Ukraine Halts Russian Gas Purchases as Deal Talks Collapse

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Ukraine halted purchases of Russian gas after its bigger neighbor took away most of a price discount and declined to sign a deal through the winter season in an echo of previous disputes that disrupted supplies to the European Union.

Ukraine will only buy gas from the EU because the price offered by Russia for the third quarter isn’t fair, Ukrainian Energy Minister Volodymyr Demchyshyn said. While the country said Europe’s energy security isn’t at risk, EU gas for winter delivery rose.

Eastern members of the 28-nation bloc, which gets about 10 percent of its gas through Ukrainian pipelines from Russia, suffered shortfalls at least twice in the past decade during similar pricing disputes between the former Soviet allies.

While Ukraine can cope without Russian gas in the summer, it must boost imports to replenish stocks before the heating season. “A colder winter could pose problems,” said Wayne Bryan, an analyst at Alfa Energy Group in London.

For the time being, gas transit to Europe isn’t “endangered,” the European Commission’s vice president for energy union, Maros Sefcovic, said on Wednesday. He mediated the meeting between Ukraine’s Demchyshyn and his Russian counterpart Alexander Novak in Vienna on Tuesday on gas supplies from July.

Different Situation

Ukraine demanded Russia sign a trilateral, binding intergovernmental protocol to set gas-supply terms through at least the first quarter of next year. Russia rejected that.

“We are much better prepared for any eventual problems with energy supplies,” Sefcovic told reporters in Brussels. “Today we are in a totally different situation than last year, when gas deliveries could have been completely interrupted.”

The EU has helped broker two interim deals between the countries after supplies to Ukrainian energy company NAK Naftogaz Ukrainy were halted for almost six months last year over a payment dispute with Russia’s OAO Gazprom.

A new gas deal is only possible in the fall, said Alexander Paraschiy, a Concorde Capital analyst in Kiev. “The issue is not in the price now, the issue is in politics,” he said.

“Naftogaz halts purchase of Russian gas till supply conditions are agreed on,” the company said in a statement after the breakdown in negotiations, adding that gas transit to the EU will proceed normally.

Discount Cut

The government in Moscow decided on Monday to lower the contract rate for Ukraine by about $40 per 1,000 cubic meters during the third quarter, less than the $100 discount in the second quarter. That would leave the rate, which is linked to oil prices, unchanged from the April-June period at about $247. The offered price is close to what Poland pays Russia, Novak said.

“The Ukrainian side wanted a lower price but that doesn’t correspond to the current market,” he told reporters after the talks in Vienna. Russia won’t discuss the third-quarter price and sees no need for additional pacts, said Novak, adding that talks on fourth-quarter supplies should start in September.

Gazprom said gas deliveries to Ukraine stopped 10 a.m. Moscow time as no payments were made. The EU transit is stable and the company sees “no problems” now, its head Alexey Miller said on the state television.

Winter gas in the U.K., Europe’s most-traded market, rose as much as 1 percent on ICE Futures Europe after the trilateral negotiations failed.

Interim Deal

Ukraine must spend at least two months refilling underground storage before the next cold season. At the Russian price, it would cost $1.7 billion for Ukraine to add the required 7 billion cubic meters of gas.

Demchyshyn said his country needs about $1 billion for gas purchases to fill underground storage and will meet potential lenders from July 6 to July 11.

Ukraine is ready to continue talks on gas supplies, but Russia should provide clear terms of deliveries through the cold season, Demchyshyn said in a statement on Wednesday.

The goal for Ukraine and the EU was to reach a bridging deal that would stay in place until an arbitration court decision on a dispute between Gazprom and Naftogaz, or at least through next winter. The court in Stockholm is expected to issue its verdict in late 2016 or in 2017.