Corrected: Russia and Ukraine sign winter natural gas supply deal

This article has been amended to say Ukraine will save $35m if it buys 5 billion cubic metres of gas at the current price, not $35bn as previously reported.

Russia, Ukraine and the European Commission have signed a package of agreements that will allow the resumption of Russian natural gas supplies to Ukraine this winter, the commission announced late on Thursday night.

“After seven rounds of gas negotiations, last night’s talks moderated by Gunther Ottinger, vice-president of the European Commission, finally yielded a breakthrough: A $4.6bn winter package, agreed by Russia and Ukraine, secures gas for Ukraine – and ultimately also for Europe,” the commission said in a statement.

Ukraine still transits more than 50% of all Russian gas deliveries to Europe and securing its own supplies in the winter was crucial for European supply security.

According to the commission, the winter package consists of two documents:

1. A binding protocol, signed by the European Commission (Vice-President Oettinger), the Russian Federation (energy minister Alexander Novak) and Ukraine (energy minister Yuri Prodan);

2. An addendum to the existing gas supply contract between Russia and Ukraine, signed by Gazprom (CEO Alexey Miller) and Naftogaz (CEO Andriy Kobolyev);

The agreement, which extends from now until the end of March 2015, covers the terms and conditions of repayment of Ukraine’s outstanding debt to Russia for previously supplied gas as well as payments for new supplies.

Under the deal, Ukraine would repay its debts based on a preliminary price of $268.50/1,000 cubic metres (kcm). The payments will be made in two tranches: $1.45bn to be paid immediately and $1.65bn by the end of the year. This constitutes $3.1bn of debt repayment. The final sum of debt will be determined through pending arbitration by the Arbitration Institute of the Stockholm Chamber of Commerce between Gazprom and Naftogaz, the EU statement said.

Russia will resume gas deliveries to Ukraine upon advance monthly payments. According to the Ukrainian media citing Prodan, supplies will resume after the first tranche is paid.

“The agreement also sends a clear message that signed agreements have to be respected and payment obligations must be fulfilled. This is hopefully the start of a new, more constructive chapter in gas relations among the EU, Russia and Ukraine. With relations based on equal sharing of risks and respect of contractual obligations,” Gazprom spokesman Sergey Kupriyanov said.

Price and payment

The agreed price is below $385/1,000cbm and is calculated according to a formula in the present contract and a price reduction through a discount in export duties by Russia. Russian export duties are calculated at 30% of the value of the gas. The agreement has no take-or-pay clause and allows Ukraine to order gas according to its needs.

Ukraine expects to buy 4 billion cubic metres (bcm) until the end of the year, costing $1.5bn.

“In the last weeks, the European Commission has been working intensively with the International Financial Institutions (IFI) and Ukraine to help Ukraine prepay for deliveries of gas in the coming winter. Unprecedented levels of EU aid will be disbursed in a timely manner, and the International Monetary Fund (IMF) has reassured Ukraine that it can use all financial means at its disposal to pay for gas,” the EU statement said.

The IFIs will continue working on further financial aid to Ukraine, also in relation to gas supplies.

“All three sides are reassured that Ukraine will have the necessary financial means,” the statement added.

Long-term deal

Some analysts doubt the current agreement will bring a permanent end of the Russia-Ukraine gas dispute.

According to Yuriy Korolchuk from the Kiev-based Institute of Energy Strategies, the agreed price does not represent a major victory for Ukraine. Korolchuk said on 31 October that lowering the price from $385/1,000cbm to $378/1,000cbm is a technical adjustment regulated by the price formula and not a result of the gas talks.

“This will not significantly affect Ukraine’s payments for gas, but the $7/1,000cbm difference will help Ukraine save some money,” Korolchuk said.

According to his calculations, Ukraine would save $35m if it buys 5bcm of gas for the agreed price.

The major test of the current deal will come in March, when Russia and Ukraine will have to go back to the negotiating table and it is unclear whether the EU will still want to mediate the talk, or even more so, continue to sponsor Ukraine for gas purchases, he said.

Russia stopped supplying gas to Ukraine on 16 June because of Ukraine’s mounting unpaid debt for gas. Katya Zapletnyuk