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Ukraine to pay $3.1bn of Gazprom debt by end of 2014

Public Policy

Ukraine will pay Gazprom $2 billion for gas it has received from Russia by the end of October and an additional $1.1 billion by year’s end, EU Energy Commissioner Gunther Oettinger announced.

The amount that Ukraine is expected to pay Russia is short of the $5.3 billion that Kiev currently owes Gazprom.

Gazprom will resume gas deliveries and send at least 5 billion cubic meters (bcm) of gas to Ukraine at a price of $385 per 1,000 cubic meters after it receives the first tranche of $2 billion, the EU commissioner and Russia’s Energy Minister Alexandre Novak said.

“This depends on final agreements. Our colleagues say that this is [going to be in] October,”Novak said in Berlin on Friday.

However, Novak reiterated that $385 was a reduced price, “$100 discount off the current price” . This price will be valid for another six months, he added.

Ukraine will also have the option to buy up to another 5 bcm by the end of March 2015, dependent on weather conditions, Oettinger added.

Five billion cubic meters is exactly the additional volume experts believe Ukraine would need to get through the winter months. Currently, Kiev only has 15.5 billion cubic meters of natural gas in storage.

Oettinger also said that Russia and Ukraine were aiming to reach an agreement covering gas supplies up to the end of March 2015. A new round of negotiations is scheduled for the end of next week.

The EU and the World Bank could act as guarantors of Ukraine’s debt payment, Russian Energy Minister Aleksandr Novak said.

Reverse gas supplies off the agenda

Speaking after three-way negotiations between Russia, Ukraine and the EU in Berlin, Oettinger said the issue of reverse gas flows to Ukraine had not been discussed, Oettinger said.

“Reverse deliveries are only possible if it does not violate contracts,” Oettinger said. “Without Gazprom’s agreement it is impossible. Such deliveries are technically possible, but they are limited. They do not solve the problem, do not provide energy security.”

On the evening before gas talks, Russian Energy Minister Aleksandr Novak warned that that supplies to Europe would be threatened if customersre-exportedany Russian gas.

“We know that Gazprom has never welcomed reverse supply, because it is unrealistic in terms of overall legitimacy and abnormal in terms of gas business,” Aleksandr Pasechnik, head of research at the National Energy Security Foundation, told RT.

The statements were made during another round of gas talks in Berlin held by Russia, the EU and Ukraine on Friday.

Gazprom CEO Alexey Miller (L) listens as Ukrainian Energy Minister Yuriy Prodan (R) speaks during a press conference after talks on energy security between Ukraine, EU-Commissioner for Energy amd Russian Energy minister on September 26, 2014 in Berlin.(AFP Photo / Odd Andersen)

Gazprom CEO Alexey Miller (L) listens as Ukrainian Energy Minister Yuriy Prodan (R) speaks during a press conference after talks on energy security between Ukraine, EU-Commissioner for Energy amd Russian Energy minister on September 26, 2014 in Berlin.(AFP Photo / Odd Andersen)

Drawn – out negotiations

Earlier rounds of EU-brokered gas talks between April and mid-June failed to produce results.

Gas price for Ukraine has been a stumbling block, as Kiev still insists it is too high. Russia has offered Ukraine a final price of $385 per 1,000 cubic meters, a price lower than it sells to any other European customer.

In June, Gazprom switched Ukraine to a prepayment system after Kiev refused to pay its billion dollar debt or agree to price negotiations. Russian gas still flows through Ukraine to Europe, but Kiev cannot take off any gas they don’t pay for up front.

Ukraine’s debt to Gazprom has been accruing over the year. After Crimea rejoined Russia in March, the Russian gas giant canceled Kiev’s discount, and the price skyrocketed from $268.50 per 1,000 cubic meters to $485 per 1,000 cubic meters, a nearly 80 percent increase in price.

Chill winter looming?

Meanwhile, the current gas situation is not helping millions of people in Kiev, who are bracing themselves for a tough winter. With temperatures plunging below zero, without hot water and heat their apartments will be unbearably cold.

“We are strengthening the doors and windows to help save heat – but how’s that going to help if it becomes really cold?” an old women from Kiev told RT.

Kiev authorities have already turned off hot water throughout the city in an attempt to save gas for the winter months.

“We have a kid and it’s already difficult enough without hot water – we have to boil it ourselves using gas or electricity. In case of more disruptions – I don’t know what we’ll do,” said Alla, a young mother.

The Kiev city administration is reportedly considering three future possibilities: a complete shutdown, supplying hot water at lower temperature, or switching to a scheduled hot water supply.

People are now rushing out to buy electric-powered boilers for their energy needs.

“We never planned to buy a boiler but now I’m forced to borrow money from my relatives to afford one,” a local woman said.

But despite the inconvenience people are bearing with utility bills doubling.

The Ukrainian gas distribution company Naftogas warned that gas prices may quadruple by the end of the year as the company plans to set a unified price for all consumers.


3 Comments on "Ukraine to pay $3.1bn of Gazprom debt by end of 2014"

  1. rockman on Sat, 27th Sep 2014 9:25 am 

    The European Union will guarantee a loan from the International Monetary Fund to help Ukraine meet its debt payments. One obvious solution from the start. But the fact that the IMF wasn’t going to provide the Ukraine with a rather small credit line (total current capital commitment of the IMF to the rest of the world is around $125 billion) unless someone co-signed the loan is rather telling IMHO. I have to wonder if this was essentially extortion: the EU covers the debt in exchange for the Ukraine continuing to ship the Russian NG to the EU countries. I also have to wonder if there was a side deal regarding what the Ukraine charged for transiting. In the past Russia paid the fee. Wonder who will be paying in the future and at what price?

    And the prepayment requirement is interesting. There were major disputes in the past where the Ukraine eventually admitted siphoning off Russian NG earmarked for the EU. The EU buyers only paid Russia for the NG they received. I’ve commented before how Russian could get paid at their border for their NG to solve this problem. If the EU buyers have to prepay that would completely solve the problem for the Russians. Under such an arrangement if the Ukrainians steal any of the throughput it won’t be a Russian problem. It will be a Europeans problem.

  2. JuanP on Sat, 27th Sep 2014 10:37 am 

    Rock, as far as I know Russia has been paying those transit fees in a timely manner in spite of everything. Both Ukraine and Russia have let that be for now.
    I’ve read reports of plans to sell 49% of Ukraine’s pipelines to Western interests, but don’t know what’s up with that.
    The IMF’s rules don’t allow it to make loans that can’t be repaid, and Ukraine may no longer qualify for IMF loans, so quietly, without explaining anything, the EU guarantees the loan so it can qualify on the EU’s credit.

  3. rockman on Sat, 27th Sep 2014 2:49 pm 

    Juan – Yes…Russia was paying the transit fee. Sometimes for NG that wasn’t being delivered to the EU. No details but essentially by the Ukraine (and maybe EU also) prepaying for the NG Russia might not be paying. When I transfer title of my NG to a buyer at my lease line I don’t pay any pipeline or processing fees…the owner of the NG does. And that ain’t me…and maybe not the Russians either. The prepayment requirement might not sound like a big deal but depending on the details it can radically change the dynamics for all the parties involved.

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