Russia, Ukraine Move Toward Interim Gas Deal Before Winter

Russia and Ukraine moved closer to a preliminary natural gas agreement -- valid for this winter only -- as the European Union brokers a truce in a dispute that was set to disrupt flows during the coming months.

If approved, Ukraine will pay $3.1 billion by the end of the year for previously delivered supplies and Russia in return will provide at least 5 billion cubic meters of gas to Ukraine in the coming months, EU Energy Commissioner Guenther Oettinger said today in Berlin following talks with the Russian and Ukrainian energy ministers. National leaders of both countries must still sign off on the deal, Oettinger said.

“I’ve experienced tough but constructive negotiators over the past weeks,” Oettinger told reporters. “Avoiding gas shortages is in the interest of all those involved.”

Under the deal, Ukraine would pay $385 per 1,000 cubics meters (about $10.9 per million British thermal units) for gas for the next six months. The agreement is at the price that Russia’s OAO Gazprom had said was its final offer and at the highest level the EU had previously said should be paid.

The EU, which depends on Russian gas piped through Ukraine for about 15 percent of its demand, has been trying to broker an accord to maintain shipments since May. After the last round of three-way talks failed in June, Russia stopped supplies to Ukraine, citing $4.5 billion in unpaid bills at the time. The debt has now swelled to $5.3 billion, according to Gazprom, the world’s biggest natural gas producer.

Market Move

Oettinger said there wasn’t any agreement on the final price of gas supplied earlier to Ukraine because it’s the subject of a court dispute in Sweden between both nations. He said $3.1 billion is the minimum Ukraine would have to pay.

Gazprom erased declines of as much as 0.9 percent, closing up 0.1 percent in Moscow after the news from Berlin.

U.K. front-month natural gas reversed gains after Russia and Ukraine agreed the possible deal. Front-month gas dropped as much as 1 percent on ICE Futures Europe after gaining as much as 2.2 percent earlier today.

“The deal between Russia and Ukraine might mean more reliable supplies and lower prices in the winter,” Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, said by e-mail today.

Political Crisis

Concerns that a winter gas shortage may develop follow a political crisis between the former Soviet allies after Ukraine’s Kremlin-backed President Viktor Yanukovych was ousted amid street protests in February.

In April, Russia rolled back two price discounts amid a growing conflict in which Russian President Vladimir Putin annexed Crimea and a separatist insurgency erupted in eastern Ukraine. As a result, Russia raised the gas price for Ukraine from $268.50 to $485 per 1,000 cubic meters, a level higher than for any EU nation.

Oettinger said that the interim deal -- if approved by the governments of Russia and Ukraine -- runs only through March 2015. Ukraine would pay $2 billion of its gas debt by the end of October and $1.1 billion by the end of the year, he said. The countries are set to decide on the draft next week, he said.

Fredrik Erixon, director of the European Center for International Political Economy in Brussels, said that Putin’s strategic target is continued destabilization of Ukraine.

Ukraine Concerns

“People are fooling themselves if they believe you can sign a deal with Putin to sustain a predictable, commercial gas relationship for Russia, Ukraine and the EU,” Erixon said in a phone interview before the accord was announced. “Any deal signed will last a few weeks or months before the Kremlin finds a new reason to disrupt it.”

Ukraine, which was ready to pay $1.5 billion of debt next month, will decide on the issues by Sept. 30, Ukrainian Energy Minister Yuri Prodan told reporters in Berlin after the meeting. The country, which has $3.1 billion reserved for possible gas payments, hasn’t made any decision yet and still sees $268.50 as fair price, he said.

Russia will resume gas supplies to Ukraine after it makes the October debt payment, Energy Minister Alexander Novak told reporters in Berlin after the meeting. While issues remain, a “big step” was made toward an agreement, he said.

Gazprom sees its average price in Europe at about $350 this year. Next year, it may decline to $316.50, according to the Russian Economy Ministry.

Possible Disruption

A preliminary gas accord is needed, while a final agreement on the price is possible only after the international arbitration in Sweden decides on Gazprom and Naftogaz claims, Prime Minister Arseniy Yatsenyuk told reporters in Kiev today.

“Unfortunately, we haven’t reached agreement with the Russian side on the price mechanism,” he said.

While transit to the EU is so far unaffected, concern has grown among its governments over a possible disruption. Russia and Ukraine have been trading accusations of threats to EU-bound gas transit since July.

Poland and Slovakia, which have the capacity to supply Ukraine through reverse flow, said earlier this month Russia has been supplying less fuel than requested. Gazprom said it was fulfilling its contractual obligations and the European request was for additional supplies. That may have to wait until November as Russia fills its own storage to a record level, it said.

Russia has challenged the reverse gas flows. “We believe that reverse isn’t provided in the existing contracts between Gazprom and its consumers” in Europe, Novak said today.

Stress Test

Hungary suspended natural gas deliveries to Ukraine yesterday for an “undetermined time” due to a projected “significant increase” in domestic demand, the Hungarian gas transit company FGSz said in an e-mailed statement.

The 28 EU governments agreed in June to take steps to increase supply security and are preparing for a stress test of Europe’s energy system to help overcome a potential cutoff in the 2014-15 winter.

Short-term supply interruptions through Ukraine transit routes this winter poses significant challenges, in particular for Bulgaria, Romania, Hungary and Greece, the European Commission said in an energy security study in May. If all supplies from Russia are disrupted from October to March, Finland, Poland, Czech Republic, Slovakia, Croatia, Slovenia, Lithuania, Latvia and Estonia are also exposed, the document showed.

Countries including Slovakia and the Balkan nations already suffered from disruptions of Russian gas supply via Ukraine in freezing temperatures in 2006 and 2009. Should temperatures remain within season norms this year, the EU would probably weather a disruption of flows via Ukraine, according to analysts including Citigroup Inc.

A final gas agreement, which means a new contract, is only likely “as part of a comprehensive reset of relations between Moscow and Kiev and that may only come after the status of eastern Ukraine is resolved,” Chris Weafer, a founder of Macro Advisory in Moscow, said by e-mail. “Clearly that is a long way off.”

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