Russia-Ukraine deal close, but key issues remain

Ukraine and Russia appear closer than ever to reaching a deal to resume Gazprom supplies, but although price estimates are now broadly harmonised, questions of volume and debt financing are still open for debate.

Naftogaz Ukrainy officials have continued to suggest that imports of Russian gas – which Ukraine suspended in November 2015 in favour of cheaper deliveries from EU countries – could resume in the third quarter of this year.

However, Naftogaz Chief Executive Andriy Kobolev indicated on national television on Thursday that Gazprom’s initial offer under the prepayment deal would mean Ukraine would immediately need to buy 3 billion cubic metres in bulk, a volume he sees as unrealistically high.

"The existing contract is built in such a way that to begin withdrawing gas we must at once make a prepayment for a large volume [...] That is at least 3 bcm, which Ukraine does not need at present for the month – this is an overstated volume, and it is a serious problem of this contract," Kobolev said.

However, the steady fall in the price of oil over recent years is feeding through into the contract price formula.

"[The] real price of this gas, I think, will be no less than $172 [per thousand cubic metres: Mcm] and possibly $175[/Mcm], depending on what calorific value Gazprom will send us from the eastern border. The contract was built in such a way as to make us unable to control the calorific value – this is a matter for the Russians," Kobolev said on Friday.

On the same day, Gazprom’s Chief Executive Alexei Miller said the price for Ukraine under the mechanism used to calculate the price to the 2009 contract formula would be $167.57/Mcm – even cheaper than Kiev had expected.

"The price for Ukraine under the 2009 contract formula is $167.57/Mcm in the third quarter. A provisional account for Naftogaz has been set up. In order to restart the supplies, Naftogaz needs only make prepayment," Miller told a press conference.

Debt financing issues

Debt supplied to Naftogaz by the London-based European Bank for Reconstruction and Development (EBRD) can only be used to fund gas purchases from approved traders, which do not include Gazprom, the bank confirmed on Friday.

"Gazprom was not among these traders," the bank said in response to a request for clarification after Kobolev indicated that financing could be used to restart deliveries from Russia in the third quarter.

"The recent agreement we managed to achieve with the EBRD foresees that a part of the funds could be used to buy gas from the east as well," Kobolev said on 30 June at the Ukraine Energy Conference.

A deal with the EBRD allowed Naftogaz to draw down on a $300 million package to fund its gas purchases before the 2015 heating season began. Eleven companies took part in the open tender process last year, with more expected in this year’s bidding.

A further $500 million loan is expected to be agreed with the World Bank in the autumn, which would help Ukraine get its gas stocks back up to its 16-17 bcm target before the heating season starts in October. The country currently has 9.74 bcm in stock.

Reforms needed

However, the debt is contingent on reforms to Ukraine’s gas market, in particular the creation of a supervisory board and for functions between different segments of Naftogaz to be separated.

"If there were no progress, the process [of supplying financing] could be suspended," the EBRD said.

The Ukrainian government approved a plan to restructure Naftogaz and unbundle its transport and storage operations at a cabinet meeting on Friday, leaving the import and sale of gas the company’s sole operational function.

Naftogaz and Gazprom have a number of disputes pending, not least over the terms and pricing of the 2009 contract, which is the subject of an ongoing case at the Stockholm international arbitration courts.

On Saturday, Naftogaz also once again dismissed the suggestion that it is liable to pay for gas being delivered to Ukraine’s disputed Donetsk and Luhansk regions, where separatists wish to align with Russia.

Given that Naftogaz must pre-pay for the gas it requests, it said it does not accept gas contracted with Gazprom through the gas metering stations at Prokhorovka and Platovo, which lie in the disputed areas.

A ruling from the Stockholm courts in the multi-billion dollar case between Naftogaz and Gazprom is due later this year or in early 2017.