Ukraine Prepares for Gas Cut as EU Price Offer Rejected

Ukrainian Prime Minister Arseniy Yatsenyuk ordered the nation’s authorities to prepare for a cut-off of natural gas flows from OAO Gazprom as Russia rejected the latest price proposal before a deadline expires next week.

Russia turned down proposals from Ukraine backed by the European Union, according to a statement on the Ukrainian government’s website. The EU suggested an interim price of $326 per 1,000 cubic meters ($8.25 a million British thermal units), which Ukraine would accept, Andriy Kobolyev, chief executive officer of national energy company NAK Naftogaz Ukrainy, told reporters in Kiev today. Gazprom’s final price offer for Ukraine is $385, the Moscow-based company said in a statement today.

“We are preparing for the worst-case scenario, when gas would not be supplied to Ukraine at all,” Kobolyev said in televised comments. “But we still hope to find a compromise, as we have two days.”

The EU, which relies on Russian gas piped through Ukraine for about 15 percent of its needs, had its flows disrupted during freezing weather in comparable disputes in 2006 and 2009. As Ukrainian government forces clash with rebels claiming allegiance to Russia in eastern Ukraine, a Gazprom deadline for Naftogaz to pay a $1.95 billion bill for past supplies or risk a move to prepayment is set to expire June 16.

Energy Security

Yatsenyuk ordered Ukraine’s Foreign Ministry and Energy Ministry to tell EU countries and the U.S. that Russia “deliberately” undermined the talks on gas supplies and rejected constructive proposals. Russia’s refusal to settle the conflict puts Ukrainian and EU energy security at risk, the premier said. Russia rejects Ukraine’s accusations that it is disrupting the talks, Interfax reported, citing Dmitry Peskov, a spokesman for President Vladimir Putin.

Ukraine invited Russia and EU Energy Commissioner Guenther Oettinger for more talks over the weekend, Kobolyev said. Olga Golant, a spokeswoman for Russia’s Energy Ministry, gave no confirmation of any discussions during the weekend when Bloomberg phoned seeking a comment.

Front-month gas prices in the U.K., the regional benchmark, advanced as much as 4.2 percent, the most since May 30, on the ICE Futures Europe exchange in London after Yatsenyuk’s comments. The contract settled up 3.7 percent at 41.86 pence ($0.71) a therm.

Less Demand

The region’s storage facilities were about 64 percent full yesterday after a milder winter, weaker demand for gas in Europe and injections into stockpiles, according to Gas Infrastructure Europe, a Brussels-based lobby group. That compares with about 38 percent a year earlier.

Ukraine has more than 13 billion cubic meters of gas in storage, Kobolyev said. Reverse flows from Slovakia can potentially cover all of the country’s needs for imports of the fuel, he said.

Ukrainian gas demand almost matches domestic output at 55 million to 60 million cubic meters a day, meaning the country could survive without Russian supplies until the middle of September, Alexander Paraschiy, an analyst at Concorde Capital in Kiev, said by phone. He cited a low-demand season and stalled production at chemical plants in the east.

Gazprom is ready to increase supplies through the Nord Stream and Yamal-Europe pipelines in case of transit disruptions, bypassing Ukraine, and to increase injections into storage in the EU to ensure that its European customers get all required volumes, the company said in a statement today.

EU Suggestion

Naftogaz is ready to pay its outstanding debt and set up a payment schedule if Gazprom accepts the price suggested by the EU, Kobolyev said earlier today in Kiev.

Under the EU proposal, Naftogaz would pay $326 per 1,000 cubic meters, Kobolyev said. Gazprom had offered $385 per 1,000 cubic meters, a $100 discount to the current price, while Ukraine sought a return to the first-quarter price of $268.50. The EU called Gazprom’s offer “appropriate,” CEO Alexey Miller said yesterday in comments televised by state-run Rossiya 24 TV.

Ukraine must pay for gas delivered in November and December and some of its bill for April and May by 10 a.m. Moscow time on June 16 or risk being moved to a system of advance billing, with supply dependent on payments made, Miller also said yesterday.

“I am optimistic that we will do all to avoid disruption” of Russian gas supply and the EU will seek to continue talks as soon as possible, Oettinger said today.

Naftogaz is prepared to pay the interim price of $326 for about 18 months, during which time it plans to pursue arbitration in a Stockholm court against Gazprom, Kobolyev said. Ukraine will underwrite Naftogaz’s commitment to pay for imported gas if Gazprom accepts the price, he said.

Refunds or additional payments would be made according to the tribunal’s ruling on an appropriate price, he said.

Yatsenyuk instructed Naftogaz to file for international arbitration against Gazprom and called for an “economically justified” rate for fuel transit to Europe, according to the government statement.

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