Ukraine focus: Where will the gas come from this winter?

Russia and Ukraine are yet to resolve their gas supply issues, but the Ukrainian energy ministry and Russian Gazprom are agreed on two things – the weather and finance are the two imponderables governing Ukrainian storage volumes at the start of the coming winter.

This emerged from two interviews given in August by Ukrainian energy minister Vladimir Demchishin and Gazprom CEO Alexei Miller.

Ukraine needs 17-20 billion cubic metres (bcm) of gas in storage by mid-October to ensure smooth transit of Russian gas to Europe. There are no dedicated transit lines in Ukraine and if domestic demand is high, stocks at the western border are used to ensure network pressure is sufficient for transit flows.

It is possible Ukraine could get through the coming season without Russian gas, according to Demchishin, but this could only be done with a relatively warm winter. On 26 August the country’s energy ministry confirmed Demchishin’s comments, given in an interview with Ukrainian weekly Tyzhden on 14 August.

Ukraine’s consumption

Ukrainian gas consumption is currently around 40 million cubic metres/day (mcm/day), according to Demchishin. In an average winter this could increase to 200mcm/day and in extreme cold to 300 mcm/day.

In an average winter consumption could be met as follows:

55mcm/day Ukrainian domestic production,

up to 60 mcm/day imports in reverse flow from Europe on condition funds are available,

120mcm/day storage withdrawals.

Under these conditions Ukraine could get by without renewing Russian supply. A preferred target figure for gas in Ukrainian storage at the beginning of winter was 19bcm, according to Demchishyn, because it would safeguard supply and transit under normal winter conditions.

The Ukrainian emergency heating plan seen by ICIS assumes that 28bcm would be consumed during the fourth quarter of 2015 and the first quarter of 2016. This means 20.7bcm would have to be in storage by the start of the season if temperatures are 3°C below last year’s winter average.

In 2014 Ukraine started the winter season with 16.7bcm in reserve. The winter was then unseasonably warm.

In mid-August this year Ukrainian sites held 13.1bcm, which rose to 14.1bcm by 25 August, with injections increasing from 40-44mcm/day, to 61mcm/day by 24 August.

Financial challenges

Demchishin said in theory the 4.8bcm gas required could be bought in reverse flow from Europe at a price of $255/kcm. That would cost $1.2bn, money Ukraine does not currently have.

The government is seeking finance and still has time to find it before the winter season. If Ukraine injected at the maximum rate of 75mcm/day at a price of $255/kcm, it would work out at $18.8m/day.

Demchishin said it was important for Ukraine not only to obtain a lower price than the $247.17/kcm offered by Gazprom, but also to reach an agreement covering the whole winter season without quarterly renegotiations, which Gazprom insisted on.

Ukraine’s gas purchasing

In the past Ukraine has been willing to abandon reverse flow once it became uncompetitive with Russian gas. However Ukraine-Russia agreements are never purely economic and political factors are at play.

Gazprom takes the view that all matters relating to technical and price issues come under the 2009 oil-indexed contract.

In a recent interview with Russian news agency TASS published on the Gazprom website, Miller said the Q4 ‘15 price to Ukraine – even without any discount – could be $35/kcm lower than Q3.

He said there would not be a fixed price for the whole winter season and could not see why it was being requested, since quarterly adjustments were normal practice.

“Naftogaz is already buying reverse-flow gas with monthly price adjustments,” he said.

Asked whether Gazprom could give the Ukrainian side some indicators for the winter season, he said “the approach to calculating the discount could be declared and Ukraine will have a clear understanding that the Russian gas price will be wholly competitive with the European market”.

The original discount to the Russian price was agreed in an April 2010 annex to the main contract. It was set at 30% – equivalent to the Russian export tax on gas – or $100/kcm, whichever was lower.

Impact on Europe

Looking across Europe, Gazprom is in a better position to withstand any transit problems than in previous years.

The Russian company now has access to 6.5bcm of storage on European territory, which would help cover possible gaps.

Asked what was needed to restore Russian gas supply to Ukraine, Miller said: “Just money. And we see Ukraine doesn’t have it.”

Ukraine may be able to come up with the money, for example, from the early August $1.7bn IMF disbursement under the extended loan facility. At any rate, Demchishin said he believed a decision would soon be taken to restore Russian flows to Ukraine. elizabeth.stonor@icis.com