Russia, Ukraine gas agreement warms Europe amid widening glut

By KELLY GILBLOM on 9/28/2015

LONDON (Bloomberg) -- It’s going to be a toasty winter in Europe.

Ukraine, a dominant gas transit hub, reached a supply agreement Friday with Russia, the European Union’s largest outside supplier of the fuel. The decision ends a disagreement between the two that threatened to disrupt flows into Europe this winter, just as homeowners and businesses start firing up natural gas-powered boilers and other heating units.

While the EU-brokered deal will help ensure supply to the 28-nation bloc, its importance has faded. Declining demand, better-connected networks and the potential for the first natural gas imports from the U.S. mean Europe is less vulnerable to the type of cut-offs that led to shortages following similar disputes between Ukraine and Russia during freezing weather in 2006 and 2009.

The deal “has undoubtedly eased some tension,” Nick Campbell, an analyst at Inspired Energy Plc, said in an e-mailed statement. “But with the likely arrival of U.S. liquefied natural gas in the fourth quarter this year, the impact of any dispute is likely to be muted compared to past issues.”

Winter natural gas in the U.K., Europe’s biggest market, tumbled as much as 1.4% to 42.27 pence per therm ($6.42 a million British thermal units) on the ICE Futures Europe Exchange. That’s the lowest price for the time of year since 2009 for the contract for the six months through March.

While Ukraine is dependent on Russian supplies, requiring about 3.5 billion cubic m (120 billion cubic ft) more gas in storage to make it through the winter, according to Russian Energy Minister Alexander Novak, the rest of the continent isn’t so concerned. Even before the dispute over pricing and debt was resolved, traders have been bearish on gas during all but one week since April amid an oversupply, according to surveys compiled by Bloomberg.

This was “more like the victory of European diplomacy rather than the safety of a system,” Fabio Cedronio, a senior gas trader at Repower AG, said by e-mail.

Europe has seen demand for natural gas slide thanks to efficiency gains and efforts to use more renewable energy sources. At the same time, a shale drilling boom in the U.S. is set to boost global gas supplies from next year while conventional finds in Egypt and Iran may help offset Europe’s declining own production in future.

Cheniere Energy Inc. plans to start production in December at its Sabine Pass terminal in Texas, paving the way for the first cargo of LNG to be loaded for export from the mainland U.S. The plant is the first in a wave of projects forecast to turn the nation into a net exporter of gas by 2017, according to the U.S. Department of Energy.

The price of Friday’s deal may be another signal Russia has lost leverage in gas supply negotiations, according to Georgi Slavov, head of research at Marex Spectron Group Ltd.

Russia’s offer to Ukraine is for gas at about $227 per 1,000 cubic m through December, according to a decree on the government’s website. That compares with an average price on the Title Transfer Facility, the Dutch gas trading hub that is the mainland European benchmark, of $258 per 1,000 cubic m during the last year, Slavov said.

“What strikes me these days is the much softer tone of the Russian side when it comes to pricing,” Slavov said by e-mail. “The discount granted by Russia means that they either see weak overall demand for their gas going forward or there is a political motive behind this decision.”

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