Crisis Puts EU Gas at Risk

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Disruptions in Russian gas shipments to Europe may be inevitable, after Moscow halted supply to Ukraine on Jun. 16 in a major escalation of their payments dispute (WGI Jun.11'14). Gazprom said it would continue to deliver to Europe via Ukraine, but company boss Alexei Miller warned there were "significant" transit risks: Ukraine needs to build up its gas storage, and the Russian gas giant says it will shut off transit pipes if it detects Kiev siphoning off gas and reroute the supply. Right now, flows to Europe are normal, according to the European Commission and large European energy companies (related). But a swift resolution to the crisis looks unlikely. Gazprom had been demanding that Ukraine's state Naftogaz pay $1.95 billion of the $4.5 billion it said it was owed, but Ukraine said it would not pay unless Gazprom first cut the gas price. Gazprom now says Kiev must pay the whole $4.5 billion and prepay for future supplies before direct shipments resume -- meaning Ukraine is unlikely to receive any Russian gas whatsoever in the coming months. It is unclear if or when Russia and Ukraine will hold further negotiations, after a series of trilateral talks brokered by EU Energy Commissioner Gunther Oettinger failed to produce a breakthrough. Oettinger suggested a compromise over the weekend whereby Kiev would repay $1 billion on Jun. 16 and the rest by the end of the year, with Gazprom charging $385 per thousand cubic meters ($10.70 per million Btu) over the winter and $300/Mcm ($8.33/MMBtu) in the summer. Brussels said Ukraine was prepared to accept this, but Moscow wasn't. Russian Minister Alexander Novak has said further talks are possible when Kiev repays its debt, although Miller has hinted that Gazprom might be ready for negotiations if Ukraine repays anything. The US has urged Moscow to resume talks, saying the EU proposal was a "reasonable compromise." But Gazprom and Naftogaz have upped the ante, on Jun. 16 filing lawsuits against each other at an international arbitration court in Stockholm. Gazprom is seeking to recover $4.5 billion from Ukraine, while Naftogaz wants to establish a "just and market-based price for gas" and to reclaim $6 billion in prepayments since 2010. The standoff has prompted concerns about a repeat of the 2009 gas crisis, when Gazprom cut off deliveries to Ukraine during a very cold January and then accused Ukraine of stealing gas destined for Europe. The EU got about 27%, or 125 billion cubic meters, of its total gas consumption from Russia last year, while 49% (or 82 Bcm of a total 167 Bcm) crossed Ukraine heading for Europe and elsewhere. To ensure stable shipments to Europe this winter while also meeting domestic demand, Ukraine needs about 18.5 Bcm in storage. Right now, it has just 13.5 Bcm, which Ukraine says is enough to cover its own needs and assure summer transits to Europe. Miller said that if Gazprom finds Ukraine taking some of the Europe-bound gas for its own use, it will redirect supply via other outlets. He said it is "ready to increase gas supplies through the Nord Stream and the Yamal-Europe pipelines, as well as to start to increase injections into underground storage in the EU to ensure that Gazprom’s European customers get all the required gas should there be any disruptions to gas transit through Ukraine." But Miller warned that wouldn't fully compensate for the Ukrainian loss. The EU still needs to replenish its stocks and is unlikely to reach the required 90%-100% inventory level until late summer. But it has made a strong start, helped by Gazprom's decision to discount contract prices to Eni and others (related). Spot prices had fallen to a 45-month low last week, although firmed as the Ukrainian cut-off loomed. Moreover, Ukraine is counting on reverse flow deliveries from the EU to replace the Russian imports. The key route from Slovakia can provide Kiev with up to 8 Bcm/yr, while Ukraine’s consumption last year totaled 50 Bcm. UK Foreign Secretary William Hague said on Jun. 17 that Gazprom's decision to halt Ukrainian shipments undermines Russia's reputation as a reliable energy supplier, but the Ukrainian authorities suggest the move is designed to pressure Brussels into looking more favorably on Gazprom's South Stream pipeline. Miller said this week that more Russian gas will start flowing to Europe via South Stream next year, despite EU assertions the project doesn't comply with EU Third Energy Package rules and transit state Bulgaria's recent decision to suspend work. He said the "Third Energy Package doesn’t prevent us from building the pipe," suggesting Gazprom is confident it can reach a compromise with the EU. If it can't, the 63 Bcm/yr South Stream may lie idle -- just as Gazprom's Opal pipeline remains under-used in Germany. Oettinger reiterated last week that Brussels is not against South Stream, but that all projects on EU territory must comply with EU law.

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