Russia Warns Cold May Force Ukraine to Siphon Off EU Gas

Aug. 29 (Bloomberg) – Bank of America Merrill Lynch Global Commodities Head Francisco Blanch examines Russian gas pipelines to Europe and the market reaction to Ukraine escalation. He speaks with Tom Keene, Scarlet Fu and Brendan Greeley on “Bloomberg Surveillance.” (Source: Bloomberg)

Russia warned Europe in a meeting of energy chiefs today it risks having natural-gas supplies siphoned off by Ukraine this winter if the former Soviet allies can’t resolve a payment dispute that’s been brewing all summer.

Ukraine has to start paying its bills immediately so Russia can resume shipments in time to add the 10 billion cubic meters to underground storage needed for the smaller country to get through the winter, Russian Energy Minister Alexander Novak said in Moscow today after a meeting with European Union Energy Commissioner Guenther Oettinger. The gas storage situation in Ukraine is now “critical,” Novak said.

Russia cut off flows to Ukraine in June citing unpaid bills, and the EU, which depends on supplies via Ukraine to meet about 15 percent of its demand, has been trying to broker a deal to get them resumed. Russia wants Ukraine to settle part of its debt and pay advance installments before it will restart shipments, OAO Gazprom Chief Executive Officer Alexey Miller told reporters after the talks.

“We clarified a number of issues,” Oettinger said after the meeting with Novak. They relate to “what can be done in the remaining weeks until mid or late October to take the necessary precautions to build up enough reserves, enough gas storage to last through a long, cold winter.”

Ukraine Crisis

The negotiations come amid a deepening crisis in eastern Ukraine, where pro-Russian separatists are battling government forces on two fronts after NATO reported a surge of Russian troops and equipment into the conflict-zone. The EU and U.S. have threatened further sanctions against Russia, while President Vladimir Putin has repeatedly denied any involvement in the unrest.

While transit of Russian gas to the EU remains unaffected so far, concern is growing over a possible disruption. Faced with armed conflict in Ukraine, the 28 EU governments agreed in June to take steps to increase supply security. European countries are also preparing for a stress test of the region’s energy system to help overcome a potential cutoff in the 2014-15 winter.

“We are aware of Russia’s plans to shut transit completely in winter even to European Union countries,” Ukraine’s Prime Minister Arseniy Yatsenyuk said Aug. 27.

Russia’s comments about siphoning EU-bound gas are “groundless” and meant to discredit Ukraine, Energy Minister Yuri Prodan said today, according to RIA Novosti.

Advance Payments

Russia estimates Ukraine needs to add as much as 10 billion cubic meters of gas to its underground storage and has just two months “in the best case” to do it, Novak said. The smaller country also should resume shipments in addition to those needed to replenish stockpiles, which is impossible without paying out the debt, he said.

Ukraine’s state energy company NAK Naftogaz Ukrainy owes Gazprom $5.3 billion for past deliveries, the Russian exporter says. Kiev-based Naftogaz says the sum is too high after Russia raised the price by 81 percent in April.

Ukraine must now pay about $2 billion to settle the debt partially, according to Novak. It should also make an advance payment, depending on volumes, if it plans to buy more, Miller said.

The EU wants three-way negotiations with Ukraine to take place in mid-September and proposes a temporary price that would stay in place until an international court rules in cases filed by Gazprom and Naftogaz.

Under the EU’s last plan, which collapsed in June, Ukraine would pay its debt in installments, with $1 billion paid immediately and the rest by year-end.

Fair Price

Oettinger said today that a fair temporary price for gas to Ukraine could be $320 per 1,000 cubic meters in the summer compared with the current $485. A proposal for settling the debt and a temporary price will be prepared for the September talks in coming weeks, Marlene Holzner, an EU energy spokeswoman, told reporters in Brussels today.

Ukraine, which demands market-based prices, said after the talks failed that it was ready to accept the EU proposal of a price range of $300 to $385 per 1,000 cubic meters, still above the $286.5 that the country paid in the first quarter.

Novak today reiterated Russia’s offer of a $100 discount for one to two years if Ukraine starts payments. Moscow may grant the discount retroactively since April, he said.

Ukraine is disappointed “by the lack of a constructive approach” from Russia as it repeats proposals already rejected in June, Prodan said today. Ukraine is prepared to pay a price that reflects European spot prices, he said.

All sides should be interested in an agreement as soon as possible, Novak said. “Every day brings us closer to winter.”

To contact the reporters on this story: Elena Mazneva in Moscow at emazneva@bloomberg.net; Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

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

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