Ukraine paid off the second part of its gas debt

Photo: Reuters

The Naftogaz of Ukraine national joint stock company transferred US $1.65 bn of its debt to Russia’s Gazprom. This payment allows for the opportunity to purchase gas from the Russian company from January 1 to March 31, 2015. If the winter is warm, Ukraine may need up to 3 bn cubic meters of Russian gas. Its price will be lower than the price at the end of the year.

Our conscience is clear

The aforementioned US $1.65 bn is the second payment required to pay off the debt for 11.5 bn cu m of gas, which Ukraine received in November and December 2013 and April–June 2014. Ukraine transferred the first payment of US $1.45 bn to Gazprom on November 4. Payment of the amount was agreed between Ukraine, Russia and the European Union on October 31 after talks in Brussels. During that meeting the parties agreed that the payment of the first tranche would give Ukraine the green light to purchase gas until the end of 2014 and the transfer of the second tranche from January 1 to March 31, 2015.

At the same time, the situation with the amount of the debt and its repayment remains ambiguous: the Ukrainian side claims that two tranches of US $3.1 bn cover the full repayment of its debts for gas as amount of debt is calculated based on the price of US $268 per 1,000 cubic m. However, Gazprom has a different view: US $3.1 bn is only part of the total debt, which is US $5.4 bn.

New meetings

Another round of talks between Naftogaz and Gazprom will begin next year when the two sides will sit down at the negotiating table to discuss the terms and prices of supplies of Russian gas to Ukraine next summer. President of the Strategy-XXI Center Mykhailo Honchar says that in the Q1 2015 the price of Russian gas will drop to US $365 per 1,000 cu m from US $378 in Q4 2014. At the same time, the expert noted that after that the price of Russian gas will fall even lower, as the pressure from the decline in oil prices will begin affecting it with a nine-month delay.

But the Russians are willing to take from Ukraine even less. According to yesterday's forecast of the Russian National Energy Security Fund (NESF), in Q1 2015 the price will be even lower - US $345 per 1,000 cu m, including a US $100 discount.

This price can be adjusted. Honchar said that in the forthcoming negotiations the warm winter (if the weather does not change) may play into the hands of the Ukrainian side. In this case, European storages will have plenty of unused resources, which the owners will put up for sale on the spot market and then the price will be even lower. “While this year Ukraine bought gas from Norwegians at US $265 per 1,000 cu m, this means that the prices in the 2nd and 3rd quarters of the year could be quite low,” he said.

Very little is needed

On the eve of the heating season the Ukrainian government committed to save gas and set appropriate limits for the main categories of consumers, which are 10–30% lower than last year's actual consumption rate. But this week, Naftogaz reported that it did not manage to save much. In particular, during the period from December 1 to December 20 industrial customers, public institutions and district heating companies consumed 1.9 bn cu m of gas, which is one fourth more than the level that the Cabinet set. Only households managed to save gas, having used only 1.5 bn cu m, which is 17% lower than last year.

Despite this, the situation with the consumption of gas is so far not catastrophic. According to Honchar’s estimates, 12 bn cu m of gas available in the Ukrainian underground gas storage facilities (UGSF) should be sufficient for 90 days, meaning until the end of March 2015 provided that for the rest of the winter the average temperature will remain at the current level. The expert predicted that in this situation Ukraine may need to import 2–3 bn cu m of gas by the end of the heating season.

Co-chair of the Energy Strategies Foundation Dmytro Marunych also believes that by the end of the heating season Ukraine’s volume of gas purchases will be quite small – up to 3 bn cu m. At the same time, he noted that on December 5 Naftogaz transferred Gazprom US $378 mn as an advance payment for the supply of 1 bn cu m of gas, but over that time it has pumped only 260 mn cu m. Marunych believes that by the end of the year the amount that was paid for will not be pumped and experts at the Foundation for National Energy Security (FNES) believe that by the end of the year Naftogaz will be unable to import more than 600 mn cu m of pre-paid gas. “So, approximately US $150 mn of advance payments will be accounted for next year, while gas will be paid for at a lower price. The price of Russian gas for Ukraine in the Q1 2015 may be reduced from the current US $378 to US $345 per 1,000 cu m, according to the FNES forecast.

At the same time, Honchar said that there were three unpredictable factors in the situation with gas. The first factor is the weather this winter. The second is the stability of the supply of coal to Ukrainian thermal power plants, because otherwise power companies will be forced to turn on oil-gas units and then gas consumption will rise sharply.

The third factor is political. Honchar is convinced that the Russian authorities are still interested in Ukraine facing a full-scale energy crisis, especially after Ukraine was granted the US $3.1 bn loan in Brussels.