine gas dispute

Without cash upfront, OAO Gazprom will cut off Ukraine when prepaid supplies run out, which the Russian exporter said could be a matter of days. There will be no more advance payments until Gazprom follows all its supply agreements, Ukraine’s state energy company said in a statement.

“A new gas dispute is inevitable before the end of this week,” said Alexander Paraschiy, an analyst at Ukrainian Concorde Capital in Kiev.

Ukraine is dependent on supplies from Russia and gas plays a crucial role in the crisis between the countries. That can affect the rest of Europe because Ukraine’s Soviet-era pipeline network carries about 40% of Gazprom’s exports. Russia stopped deliveries to its neighbor in 2006 and 2009 during cold winter months because of payment disputes, leading to supply disruptions in Europe.

‘Moderate Risk’

The risk for the European Union gas supplies is “moderate” for now, Trevor Sikorski, head of gas, coal and carbon at Energy Aspects Ltd., said by phone from London.

The European gas markets reacted nonetheless. U.K. front- month gas, a European benchmark, jumped as much as 3.8% on the ICE Futures Europe exchange in London, the most since Feb. 12.

“We expect that gas transit to the EU will not be affected by the situation in the east of Ukraine,” European Commission spokeswoman Anna-Kaisa Itkonen told reporters in Brussels.

An early spring in Eastern Europe will make it easier to survive on limited rations of Russian gas, according to Mikhail Korchemkin, the founder of East European Gas Analysis in Malvern, Pennsylvania.

In June, Russia cut gas flows to Ukraine for six months after a dispute over unpaid bills, without affecting transit Europe. As winter loomed, the EU brokered a temporary deal, allowing supplies to be restored for the cold season. There’s been little progress on a new deal for deliveries after that accord expires March 31.

Rebel Provinces

The latest dispute centers on Gazprom’s decision to make direct shipments to provinces in eastern Ukraine held by Russian-backed rebels who oppose the government in Kiev. Those volumes cost about $4 million a day, based on Gazprom data.

The exporter plans to draw down cash for those shipments from the advance payments made by state-owned NAK Naftogaz Ukrainy, according to Gazprom.

Gas deliveries to the east of Ukraine should be seen as humanitarian aid after Naftogaz stopped its own shipments to the areas on Feb. 18, Russian Prime Minister Dmitry Medvedev told the government in Moscow last week.

Naftogaz responded by saying it won’t pay for any fuel Russia sends to the conflict zones as it has no way to verify delivery and boosting daily orders for Russian fuel to 114 MMcm from about 30 MMcm supplied Feb. 19. Gazprom’s move violates all supply agreements because Naftogaz, its client, hadn’t ordered the shipments to the east of country, it said.

On Monday, Naftogaz turned to the European Commission, saying Gazprom has been supplying less than half the level it has requested in violation of their contract. Gazprom delivered only 39 million cubic meters on Monday, Naftogaz said.

Contract Terms

Naftogaz brought forward “serious allegations which merit and necessitate a thorough analysis and fact-checking,” EU’s Itkonen told reporters.

Ukraine’s previous payments will run out in just two days if Gazprom starts delivering the volumes Naftogaz demands, Alexey Miller, the chief executive officer of the Russian company, said in an e-mailed statement. The payments cover only 219 MMcm of fuel as of today, Miller said.

The smaller country risks “a complete termination of Russian gas supplies,” Miller said. That creates “serious risks for gas transit to Europe.”

EU-bond transit gas is at risk only if the weather grows colder, said Alexey Grivach, deputy head of the Moscow-based National Energy Security Fund consulting company. If it’s warm, Ukraine may cope by using reverse gas flows from the EU as well as fuel from underground storage and gas produced locally.

“Much depends on the weather in March,” Grivach said.

Europe is Ukraine’s main source for imported gas now, Naftogaz head Andriy Kobolyev said in the company’s statement on Tuesday, adding that the company’s strategy is to ensure stable transit to the EU.

Gazprom and Naftogaz’s exchange threatens to blow up into another as the end of the temporary accord nears.

“Looks like we are circling around again,” Dennis Sakva, an energy analyst at Dragon Capital in Kiev, said. “We have another round of the gas war with the potential halt of gas supplies and other troubles.”