Russia Cuts Gas to Ukraine While Maintaining Flow to EU

Ukraine said Russia cut natural gas supplies after demanding advance payments for the fuel, the first time shipments have been affected in this year’s crisis in relations between the two countries.

Russia’s OAO Gazprom is only providing enough gas to Ukraine’s pipeline system to meet demand from European customers and not the country’s needs, Ukraine’s state gas company said. Ukraine must pay its debt and then will only receive gas paid for up front, Gazprom Chief Executive Officer Alexey Miller said today after a deadline of 10 a.m. in Moscow passed without receiving payment.

The European Union, dependent on Russian gas piped through Ukraine for about 15 percent of its demand, has been trying to broker a deal to maintain shipments and overnight negotiations in Kiev ended yesterday without a deal. A supply cutoff may have less impact in the European summer, when consumption is lower and stockpiles higher.

“Ukraine was ready for such developments,” said Ukrainian Energy Minister Yuri Prodan. “We will provide reliable supply of gas to consumers in Ukraine and we will provide reliable transit to the European Union.”

European gas prices jumped the most in more than three months on concern regional supplies may be disrupted. U.K. front-month gas jumped as much as 8.8 percent, the biggest increase since March 3 and a record for the July contract, on the ICE Futures Europe exchange in London.

Transit Volumes

The company doesn’t see ground for renewed talks with Ukraine unless the country, which Miller described as bankrupt and “destroying itself,” starts paying debts, he said.

Ukraine’s $4.5 billion gas debt is a “serious” sum even for Gazprom, Miller said.

Gazprom is shipping more than 180 million cubic meters of gas a day through Ukraine and will monitor transit volumes, Miller said at a news conference in Moscow.

The grid operator in Slovakia, where Ukrainian pipelines arrive at the EU, said there was no reduction in gas pressure or import volumes.

Stocks in EU gas underground storage sites are larger than in previous years and the region is able to cope if there are disruptions, EU Energy Commissioner Guenther Oettinger, who has been involved in the trilateral talks since they started in May, told a press conference in Vienna today.

EU Plan

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

Ukraine must pay $1.95 billion to partially settle its debt by the deadline, Gazprom said yesterday. The company previously extended the payment deadline for Ukraine after receiving $786 million for supplies delivered in February and March.

Ukraine refused to pay the rest of its debt demanding market-based prices, which it says would be lower than Gazprom proposed.

In April, after Ukraine’s Kremlin-backed President Viktor Yanukovych was ousted in street protests, Gazprom rescinded a gas discount it had previously granted Ukraine. Russian President Vladimir Putin also stripped the Ukraine of a 2010 export-duty reduction that it exchanged for a lease on its Black Sea fleet’s port in Crimea, which Russia annexed in March.

Street Protests

Ukraine was ready to accept the EU proposal of a price range between $300 and $385 per 1,000 cubic meters, still above the $286.5 that the country paid in the first quarter, NAK Naftogaz Ukrainy, the state gas company, said today. Gazprom’s final offer was $385, Miller said today.

Ukraine, which relies on Gazprom for about half its gas, is able to survive without Russian fuel until the middle of September as its current gas consumption almost matches domestic output due to low seasonal demand and the stalling of production at its chemical plants in the east, according to Concorde Capital, a Kiev, Ukraine-based investment company.

Ukraine has been filling underground storage facilities over the past few months to provide a buffer in the event of disruption, Andriy Kobolyev, CEO of Naftogaz, said today. “We have time,” he said.

The European Commission, the 28-nation EU’s executive arm, said in a statement today that it still aims to help broker an agreement that secures supplies from Russia.

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