Fitch: SE Europe Gas Supply Risk From Gazprom Prepayment Halt
Gazprom's decision to halt prepayment of natural gas transit fees to Naftogaz until at least 2015 creates the potential for modest supply disruptions in South East Europe this winter due to low levels of gas in Ukraine's storage facilities. The move is a further blow to Naftogaz, which depends on revenues from the transit of Russian gas to Europe.
Gazprom's prepayments are critical for Naftogaz, which continues to rely on gas transit revenues and support from the Ukrainian government to offset losses on domestic gas sales due to low government-set tariffs. Since the beginning of 2012, Gazprom has made USD3.5bn of transit fee prepayments to Naftogaz, which the Ukrainian company used to finance purchases of Russian gas, including that for storage. But Gazprom said recently that the latest USD1bn payment will cover the period until the start of 2015.
These payments have helped Naftogaz maintain stored reserves of 7.5 billion cubic meters (bcm). But Gazprom said that Naftogaz needs to store a further 12bcm of gas to ensure Ukraine has enough for the winter and that it won't need to use gas passing through the pipeline to Europe. At the current prices to Ukraine of about USD400 per 1 thousand cubic meters of gas this would cost about USD4.8bn, which Naftogaz cannot afford on its own. Naftogaz's weak financial position and reliance on the state are already reflected in the company's 'CCC' rating.
The volume required only represents around 2% of European annual gas consumption and the dispute is therefore unlikely to have a significant impact on the region as a whole. But it could still result in some disruption in countries that are reliant on Russian gas via Ukraine, including Bulgaria, Greece and Turkey.
We view Gazprom's more aggressive stance on Naftogaz as a sign that negotiations between Russia and Ukraine on gas prices and the future of Ukraine's gas transit system are proving difficult. Gazprom has publicly criticised Ukraine's re-purchases of Russian gas from Europe. By buying Russian gas from European countries such as Hungary or Slovakia, Naftogaz can achieve significant savings on the price it pays Gazprom.
Ukraine is reducing purchases of Russian gas - in Q113 it bought only 7bcm of gas from Gazprom, a 17% drop yoy. At the same time, the volume of gas in transit from Russia to Europe via Ukraine also dropped 17% to 20.3bcm. Gazprom is building a 63bcm South Steam pipeline to Eastern and Central Europe to essentially bypass Ukraine.
We believe that even though Gazprom is interested in negotiating with Ukraine about participating in its gas transit system, a high-level political decision is needed first. It appears that neither side is willing to give concessions at this time.
Source: Fitch Ratings