Ukraine and Russia agreed on their positions in talks on the issue of gas supply

Photo: Reuters

Gas talks between Kyiv and Moscow have finally reached the finish line. Both parties settled for a compromise.

Ukraine’s compromise

Ukraine agreed the terms of Russian gas supplies within the framework of the “winter package” that will be effective for the next six months. The corresponding protocol was approved by the Cabinet of Ministers yesterday. Ukraine will receive Russian gas for US $378 per 1,000 cubic m in Q4 2014 and for US $365 per 1,000 cubic m in Q1 2015, said Premier Arseniy Yatsenyuk at yesterday’s government meeting. The price will be determined by a formula specified in the 2009 agreement between Naftogaz of Ukraine and Gazprom, which takes into account a US $100 discount per 1,000 cubic m, against which the Ukrainian side was constantly protesting.

Dark spots

Russia’s Ministry of Energy confirmed these calculations. According to the protocol agreed to by the Russian government, Ukraine will be able to purchase the lacking 5 bn cubic m of gas for the winter heating season on terms of pre-payment.

The amount of debt that Naftogaz has accumulated over the last few months is the only factor that remains unclear. Ukraine’s premier said the size of the debt will be calculated based on the price of US $268 per 1,000 sq. m. The Ukrainian government says the amount corresponding to such a price is the equivalent of US $3.1 bn, which Ukraine allegedly reserved on accounts within the framework of financial assistance of the International Monetary Fund and the European Union. Despite this, the Russian side did not mention any revision of the amounts of the gas debt.

Right on time

Given the market realities it is possible to say that the preliminary outcome of the agreement is quite acceptable for both sides, says Vice Chairman of the Energy Strategies Foundation Dmytro Marunych. He says for Ukraine the supplies of Russian gas will be more beneficial than the reverse shipment of gas from Europe. For example, the Odesa Port Plant contracted reverse gas supplies for February 2015 at the price of US $392 per 1,000 cubic m. At the same time, the expert believes that Russia protected itself from the risks of disruptions in gas transit.

Without Russian gas Ukraine would be in a critical situation. The day before yesterday German Chancellor Angela Merkel made it clear that if Ukraine did not agree with Russia on gas supplies, Germany would not be able to provide reverse gas supplied to Ukraine. Some experts believe that eventually Poland and Slovakia would also cease supplying Ukraine with gas. Also, Senior Analyst at the Dragon Capital investment company Denys Sakva says that without reverse supplies Ukraine could provide itself with gas from the underground gas storage facilities (UGSF) only until the end of this year. The expert says that by that time there would be approximately 6.5 bn cubic m of gas in the UGSFs and such a level of gas in storage facilities complicates its extraction due to the drop in pressure.

Our calculations

Capital’s calculations seem to be slightly more optimistic. On October 20 Ukraine started pumping out gas from its underground storage facilities due to the start of the heating season. According to Naftogaz of Ukraine, daily gas extraction is 23–25 mn cubic m and over time (in conditions of permanent cold weather) it will be increased to 50 mn cubic m, keeping in mind that at the moment reverse gas is practically not being pumped to UGSFs, as it is immediately used to satisfy the needs of household consumers. Today, Ukraine receives an average of approximately 30 mn cu m of reverse gas per day. This means that in case reverse supplies are cut extraction will not be increased to 50 mn cubic m per day, rather to 80 mn cu m. Therefore, Ukraine will reach the critical level of 6.5 bn cu m of gas in its underground storage facilities 3 months from now, specifically, by the end of January – beginning of February. However, such an optimistic forecast is not so rosy, because the heating season will end 1.5 months from that moment.

Gas reserves will be exhausted more intensively after thermal power plants begin to use it due to the coal shortage, which was not taken into account by the government, says Sakva. On October 28 the Centrenergo Energy Company started up the oil-gas unit No. 5 at the Trypillya power plant. Last time Ukraine started up the unit in 2012, when it suffered from a shortage of electricity in the Joint Electric Power System of Ukraine. As a result, gas consumption will exceed the calculated volume and without gas agreements signed with Russia the Ukrainian households will freeze in the midst of winter.