Ukraine Seeks More EU Gas Imports as Russia Demands Billions

Ukraine is seeking to import more natural gas from Europe via Slovakia as Russia demands an extra $11.4 billion for contracted fuel and clashes with pro-Russian forces in the country’s east escalate.

The European Union, Slovakia and Ukraine failed today to agree on flows from the west, aimed at reducing Kiev’s dependence on Russian gas, as officials met in Bratislava, Slovakia. EU Energy Commissioner Guenther Oettinger said an accord to supply substantial volumes to Ukraine would require Russian consent. With current proposals, European supplies could replace less than half the imports from Moscow-based OAO Gazprom (GAZP) this year, according to data compiled by Bloomberg.

“Slovakia is going to want some sort of guarantee that it will get paid,” Julian Lee, a senior energy analyst at the Centre for Global Energy Studies in London, said today. “The problem is in part because Ukraine is unable to pay for its gas delivered from Gazprom, and any other supplier is going to want to make sure they don’t end up in the same position.”

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Ukraine and Slovakia have so far been unable to agree on terms and volumes of flows from Europe. The EU and the U.S. are jointly seeking alternative supply sources to Ukraine, including reversing pipelines amid the worst standoff between Moscow and the West since the Cold War, spurred by the new Kiev government’s plans for closer ties with the EU.

Slovakia, a transit country for the fuel, pumped more than 50 billion cubic meters from Gazprom through its pipelines to European nations last year, or about a third of the world’s biggest gas exporter’s sales to the region, according to data from Eustream AS, the Slovakian pipeline operator, and Gazprom’s export unit. That compares with 5.4 billion cubic meters Slovakia imported for its own needs, according to Gazprom.

Commercial Problem

“There is a commercial problem in the sense that Gazprom is obviously a very large client for Eustream, and obviously it is not in Gazprom’s commercial interests for reverse flows deliveries to start,” Simon Pirani, a senior research fellow at the Oxford Institute for Energy Studies, said yesterday.

Slovakia can’t commit to supplying Ukraine more than 10 billion cubic meters a year via an existing idle pipeline, Slovak Economy Minister Tomas Malatinsky told reporters. Ukraine is proposing “more audacious solutions,” which Slovakia can’t accept because they may harm contractual relations with Gazprom, he said.

Russian Shipments

A Snapshot of Ukraine's Past and Future

Russia shipped 25.8 billion cubic meters of gas to Ukraine last year, including supplies to state-owned NAK Naftogaz Ukrainy, or about 71 million cubic meters per day, meeting half of the nation’s demand, according to data from Gazprom.

Eustream last week offered to start reversing supplies to Ukraine in October. The flows would begin at 3.2 billion cubic meters a year, or 8.8 million cubic meters a day, increasing to as much as 10 billion cubic meters a year from March 2015, Vahram Chuguryan, a spokesman for the company in Bratislava, said yesterday. That’s enough to replace 39 percent of Ukraine’s Russian imports, according to data compiled by Bloomberg.

Ukraine needs 30 billion cubic meters of gas from Europe via Slovakia, Naftogaz Ukrainy Chief Executive Officer Andriy Kobolev said on April 18, and wants to use one of four existing operational pipelines on the Slovakia-Ukraine border for reverse supplies. Eustream’s “best solution” is to invest in restarting Slovakia’s idle Vojany pipeline, Chuguryan said.

“The talks today resulted in great progress, I’m optimistic that further steps will lead to the signing of a memorandum of understanding,” Oettinger said.

Talks Continuing

The trilateral talks will continue tomorrow, Oettinger said. Ukraine is seeking a deal by April 28, Ukrainian Energy Minister Yuri Prodan said after the meeting.

The new fuel bill from Moscow is for contracted gas that Ukraine failed to buy last year, Sergei Kupriyanov, a spokesman for the Russian state-controlled exporter, said today by phone. Naftogaz was obliged to pay for 41.6 billion cubic meters of gas in 2013 under a take-or-pay contract, whether or not the volumes were imported, he said. The charge follows a separate bill for $2.2 billion for unpaid supplies.

Russia is ready for talks with the EU and Ukraine on April 28, Olga Golant, a Russian Energy Ministry spokeswoman, said today by phone. No date or venue for negotiations with Russia has been set yet, Sabine Berger, a spokeswoman for the EU’s Oettinger, said today.

Gazprom doubts that shipping gas from Europe to Ukraine’s central or eastern regions is possible, Chief Executive Officer Alexey Miller said April 5, according to Interfax. Kupriyanov declined to comment on reverse flows when reached today by phone.

Polish Imports

Ukraine can also import about 4 million cubic meters a day, or 1.5 billion cubic meters of gas a year, from Poland, according to Naftogaz and Polish state-run pipeline operator Gaz-System SA.

Supplies from Poland began this month under a deal with RWE AG, Germany’s second-biggest utility.

Hungary may supply fuel to Ukraine through a separate pipeline with annual interruptible capacity of about 6.1 billion cubic meters, or 16.8 million cubic meters a day, according to the national pipeline operator FGSZ.

Ukraine is seeking a total of 37 billion cubic meters a year via reverse flows, according to an e-mailed slides from Naftogaz.

“It is not a long-term solution in terms of diversifying away from Russian gas,” Pirani at the Oxford Institute for Energy Studies said. “In any case, the vast majority of gas volumes in that part of Europe are going to originate in Russia.”

To contact the reporters on this story: Anna Shiryaevskaya in London at ashiryaevska@bloomberg.net; Elena Mazneva in Moscow at emazneva@bloomberg.net; Radoslav Tomek in Bratislava, Slovakia at rtomek@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net; Lars Paulsson at lpaulsson@bloomberg.net Lars Paulsson

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