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Russia, Ukraine come to terms over wintertime gas supplies

September 25, 2015, 23:46 updated at: September 26, 2015, 5:12 UTC+3
In the "winter package" Russia managed to safeguard the rule of quarterly price-setting
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© EPA / SERGEI KOZLOV

BRUSSELS, September 26. /TASS/. Russia, the European Union and Ukraine on Friday initialed an agreement that is expected to maintain the supplies of Russian gas to Ukraine throughout the winter period, but at the same time said that the arrangement document was a preliminary one and will be signed during next week.

Regular trilateral consultations by Russia, the European Union and Ukraine over gas supplies to Ukraine and transit to Europe got underway in May 2014 after Russia canceled its discount off the price of gas for Ukraine. And last summer Gazprom started providing gas on the condition of prepayment.

Ukraine insists on extra binding gas supply agreements, while Russia argues that Ukraine is obliged to comply with the terms of the open-ended contract and to maintain the transit of gas to the EU, while the EU must provide financial guarantees the supplies to Ukraine will be paid for. The European Commission is primarily interested in the uninterrupted flow of gas through Ukraine to Europe.

Infographics Gas agreement signed by Russia, Ukraine and the EU Gas agreement signed by Russia, Ukraine and the EU
Gas agreement signed by Russia, Ukraine and the EU On October 31 Russia, Ukraine and the EU signed an agreement on gas supplies. Infographics by TASS

"We just initialed a trilateral agreement for the upcoming winter. All technical details are agreed and the framework set. Confirmation and formal signing of the full agreement would require separate procedures," said the European Commission’s deputy chief for energy Maros Sefcovic after around five hours of talks in the Belgian capital.

Quarterly discount

In the "winter package" Russia managed to safeguard the rule of quarterly price-setting. Gazprom will refrain from using the "take or pay" arrangement during the 2015-2016 winter period in contrast to the previous winter package, which would enable Ukraine to avoid sanctions should it use less gas than it was originally expected.

"Russia will be granting Ukraine a quarterly discount throughout the winter period of October 1, 2015 through March 31, 2016," said Russian Energy Minister Aleksandr Novak. Earlier, Russia noted the volatility of the price for gas - the main reason why it suggested setting the price of gas once in three months, and not for the whole six-month long winter period.

Sefcovic said that the price of gas for Ukraine less the discount would be $232 per 1,000 cubic meters. Novak said the discount in the fourth quarter would reach about $20 per 1,000 cubic meters. The European Union agreed to provide $500 million for pumping 2 billion cubic meters of gas into Ukraine’s underground gas tank farms in October.

According to the Russian government’s resolution published on September 25 the customs discount in the fourth quarter of 2015 implied Russian gas would be available to Ukraine for 227 dollars. Gazprom CEO Aleksei Miller speculated that the price of gas in the first quarter of 2016 might prove lower than in the fourth quarter of 2015.

Also, Russia insisted on European guarantees of financing gas supplies to Ukraine. Under the initialed agreement Ukraine will receive $500 million from international financial institutions against EU guarantees. Gas supplies will begin as of October 1. Also, the parties discussed the possibility of extra lending to Ukraine.

Contacts are underway with international financial institutions over the possibility of providing another $500 million to Ukraine by the end of the year, a source close to the trilateral negotiations said. "We are working on this," the source said.

Gas price is a taboo

Novak said the promised funds would be entered to a special account for purchasing gas from Gazprom. The European Commission, he went on to say," would promote Ukraine’s purchases of the current amounts of gas, which is important during the winter period to keep up uninterrupted Russian gas transit through Ukraine to Europe.

At the moment Ukraine has 15 billion cubic meters of gas in its gas storages. Last winter Ukraine managed with 16 billion cubic meters.

Miller estimates Ukraine’s current demand at 5-7 billion cubic meters, adding that consumption in the crisis-stricken Ukrainian economy was dwindling. He warned, though that consumption might surge, if the coming winter proved too cold.

"If the winter is too cold, the amount of gas Ukraine will pump in now, in October, under the just-concluded arrangement - 2 billion cubic meters - will be not enough to make it through an unusually cold season even in the context of Ukraine’s economic crisis and the drop in consumption," Miller said.

The European Commission estimates Ukraine in the coming winter season will need an extra 9-12 billion cubic meters of gas. This will depend on consumption and consumption will depend on temperatures, an EC source explained.

Ukraine’s Energy and Coal Industry Minister Vladimir Demchishin said the protocol would require more scrutiny by lawyers. "The just-initialed protocol (on gas supplies to Ukraine in the winter period) will require extra specifications before it can be signed. I hope that this work will be completed in the near future and the document will be signed," he said.

Russia hopes it will be concluded within a week.

Novak argues that the initialed protocol, concerns technical parameters, and not the price of gas, adding that the contracting parties were already implementing the agreement de facto.

"It does not concern the matter of prices. Price is a taboo," Novak told TASS.

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