Ukraine and Gazprom agree to end conflict after gas supplies drop further, allegedly affecting European deliveries

Update: Following direct phone talks between Naftogaz’s Oleg Dubina and Gazprom’s Alexei Miller, a resolution to this gas supply conflict is apparently on its way “soon.” Here’s more details on the vague “agreement” reached:

In particular, the sides have agreed that the gas supplies during January 1- March 1, 2008, will be paid for by Naftohaz Ukrayiny by the scheme [that] exist[ed] a[t] of beginning of the year. The problems with Russian natural gas supplies will be solved. The talks on other issues of collaboration in the gas sphere will continue.

Assuming supplies are back to normal by tomorrow, much of the post below won’t be too applicable. But feel free to read it anyway.

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Gas supplies remain at below-normal levels in Ukraine dueGazprom’s 25% cut in gas supplies (or 35%, depending on whom you believe) to Ukraine on Monday was followed by a further reduction in deliveries yesterday. Ukraine’s Naftogaz responded that it may retaliate by dipping into deliveries destined for Europe, which (according to Gazprom) apparently has already begun to happen today.

The level of gas from Russia has dropped by about 70 million cubic meters (Mcm) per day, which represents around half of Ukraine’s typical daily gas imports. Gazprom says it received a telegram (what century is this?) from Naftogaz saying that the Ukrainian state-owned company has diverted 60 Mcm per day from transit to Europe. Of this, 30 Mcm is designated as coming from Gazprom’s shipments west and 30 Mcm from RosUkrEnergo’s. These volumes represent about 8% of Gazprom’s average exports to Europe (358 Mcm / day) and the entire amount of exports for RosUkrEnergo. Gazprom is complaining that it is not being given access to data from gas transit monitoring stations in Ukraine to independently verify the discrepancies in volume.

Naftogaz asserts that the additional reduction of supplies is uncalled for, as it now cuts into the “Central Asian” portion of gas Ukraine is supposed to be receiving. For this time of year, the percentages are apparently supposed to be 25%-75%, Russian-Central Asian, but it’s doubtful there’s a contract anywhere that says that proportion is set in stone. Naftogaz also blames Ukrgazenergo and RosUkrEnergo–the two intermediaries coordinating the supply of gas imports to Ukraine–with stonewalling and hampering negotiation efforts.

It is believed that Ukraine has enough gas in storage (plus its domestic production) to satisfy demand for a few weeks before Ukrainian consumers will be affected. That would suggest that the reduction of transit supplies by Naftogaz is being done on principal–the belief that this act by Gazprom is illegal and hampers the Russian side’s negotiating stance–rather than out of need. Tymoshenko has assured Ukrainians that their heat and hot water will remain on, barring a conspiracy between Ukrgazenergo and RosUkrEnergo. Problems in Kirovgorod–heat allegedly shut down to “maternity wards, schools and kindergartens”–appear to be only political agitation.

The shortfalls of gas leaving Ukraine are unlikely to cause Gazprom to break the terms of its contracts with European consumers, as the volumes being sold up until a few days ago were in all likely hood above well the minimum stipulated amounts (which are determined over given lengths of time, rather than by daily flow). Also, Naftogaz announced that transit volumes through Ukraine had been up significantly for the past two months, suggesting the average deliveries could still fall within contractual amounts even with a period of lessoned supplies. Regardless, the structure of the contracts has Gazprom responsible for the delivery of its gas to European consumers. That won’t stop the Russian company from charging Naftogaz with illegal activities and seeking recompense, but the downstream customers are obliged to complain first to Gazprom.

This isn’t to say Ukraine isn’t at fault, nor that it won’t generate ill-will from European consumers. Both sides are investing heavily in PR efforts to publicize their arguments and reassure observers, but it is unclear at this point how they will play out. A spokesman for the US government characterized the situation as a “commercial conflict” that should be resolved via “commercial means.” While decrying the use of supply cuts, this nevertheless strays from the overtly political undertones accompanying most coverage of the January 2006 shut off.

Most international press has connected the current cut in supplies to debt accusations made by Gazprom. My last post attempted to show that this emphasis on the money portion of the conflict is being overblown. Instead, the main point of contention is the future composition of the gas supply scheme. (Naftogaz’s spokesman reaffirmed this.) A few hundred million dollars is not a big issue when companies with revenues of tens of billions of dollars are at stake.

The deal that Gazprom is pressuring Tymoshenko to sign off on–and that the president’s have agreed to–would have Gazprom increasing its share in the domestic market from 25% to 50% and include access to Ukraine’s domestically-produced gas. Whether or not those concessions are included in the agreement reached to end this conflict will show which side emerged the winner.

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2 responses to “Ukraine and Gazprom agree to end conflict after gas supplies drop further, allegedly affecting European deliveries

  1. “З питання 25% участі “Газпрому” в “УкрГаз-Енерго” ми могли б абсолютно обійтися без створення СП-1 і СП-2, що руйнують фінанси “Нафтогазу”, а запропонувати дочірнім компаніям “Газпрому” одержати ліцензії (на продаж газу споживачам України) у розмірі 25% або близько 5 млрд. кубічних метрів, що має “УкрГаз-Енерго”, – цитує прем`єра “Українська правда”.”
    http://www.unian.net/ukr/news/news-239773.html

    Don’t look like UkrGazEnergo is going anywhere.

  2. Pingback: Kremlin, Inc » Ukraine capitulates on $321 for Russian gas but negotiations continue on future of the supply scheme

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