Russia, Ukraine and the EU failed to reach an agreement to govern gas flows between Russia and Ukraine at a meeting in Vienna because of a “lack of political will”. European Commission Vice President for Energy Union Maroš Šefčovič is frustrated with the Ukrainians as much as with the Russians. “The lack of a deal is not good for the image of Russia as a reliable supplier or Ukraine as a reliable transit country”, he said. He added that “Gazprom is very responsible for the image of gas in Europe”.
The meeting in Vienna on 30 June between the three parties was supposed to agree a follow-up to the so-called Winter Package that expired on the same day.
“All parties agree on the principles needed to ensure stable and smooth gas deliveries to Ukraine and transit to the EU [but] the translation of these principles into a jointly agreed final framework require further work,” said European Commission Vice President for Energy Union Maroš Šefčovič in Vienna. “The parties are still far apart,” he added.
The meeting in Vienna was attended by Russian energy minister Alexander Novak, Ukrainian energy minister Vladimir Demchyshyn, and CEO of Ukraine’s national oil and gas company Andriy Kobolev, besides Šefčovič. It was supposed to agree a follow-up to a Winter Package that was originally due to expire on 31 March, but was then extended to 30 June.
The Winter Package saw Ukraine agree to 1) pay debts to Gazprom of US$3.1 billion and 2) spend US$1.5 billion on fresh supplies. It also saw Russia agree to a US$100 per thousand cubic meters discount for Ukraine and it suspended a “take-or-pay” clause.
The follow-up deal was supposed to cover the entire period to next autumn, when an international arbitration court in Stockholm is set to rule on Russia and Ukraine’s dispute over the 2009 contract that actually underpins Russian gas sales to Ukraine.
No deal
But there was no deal on a new interim agreement on 30 June. Šefčovič told journalists in Brussels on Wednesday he had hoped to come back with better news. Discussion at the expert level had been “encouraging”, Šefčovič said, with “differences not impossible to overcome”. But the political will for a deal wasn’t there, he suggested.
Pricing, delivery volumes, European financial support to Ukraine (so it can actually pay), and the duration and binding nature of a new interim agreement were all up for discussion. Russia wanted to offer Ukraine a US$40 discount on the 2009 contract price, less than the US$100 discount last time round, but one that would bring the actual amount due – US$247 – into line with what other countries in the region pay, notably Poland, Russia said (the 2009 contract price is linked to oil prices in the last six months).
Ukraine wanted a US$85 reduction. It rejected Russia’s offer as too expensive and also because it was a unilateral offer that ignored trilateral expert discussions. Russia also said it wanted to review the discount every quarter, whereas Ukraine – backed by the Commission – was looking for price certainty through to next autumn. There were also different ideas on how long the agreement should run.
Since there was no formal agreement, the take or pay clause is officially back in effect. In theory, this commits Ukraine to buy 50 bcm (billion cubic metres) a year of Russian gas, which would cost more than €12 billion. So it could translate into a hefty bill, if Russia chooses to enforce it. But Russia has never done so and minister Novak reassured the EU it does not plan to do so, Šefčovič said.
Reverse flows
Šefčovič emphasised that a deal was not as urgent as a year ago due to “strong reverse flows” today that let Ukraine import its gas from other European countries. Ukraine has about 12 bcm in storage now and would need 19 bcm by the start of the winter. The missing 7 bcm it can get in three or three-and-a-half months entirely through reverse flows if necessary, Šefčovič said
But when winter comes, Ukraine will need to buy Russian gas. There are limits to the rates of which it can release gas from storage. Reverse flow cannot always be used at 100% capacity (the Slovak-Ukraine reverse flow rate has been 50-80%). And reverse flows are not always easy to arrange. Hungary and Ukraine have signed an official interconnection agreement which allows reverse flow at their border. The Commission says it serves as a legal basis to get Gazprom to stop the network operation activities it still performs at Ukraine’s borders with the EU. The Commission will lead negotiations with Slovakia, Poland and Romania on this issue, but Šefčovič also said this is “highly complex” and “might take a very long time to resolve”.
The Commission’s anti-trust investigation against Gazprom and extension of sanctions against Russia were not discussed at the talks, the Vice President said.
What happens next? Commission President Jean-Claude Juncker and High Representative for Foreign Affairs and Security Policy Federica Mogherini were both informed about the failure of the trilateral talks by Šefčovič on Wednesday morning. The latter’s job is to bring it to the table in the so-called Normandy group (France, Germany, Russia and Ukraine) which is looking after implementation of the Minsk ceasefire agreements.
After “some time out”, the Commission foresees a next meeting – at expert, not political level – after the summer break. This would be followed by a political meeting in September.
Frustration
In the meantime, Naftogaz announced on 30 June that it would suspend gas purchases from Gazprom from 1 July pending agreement on new supply conditions. The delivery of Russian gas via Ukraine to Gazprom clients in the EU and Turkey would not be affected, Naftogaz said.
The company said it was “ready” to renew gas purchases as soon as a “comprehensive temporary agreement” is reached that covers “all unresolved issues”. The agreement should run “at least until 31 March 2016” and should be “binding in order to ensure its implementation by all sides”. Naftogaz said Russia “rejected” the temporary agreement on the table in Vienna and “refused to sign a trilateral protocol”.
But Šefčovič appeared to express frustration with the Ukrainians as much as with the Russians. The lack of a deal is not good for the image of Russia as a reliable supplier or Ukraine as a reliable transit country, he said. “Gazprom is very responsible for the image of gas in Europe,” he added. Gazprom’s share in the European market grew by 7% from 2010-14, despite a 20% decline in demand, Gazprom CEO Alexei Miller told shareholders on 26 June.
The EU meanwhile, has recently agreed a fresh loan of €1.8bn for Ukraine, of which €600 million is due to be mobilised by the end of July. It wants to see a financial plan from Naftogaz and the Ukrainian authorities on how they intend to use this money – and their own – to pay for gas in future. This is an issue whether it’s Russian gas or not.