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Kiev negotiates a winter package with Russia and EC

Ongoing negotiations between Ukraine, Russia and the EC about a new winter package are nothing like last year

But with very little gas in store as winter nears, Kiev needs to agree terms.

After last year’s war of statements and hints about problems with gas transit in winter, Kiev and Moscow are now corresponding mostly on the question of price. Sometimes they even praise their opponent for taking a constructive approach, making a refreshing change.

The price of winter supplies remains the stumbling point though. According to energy minister Vladimir Demchishin, Kiev’s position is the same – Naftogaz is ready to pay “European market price” minus $32/’000cm – the cost of transiting Russian gas through Ukraine. The price of Russian supplies for the fourth quarter, in accordance with the contract of 2009, is $252/’000cm, but that is not a market price, Demchishin says.

It is worth mentioning that at the start of September his Russian counterpart, Vladimir Novak, suggested that the fourth quarter price for Ukraine could be at a discount to the price of gas in neighboring countries such as Poland. He also added that Naftogaz had been offered a 14% discount in the third quarter, bringing the price down to about $247/’000cm, but the state-owned enterprise preferred to buy more expensive gas from EU counterparts via reverse flow instead.

Ukraine recognizes the latter fact officially and it is indirectly confirmed by the country’s official sources. According to Ukraine’s state statistics committee, in July – the latest month for which data is available –Ukraine imported from the European Union 570.7m cm of gas worth $153.7m. This suggests the average price of $269/’000cm which is notably higher than the $247/’000cm proposed by Russia for July-September and is rather explained by political expediency.

Naftogaz said it imported gas from the EU at an average price of $267/’000m³ in the second quarter of the year, which worked out at $275/’000cm including the cost of transportation to Ukraine’s borders.

Reverse flow was an initiative launched in Kiev with support from the European Commission and pipeline companies such as Eustream in Slovakia. It was intended to improve Ukraine’s security of supply and also to bring pressure on Moscow to lower its price, and it still annoys the Russian counterparts.

Naftogaz bought just 3.7bn cm from Gazprom in the first six months of the year, before imports from that direction stopped 1 July. Over the same period, imports from the EU reached about 6.3bn cm. Reverse flow remains the only source of imports for Naftogaz as imports from Russia have not been renewed.

But more expensive imports are not the ideal solution for Naftogaz, taking into account its chronic financial problems. For example it has not been able to fulfil its own plans to inject into storage ahead of winter. As of 21 September there were 15.3bn cm in Ukrtransgas facilities, meaning it injected just 7.7bn cm this year and only 1.2bn cm since 26 August. This contrasts with the cabinet of ministers’ schedule to inject almost twice as much – 13.9bn cm – between the middle of April and the middle of October. This puts into question Ukraine’s ability to balance demand hikes this winter, not just in EU countries, but on its own territory.

On 15 September, Demchishin said Ukraine would start the heating season with 16-18bn cm in storage which he described as adequate. At the same time he had to refute rumours that the government would expropriate gas from Ukraine’s independent producers in order to avoid a supply crisis. Taking into account that similar ideas were discussed in 2013-2014, when the situation with stocks was much better, there is the possibility that this option remains on the table.

Naftogaz though remains under pressure to inject the necessary volume and time is short for negotiating a loan. The list of possible creditors includes the World Bank and the European Bank for Reconstruction and Development. 

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