EU Holds Russia, Ukraine Gas Debt Talks as June Cut Looms

Russia warned Ukraine it may cut natural gas supplies in June because of mounting debts as European Union officials met their counterparts from the two former Soviet states.

Energy officials from the three powers, who gathered in Warsaw today for their first three-way meeting, agreed to hold the next round of negotiations in the middle and end of this month, pledging no supply disruptions in May, EU Energy Commissioner Guenther Oettinger said at a briefing. Russia will move to prepayment from its cash-strapped neighbor on May 16 and may limit supplies if the June bill is not paid by May 31, Russian Energy Minister Alexander Novak said after the meeting.

“It’s with concern for me to see that security of supply for end-consumers is not guaranteed,” Oettinger said after the meeting with Ukrainan Energy Minister Yuri Prodan and his Russian counterpars, Alexander Novak. “We need to make an effort to find common ground in the gas sector in the coming month.”

Europe imports about 30 percent of its gas from Russia, half of which crosses Ukraine in Soviet-era pipelines, making the transit country a linchpin in the EU’s energy security. Ukraine, which won a pledge of $27 billion in international aid, depends on Russia for half of its gas consumption. Russian gas exporter OAO Gazprom claims Ukraine owes a total of $14.9 billion, as a debt for past supplies increased to about $3.5 billion as of the end of April, Novak said today.

‘Too Politicized’

“The gas issue between our countries is too politicized,” Andriy Kobolyev, the head of Ukraine’s state-run oil and gas company NAK Naftogaz Ukrainy, said in an interview in Kiev before the meeting. “We can expect anything from Russia.”

Ukraine is ready to pay an “honest, market price” for gas, and will seek international arbitration on May 28 if talks with the Moscow-based gas exporter fail, Prodan said today.

The former Soviet republics have fought over gas prices for years, and disputes in 2006 and 2009 led to disruptions in Europe-bound flows during freezing weather. The negotiators from Russia, Ukraine and the EU agreed today to guarantee no disruptions in supply of gas through the end of May, Oettinger said. The 28-member bloc will mediate “in issues related to a fair and justified gas price,” he said.

Defying Putin

The gas talks come as Ukraine defied calls by President Vladimir Putin to withdraw troops from the largely Russian-speaking east, starting a special operation today to dislodge pro-separatist forces in Slovyansk in the Donetsk region. The EU and U.S. have blamed Putin for fomenting unrest and are threatening to expand sanctions against Russia, as the eastern Donetsk and Luhansk regions slip out of the Ukrainian goverment’s control.

The International Monetary Fund, which approved a $17 billion bailout for Ukraine this week, urged the country to reach a gas agreement with Russia by end-September, when it is going to complete the aid program review. The IMF approval makes $3.2 billion available to Ukraine immediately while the rest is subject to “frequent reviews”, according to the IMF’s website. Part of the financing is earmarked to repay previous IMF debt.

“Naftogaz needs to clear its 2013 arrears to Gazprom and remain current on its 2014 bills,” the IMF said in a report.

Russia has provided Ukraine’s economy with $35.4 billion of gas subsidies in the past four years, Putin wrote earlier this month in a letter to the heads of 18 European gas-buying nations. Gazprom sent Ukraine a bill for part of that amount, $11.4 billion, for gas it said Naftogaz was obliged to buy under a take-or-pay contract, an arrangement the Ukrainian government called unjust.

Price Dispute

Russia doesn’t believe that Naftogaz can pay the bill and is using it as a negotiating point, said a Russian government official involved in discussions, asking not to be identified because talks aren’t public. Ukraine must resolve its debt for fuel already supplied by Gazprom and future payments for gas to be pumped into the underground storage facilities before the heating season to ensure transit to Europe, the official said.

Russia almost doubled what it charges Ukraine to $485 per 1,000 cubic meters from April, more than any EU country pays, from $268.50 in the first quarter after ending all discounts that it had granted Ukraine in 2010 and 2013. Ukraine’s leaders had been seeking to renegotiate their 2009 contract, signed to resolve a price dispute, even before protesters in the capital, Kiev, ousted Kremlin-backed President Viktor Yanukovych in February and Russia annexed the Crimean peninsula a month later.

Debt Claims

Ukraine “has questions” about the debt claims because it disputes the price, said Kobolyev. “We find this part is doubtful. We think it might and must be lower,” he said, adding that the nation is “ready to repay $2.2 billion to stabilize the situation and prevent a gas cut off.”

Ukraine is able to buy gas in the EU at $350 to $400 per 1,000 cubic meters, European and Ukrainian officials have said.

The country needs to import about 30 billion cubic meters of gas this year, Kobolyev said.

Ukraine has received 8.7 billion cubic meters this year, almost all from Russia. Imports in April rose to the most in five months after Putin threatened Ukraine with prepayments, according to Bloomberg calculations based on data from Russian and Ukrainian energy ministries.

Reverse Flows

European countries -- Poland, Slovakia and Hungary -- may supply Ukraine with as much as 8 billion cubic meters this year, using pipelines in reverse, according to data compiled by Bloomberg from European pipeline operators. So-called reverse flows from the European Union into Ukraine were not discussed today, Novak said.

Storage facilities, located near Ukraine’s western border, feed Europe during the winter while most of gas supplied from Russia in the east goes toward Ukrainian consumption.

Naftogaz has proposed European companies pump 12 billion cubic meters of gas into Ukrainian storage themselves, using their contracts and their gas prices, to avoid transit risks in the winter of 2014-2015, Kobolyev said. The companies said they aren’t able, according to Kobolyev.

“They say: ‘We can’t supply gas for storage through reverse flows from Slovakia, and Gazprom refuses to sell us the necessary volumes on Ukraine’s eastern border,’” he said.

Gazprom maintains it has the right, under their contract, to raise the price and move Naftogaz to prepayments.

“Naftogaz isn’t paying at either the new price or the old, including periods when there weren’t any controversial issues -- February and March,” Sergei Kupriyanov, Gazprom’s spokesman said today by phone. “Payment deadlines have passed, so we had the right to move Ukraine to prepayments long ago.”

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