Ukraine considers paying $2 billion gas debt — Gazprom’s CEO

Ukraine’s authorities have begun considering an option, where the country may pay within the current week $2 billion of the debt for consumed gas and additional $500 million as a prepayment for future supplies. Gazprom’s CEO Alexei Miller said this in an interview with the Rossiya-24 TV channel.

Miller specified that the Ukrainian side, as it had been agreed earlier, was to make a prepayment before June 7 without discussing the price.

The payment of two billion dollars is “at least something,” he said.

Alexei Miller noted that Russia was ready for a drop in price for natural gas for Ukraine by cutting the export duty, but the amount of the discount would be negotiated after the debt is partially paid.

Gazprom CEO pointed out that there were still high risks of non-payment under the proposed scenario.

Ukraine’s gas debt

To date, Ukraine owes $3.5 billion for the consumed gas. Earlier, the Russian side suggested Naftogaz settled the debt for April — $2.3 billion.

Ukrainian state energy company Naftogaz’s debt to Moscow currently totals some $3.508 billion with the gas price standing at $485.5 per 1,000 cubic meters. European consumers have voiced fears that the situation may affect transit gas supplies to Europe.

Moscow raises the issue at international level

On April 10, Russian President Vladimir Putin sent a letter on the situation in Ukraine to the leaders of 18 European countries who buy Russian natural gas. In the letter, he explained in detail the current critical situation with Ukraine’s debt for Russian gas supplies, which could affect gas transit to European consumers.

Moscow recently substantially raised the price for gas supplied to Ukraine from the figure of $268.5 per 1,000 cubic meters agreed last year when an association agreement with the European Union was shelved in November 2013.

In the second quarter of 2014, the price for Russian gas for Ukraine was set at $385.5 per 1,000 cubic meters. Gazprom said earlier that the price rose from $268.5 due to the return to earlier contract agreements, as Ukraine failed to fulfill its commitments under an additional agreement concluded in December 2013, which obliged the country to pay for supplied volumes of Russian gas in time.

Denunciation of Kharkiv accords

On April 2, Putin signed a law on denunciation of the Kharkiv Accords with Ukraine, which were struck in 2010 and stipulated that Russia’s lease of naval facilities in Crimea [then part of Ukraine] would be extended by 25 years beyond 2017 — until 2042.

The Kharkiv deals envisioned a discount of $100 per 1,000 cubic meters on Russian gas for Kiev. Now that the accords have been denounced due to Crimea’s accession to the Russian Federation, the discount is no longer applied, raising the gas price by another $100 to $485.5 per 1,000 cubic meters.

Ukrainian crisis

Kiev recognizes a debt of $2.237 billion as of April 1 but does not start paying it off because it believes the price should remain at $268.5 per 1,000 cubic meters.Ukraine saw a coup in February, with new people brought to power amid riots as President Viktor Yanukovych had to leave the country citing security concerns. Crimea refused to recognize the new Kiev authorities and seceded from Ukraine to join Russia after a referendum in March.

Ukraine’s attempts to solve the problem

On April 28, Ukrainian parliament-appointed Prime Minister Arseniy Yatsenyuk reported that the government decided to start the procedure of suing Gazprom. He said “Ukraine is ready to pay $268 per 1,000 cubic meters of gas, and if Russia gives a positive answer on the price and extends the contract, Ukraine will without delay pay off its $2.2 billion debt to Gazprom”.

“Ukraine is awaiting a reply from Gazprom for 30 days, otherwise, [the country] will sue [Gazprom] in Stockholm,” Yatsenyuk said.

Reverse supplies can only be carried out via local pipes and not through trunk gas pipelines linking Russia and Europe.In addition, on April 28, Ukraine and Slovakia signed in Bratislava a memorandum of intent on organizing reverse supplies of gas to Ukraine. In line with the reached agreements, from October, supplies to Ukraine will total 3.2 billion cubic meters annually. In 2015, the volume may grow to 10 bcm.

Meanwhile, the gas reverse agreement with Slovakia will not allow Ukraine to stop purchasing Russian gas. Internal consumption of gas in Ukraine totals 50 bcm annually, with its own production accounting for slightly less than a half.

The deal with Slovakia envisions reverse deliveries of 3.2 bcm, and a deal with Germany’s RWE on reverse gas supplies from Poland stipulates deliveries of 1.5 bcm. Possible reverse deliveries from Hungary can reach 5 bcm. Thus, Ukraine can only cover a third of its Russian gas imports due to supplies from Europe.