x Abu Dhabi, UAEFriday 28 July 2017

Ukraine left to negotiate Gazprom's $7bn gas bill

Russia's Gazprom has sent Ukraine's state-run energy company a US$7 billion bill for failing to import agreed natural-gas volumes last year

An employee inspects Gazprom pipelines in Sudzha, Russia. Ukraine is seeking to curb its dependence on Russian fuel. John Guillemin / Bloomberg News
An employee inspects Gazprom pipelines in Sudzha, Russia. Ukraine is seeking to curb its dependence on Russian fuel. John Guillemin / Bloomberg News
Russia's Gazprom sent Ukraine's state-run energy company a US$7 billion (Dh25.71bn) bill for failing to import agreed natural-gas volumes last year, in an echo of a conflict that has twice disrupted shipments to European customers.
The demand comes as Ukraine seeks to curb dependence on Russian fuel imports by sourcing gas from other producers and developing its own resources. Royal Dutch Shell, Europe's largest oil company, last week signed a deal to develop Ukrainian shale.
"The contract volumes that were agreed a long time ago do not correspond to the economic situation," said Lev Snykov, a partner at Greenwich Capital in Moscow. "Maybe there will be mutual concessions. I don't think there will be a third gas war."
Ukraine reduced gas consumption as its economy shrank and the country struggled to restart international aid. Gazprom, the world's biggest gas producer, has repeatedly disagreed with Ukraine over import prices and volumes. From 2006 to 2009, Gazprom twice cut supplies in freezing temperatures, interrupting gas transit flows to Europe.
Gazprom and Naftogaz signed the current 10-year supply contract in January 2009, ending the most recent standoff.
Ukraine, seeking lower gas imports and prices, has asked Russia to revise the accord, which its prime minister Mykola Azarov has called "unfavourable and enslaving". It was signed by his predecessor Yulia Tymoshenko, who is now jailed for abuse of office over the deal.
The contract obliged Ukraine and Russia to agree in writing on revisions at least six months before the start of the year, Gazprom said in January last year, when the Ukrainian partner, Naftogaz, said it was allowed to curb imports to 27 billion cubic metres. Naftogaz said on Saturday that the agreement allowed it to cut imports and that it had notified Gazprom ahead of time that it was going to do so.
Gazprom's chief executive, Alexey Miller, said in June last year that if Ukraine did not meet its annual take-or-pay obligations, "the documents we have for the moment will be the basis of our claim against Ukraine," according to a transcript of his comments posted on Gazprom's website.
Sergei Kupriyanov, a spokesman for Gazprom, did not respond to calls and texts requesting comment on the $7bn invoice.
Under the contract, Ukraine must import or pay for 80 per cent of the annual contracted volume of 52 billion cubic metres a year, according to Gazprom. The company uses the take-or-pay clause in contracts with most of its clients.
The matter is likely to be decided in international arbitration, Alexander Burgansky, an oil and gas analyst at Otkritie Capital, said in a note yesterday.
Ukraine imported 32.9 billion cubic metres of gas last year, about 26 per cent less than in 2011, according to information on the website of the country's energy and coal ministry.
Ukraine and Shell plan to develop the Yuzivske project, in Ukraine's Donetsk region, where production may reach as much as 20 billion cubic metres a year. The area has a mix of conventional and shale deposits. Ukraine estimates the project will cost at least $10bn.
"Very exciting in Ukraine," Shell's chief executive, Peter Voser said.
"We are now starting to actually go into the exploration phase, we are hopeful."
Gazprom has made concessions to its European clients, which means a compromise may also be found with Ukraine, Greenwich Capital's Snykov said.
The Moscow-based gas producer provided price discounts to clients including Eni, Eon and Polskie Gornictwo Naftowe i Gazownictwo last year after the partners sought a review of contract terms.
"Interruption of Russian gas flow to Ukraine is unlikely, though Europeans should pray for a warm February," Mikhail Korchemkin, head of Malvern, Pennsylvania-based East European Gas Analysis, said. "Just in case."
 
* Bloomberg News