Ukraine Natural Gas Price Risk Premium Remains for Europe

The European Union still faces the threat of natural gas disruptions this winter after helping forge a draft deal to settle a debt dispute between Russia and Ukraine, which carries about 15 percent of the bloc’s gas needs.

The premium of U.K. winter gas over the day-ahead contract widened 3.1 percent yesterday, its biggest increase in more than 10 days in a sign that supply concerns remain, broker data compiled by Bloomberg show. The risk of transit interruption, as in previous disputes between the eastern European nations in 2006 and 2009, persists as long as no definite agreement is signed between the parties, according to Societe Generale SA.

Ukraine’s state energy company NAK Naftogaz Ukrainy would pay Russia’s OAO Gazprom $2 billion by May 30 and a further $500 million by June 7, the European Commission, the 28-nation bloc’s regulatory arm, said May 26 after talks between the three parties. Ukraine will give its answer on the commission’s proposal today, Energy Minister Yuri Prodan said.

“As long as we haven’t solved the situation for the start of the winter, you have a risk,” Thierry Bros, a European gas and LNG analyst at Societe Generale, said yesterday by phone from Paris. “We still have a big unknown, which is how much Ukraine can pay back.”

Gas for delivery in the six months from October in the U.K., Europe’s biggest market, was yesterday 16.8 pence a therm (28 cents a million British thermal units) more expensive than next-day fuel, up from 16.3 pence on May 23, the previous trading day, according to broker data. The premium widened to 17.15 pence today. It reached 17.5 pence on May 16, the highest since March 2012, as warmer-than-usual weather reduced near-term demand, and has averaged 16.3 pence this month. U.K. markets were closed May 26 for a holiday.

$3.5 Billion

Next-month U.K. gas, the benchmark contract, fell as much as 1.6 percent to 42.05 pence a therm today in London, its lowest price since September 2010, on the ICE Futures Europe exchange in London.

Ukraine’s overdue gas debt is $3.5 billion from November through April, according to Gazprom. Russia is seeking about $1.7 billion in advance payments for June supplies by the second of that month and will only ship volumes paid for from the next day, Gazprom said earlier this month. The prepayment requirement may be canceled and the cost for Naftogaz may be lowered if Ukraine settles its debt, Russian Energy Minister Alexander Novak said after the three-party talks.

Ukraine is ready to pay for Russian gas at fair market prices, close to the $268.50 per thousand cubic meters it paid for the fuel in the first quarter, according to Prodan. The government in Kiev wants the future price to be set before starting payments, Ukrainian Finance Minister Oleksandr Shlapak said May 27, according to RIA Novosti news service.

Compromise Price

Gazprom and Naftogaz may eventually reach a compromise on Russia’s gas price at about $350 per 1,000 cubic meters, VTB Capital analysts led by Dmitry Loukashov, said today in an e-mailed note.

Newly-elected Ukrainian President Petro Poroshenko has set his nation on a collision course with Russia, vowing to step up operations to rein in pro-Russian separatists in the east. Any escalation would be a “colossal mistake,” Russian Foreign Minister Sergei Lavrov said May 26, the day after the Ukrainian election.

“The security situation in the east will remain precarious” until planned talks next month between Poroshenko and his Russian counterpart, Vladimir Putin, Alisa Lockwood, head of Europe, CIS analysis at IHS Country Risk, said yesterday in an e-mailed statement.

Troops Withdrawing

While rebels increased tensions in eastern Ukraine, sending a “strong signal” on their refusal of Poroshenko’s electoral victory, they aren’t numerous enough to resist the Ukrainian military for an extended period without external support, IHS’s Lockwood said. Russia looks unlikely to intervene at this point and satellite images point to Russian troops withdrawing from border regions near Ukraine, she said.

“Even if the Ukrainians don’t pay, nobody thinks that Russia will reduce overnight the volumes,” Bros said. “The question isn’t going to be solved in June, and the question is going to be asked in July, in August and with the start of winter -- then it starts the risk of transit interruption.”

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