Gazprom Switches to Prepayment, Russian Gas Disruptions to Europe to Come Soon?
As expected, the trilateral negotiations ended and nothing changed for good. While Ukraine and Russia remain at loggerheads, the worst came true and the situation got even worse: Gazprom reduced supplies to Kiev, saying that starting from today Ukraine’s Naftogaz ‘will receive only prepaid volumes of Russian gas.’
The dispute could disrupt supplies to European countries, which meet almost 15% of their gas needs through gas imported from Russia via Ukraine. But for the moment no pressure reduction or gas volumes have been registered. The main risk is for Eastern European Governments, as the recent political crisis in Bulgaria already suggested. The situation is extremely complex and solutions are clearly not around the corner.
‘Today at 10:00 (Moscow time), in full compliance with the effective contract, Gazprom switched Naftogaz of Ukraine to a prepayment of gas supplies. The decision was made owning to persistent non-payments by Naftogaz of Ukraine. The overdue debt of the company for the supplied Russian gas equals USD 4.458 billion: USD 1.451 billion – for November and December 2013 and USD 3.007 billion for April and May 2014,’ reads a note released by Gazprom at 10:00 MSK.
Moscow pass the buck on Kiev, Ukraine blame on Russia.
“We keep our fingers crossed and hope to resolve our differences in a civilized manner. Further escalation is clearly not in the interests of any of the parties involved,” Andriy Kobolyev, CEO of Naftogaz of Ukraine, said on Saturday, reminding that Russian authorities rejected a compromise put forward by European authorities.
According to EU Energy Commissioner Guenther Oettinger, Russian negotiators pulled out of the negotiations.
In this context, it comes as no surprise that the arm-wrestling could further evolve in a open-faced war. Moscow has many options to flex its muscles, Ukraine has mainly legal cards to play.
LAWSUIT IN STOCKHOLM: RUSSIA BLAMES UKRAINE
‘The Prime Minister of Ukraine Arseniy Yatsenyuk has commissioned the Ministry of Energy and Coal Industry of Ukraine, Justice Ministry of Ukraine, Ministry of Foreign Affairs of Ukraine and Naftogaz Ukrainy to take all measures to protect national interests in Stockholm Court. He said at a session of the Government on Monday, June 16,’ the Ukrainian government wrote on Monday afternoon, in response to Gazprom’s decision to file a lawsuit in Stockholm International Arbitration Court seeking to get USD 4.5 billion from Naftogaz.
Gazprom clearly put the onus on Ukraine. Its message is clear: if Europe does not receive its gas is not Russian decision.
‘Naftogaz of Ukraine is obliged to secure natural gas transit to third countries in full compliance with terms of the effective Contract No. ТКГУ on volumes and conditions for natural gas transit through Ukraine from 2009 to 2019, dated January 19, 2009 between Naftogaz of Ukraine and Gazprom.Gazprom relies on strict observance of contractual obligations taken on by Naftogaz of Ukraine for the gas transit to third countries,’ Gazprom wrote at 11:00.
The company’s chief executive Alexei Miller is expected to meet Energy Minister Alexander Novak and President Vladimir Putin in the afternoon, after a possible Western reaction.
In the while, the European Commission was notified about possible disruptions of gas transit ‘if Naftogaz of Ukraine illegally withdrew gas from transit flows.’ For the moment, this does not seem the case.
UKRAINIAN VIEWPOINT: IT IS ALL ABOUT SOUTH STREAM
According to Ukrainian authorities, Gazprom does not intend to settle the issue, but it simply wants to put pressure on Brussels to receive the necessary green lights to its South Stream project.
‘The clearly artificial gas price dispute with Naftogaz could be used as a new tool in this promotion, serving as an excuse to halt gas supplies,’ the Ukrainian company commented.
According to Naftogaz, the company paid all invoices for gas supplies the price of which is not disputed. It is also ready to pay for the remainder ‘as soon as we reach agreement on price.’
‘Naftogaz will not pay $485/tcm - the price demanded by Gazprom - because our contract clearly states that we should be charged $268.5/tcm. This price cannot be changed by our Russian counter-party unilaterally.’
Naftogaz’s last offer was around $300/tcm. The company argued that that it is the fair and market-based price level, in line with European Commission’s proposed compromise.
But now Kiev has to play its cards. It has to find a common strategy with Brussels, while getting ready for the lawsuit filed by Gazprom. On Monday afternoon, Yatsenyuk did indeed instruct to send a Governmental delegation to Brussels, adding that national interests will be protected in Stockholm Court. Despite the hard times to come, Ukraine can rely on Western support. At least, that is what Kiev hopes.
“I consider our prospects in court are very promising…We must be prepared for the hardest times and we should be ready for that,” Ukraine’s Prime Minister noted, adding that the Government will meet in the afternoon.
SO WHAT? UKRAINE, GAZPROM TO SUFFER, EUROPEAN GAS MARKET TO PAY FOR UNCERTAINTY
Considerations and forecasts are nothing but difficult. The only two certain things are that Ukraine and Gazprom will suffer. The company’s share prices fell on Monday. On the other hand, Ukraine could enjoy its mild summer, but it should find a solution soon before running out of gas in late autumn.
At the same time, the short-term consequences on Europe are clear. Markets will discount the uncertainty. According to Bloomberg, European gas prices jumped the most in more than three months, with the UK front-month gas jumping as much as 8.8%.
The markets are discounting the uncertainties, but at the moment they can still enjoy their gas as Gazprom keeps sending full volumes to European clients. Eurostream, Slovakia’s grid operator, wrote that it did not record pressure reduction or gas volumes decrease at the Compressor Station Veľké Kapušany, the only entry point from Ukraine. Despite the stable flows, things could drastically change any time soon.
‘The Ukrainian side has confirmed nomination for the current day in the same amount… (But) Eustream is ready to ensure reverse flow from Austria in volume of 23,8 mil.m3/day and from Czech Republic in volume of 67 mil. m3/day via Slovak territory. There are the volumes of declared technical maximum on both entry-exit points, which will be kept by the Slovak Transmission System Operator. In case of need, there is possibility to use newly built Slovak-Hungarina pipeline, the construction of which is on the Slovak side completely finished,’ reads a note released by the Eurostream on Monday.
European authorities have now to decide what to do. Support Kiev? Ask for American intervention? Accept Russian requests, paving the way to South Stream? The situation is so tangled that questions are the only sentence with a vague sense. While asking ourselves this questions, eyes locked on Moscow, Kiev, Brussels, Oslo, Wien and Bratislava.
Is the situation so difficult to read? Yes, it is.
Sergio Matalucci