AnalyticsGas war with Russia: Time plays for Ukraine
Ukraine finally took the right direction in gas talks with Russia by ejecting the conditions of the Gazprom and suspending purchases of Russian gas. Our country will still have some gas available, while the question of filling our gas storage facilities for the winter period lies solely in the framework of relations between Moscow and Brussels, experts say.
The last round of gas talks held in Vienna in the already traditional trilateral EU-Ukraine-Russia format saw no result - a compromise has not been reached. Such an outcome of the tripartite meeting was actually expected by many. All the statements ahead of the talks by the Russian leadership - the president and the prime minister, but not by the Gazprom top managers, indicated that the dialogue would be built not on an economic but on a political basis. As before, the Kremlin continues using its energy tools to exert pressure on Ukraine, considering that this puts our country in a desperate situation and compromises us in the eyes of the European community. Russia does not want to understand that the situation has changed dramatically and now, Ukraine can meet all the Kremlin’s challenges. This is exactly what happened.
Ukraine rejected Russia’s conditions - the $ 40 discount for the third quarter down to the price of $ 247 per 1,000 cubic meters, that is, the same cost as in the second quarter. Our country insists on a discount no less than 30% of the contractual gas price and also on the resolution of all arguments before the end of the first quarter of 2016, ahead of the conclusions by the Stockholm arbitration court on the claims of both parties.
Therefore, the Naftogaz has suspended purchases of gas from the Gazprom from July 1, as the additional agreement on a so-called "winter package" has ceased to have effect on June 30. Transportation of natural gas to European consumers will be implemented in full and in accordance with the contractual terms.
"Effective solution of the gas issues with Russia should be trilateral and binding,” said the Naftogaz officials.
Russia refused to sign a trilateral protocol drafted on the principle of the "winter package", drawn up in Brussels in October 2014, which has proved being effective in ensuring the stability of Russian gas supplies throughout the 2014-2015 heating season.
But the very next day following the negotiations, on July 1, Russia decided to increase the pressure on the out-of-control Ukraine.
Russian Energy Minister Aleksandr Novak said that Russia unilaterally reduced the discount on gas price from 30% to 13.92%, otherwise the cost of fuel for Ukraine would be much lower than for the neighboring countries. This, according to Novak, "does not favor the interests of the Russian state, the interests of the budget, the interests of the Gazprom. And the gas will be supplied only on prepayment.
The arguments not in favor of "Gazprom"
One can easily argue with the Gazprom's market price calculations. By the way, in early June, Volodymyr Demchyshyn, Ukraine’s Energy Minister, said that the Russian gas price for our country should not exceed $ 205, which Ukraine would insist on. And it is impossible not to agree with the minister.
This year, the price of gas falls proportionally to the reduction of oil prices, which is almost doubling. Accordingly, the real price of gas for Ukraine in the third and fourth quarters should be around $ 200. And this corresponds to the European trend. Large amount of gas in European storages due to the relatively warm winter of 2014-2015 has also been pressing down on gas price.
In the summer of 2014 the price of gas on the spot market was below $ 200, while the oil price was over $ 100. This summer, gas prices may hold back to the level of the early 2000s. Moreover, the Gazprom is aware of this, as it has repeatedly lowered the prices for European consumers, and continues to do so.
According to the 2016-2018 macroeconomic forecast by Russia’s Economic Development Ministry, which was drawn up last spring and now is planned to be revised, the price of Russian gas will drop from $ 235-240 in 2015 to $ 185-190 per 1,000 cubic meters in 2016. This is because all the contracts of the Gazprom are tied to the oil price, and the monopolist just does not want to change its "age-old" strategy.
Oleksandr Kharchenko, general director of Ukraine-based EIR Center, said that our country’s position is absolutely justified, as it fully reflects what our country had to do for the past 12 years.
“Finally, the negotiating team has taken a correct position, that’s when Ukraine said that we would not buy natural gas, and now let's see how you'll get it back into the bowels of the Earth. And as long as we are not offered an adequate price suitable to us, based of prices on the European spot market and transportation costs, we will not buy your gas. And this is the most correct position I can imagine in relations with the Gazprom,” said the expert.
President of the Strategy XXI Center Mykhaylo Honchar believes that, if the Gazprom voices such statements, Ukraine may refuse its services. “The technical capabilities for reverse gas flow allow us to fully cover our needs by importing gas from Europe. We have not done it yet due to compromises reached in EU-Ukraine-Russia format. But we also consider that today, Russia is the aggressor state. And if it starts intensifying its aggression once again, then we can showing our ability to get by without the Gazprom. In this sense, the last year is quite showing as we have done well almost without Russian gas for 180 days, and nothing terrible happened,” said Honchar.
Indeed, current imports of gas to Ukraine are by nearly 55% provided by reverse from Europe, and by 45% - at the expense of supplies from Russia. This is consistent with the adopted law on the gas market, with which Ukraine has actually implemented the EU Third Energy Package, designed to eliminate any monopoly on the energy market. Another 13-15mcm of gas of Ukrainian origin is being pumped daily. Besides, Ukraine is constantly decreasing gas consumption - in April, the Cabinet of Ministers approved the forecast for gas balance in 2015 with total volume of 40bcm of consumption and 25bcm of imports. Thus, we can safely reduce to a minimum the purchases of Russian gas, which is disadvantageous to Moscow since our country remains the largest importer of Russian gas. Meanwhile, the Russian Federation is barely making ends meet in the wake of Western sanctions and the ongoing recession. But, apparently, politics plays a more significant role in the Kremlin than economic viability.
The financial side of the gas issue
Gas is not Ukraine’s biggest problem. It is the money for its purchase. Russia insists our country pump 19bcm of gas into its storages. Demchyshyn declared that we are ready to do so, provided the assistance by the EU, but we do not consider such amounts "critically needed", and 16bcm would be enough (now, there is about 12bcm of gas in our underground storage facilities).
"We can speak of 19bcm only from the perspective of economic conditions - if the price is under $ 200, and if we get support from the European Bank," said Demchyshyn.
Ahead of the Vienna talks, on June 25, Serhiy Oleksienko, chief advisor to the chairman of the Naftogaz, said that the state energy holding would not be able to finance filling the underground storages with gas for the next heating season and guarantee uninterrupted transit of "blue fuel" to the EU.
On the same day, Prime Minister Yatsenyuk urged the governments of the G7 to help Ukraine in resolving the issue.
The Naftogaz has been holding negotiations for the past six months with its European partners on granting Ukraine a loan for the purchase of and filling underground storages with EUR 1.5 billion worth of gas for the 2015-2016 heating season.
The European Commission announced its intention to help, but it has not yet been specific on this issue. On June 30, the EC said it would keep searching for a way to continue the dialogue between the parties.
“As the meeting has shown today, the parties are still far apart. We have agreed that the Commission will put forward ideas to prepare next steps so that the next consultation could take place. We will use the summer to start preparing the next winter season,” EC Vice-President Sefcovic said in Vienna. Also, he once again assured that the EC tries to simplify the Ukraine’s negotiations with international financial institutions on the issue of filling underground storage facilities with gas.
Now, Europe has to find a quick way out of this stalemate as the Naftogaz not only suspended the purchase of Russian gas on July 1, but also halted its reverse flow gas imports which will inevitably affect the EU. By the way, the European fuel purchases have been growing since May, especially on the Slovakian route. According to the Ukrtransgaz, for six months of this year from Europe 6.3bcm of gas was imported from Europe in total, while only 3.7bcm was supplied from Russia.
Honchar relates reduction of Ukraine's gas imports from the EU solely to the Naftogaz lacking sufficient funds for its purchase. "This is only about the money. If there is money - there are purchases, no money - no purchases,” said the expert.
Valentyn Zemlyansky, director of the energy programs at the center of world economy and international relations of the Ukraine’s National Academy of Sciences, doubts the bailout by the EU. "I really doubt [it]. Last winter, they promised to help, but nothing has changed," he said.
According to Kharchenko, the issue of financing of the filling of storages with gas should be dealt with exclusively by the Gazprom and the European Union, while Ukraine may sit back and watch the process.
"Ukraine has the right position regarding the price. There are many different versions regarding financing. Europe keeps insisting on the need to pay for gas pumped into Ukrainian storages, which is not used during winter for Ukraine’s needs, but is only used to support the transit of Russian gas to Europe. So who should pay for it? Not Ukraine. And now, let Europe together with the Gazprom sort out who is to pay for it. Why should Ukraine freeze $ 1.5 billion in underground storages if it pretty much does not use any it,” said the expert.
The European Commission hopes that the next round of gas talks will be held in August, at the technical level, and in September - at the political level.
"We will have a meeting at the technical expert level after the summer vacation, to be able to meet at the political level in September," said the EC Vice-President Sefcovic, adding that a meeting of experts can take place in August.
Now, we have to see how Europe and Russia will resolve the problem of the filling of the storages with gas – the burden Ukraine has been bearing for decades.