Ukraine “sluggishly” undermining heating season in Europe

Kiev authorities are due to undermine the heating season in Europe and freeze their own country. On July 9, Gazprom said Ukraine has reduced gas pumping into gasholders more than fivefold – to 14 million cubic meter per day. At such rate, by mid-October, when the heating season starts, there will be not even 14 billion cubic meters of gas in Ukraine’s gasholders. EU and Russia say at least 19 billion cubic meters needed to ensure the transit of the Russian gas to Europe, to hold Kiev from stealing gas and not let al them “kick the bucket.”

Meantime, Ukraine’s leadership makes believe that nothing is happening. The president says the preparations for the heating season are meeting schedule. Prime Minister Arseniy Yatsenyuk says Ukraine will produce enough gas to meet its domestic demand in ten years. Andrei Kobolev, the head of Naftogaz of Ukraine, in turn, posts Ukrtransgaz’s news in social media saying gas reverse from Europe increased in December and the gas price for the population in Ukraine is 4-times as low as in Sweden.

"In fact, the situation with gas in the country is worse than it was last year," says Dmitry Marunich, the co-chair of the Ukrainian Energy Strategies Fund. "On the one part, as economy declines, gas consumption will shrink by fifteen percents, and the gas price is low due to the oil prices. However, the winter in Ukraine is not likely to be as warm as the previous ones. There is not as much gas in the gasholders as last year. In addition, the government is short of money and cannot buy gas either from Gazprom or from Europe. That is why the government has resorted to the time-tested method – populism."  

There is another, extremely unpleasant fact for Ukraine’s leadership: in March the gas price for the population rose 6-fold, but the budget revenues did not increase. For instance, in May, debts for gas in Ukraine doubled, according to data of Alexander Okhrimenko, the president of the Ukrainian Analytical Center. "With such growth rates, the population’s debt for the consumed gas may exceed 5 billion hryvnias (227 million dollars) as early as in autumn. And it is the debt for gas only,” the expert said.

Internal gas recovery - it accounts for half of the domestic demand - is shrinking too. It shrank 2% within 6 months. Some private companies have already announced crisis-induced job cuts.

"Normally, the gas price hike was to stimulate gas recovery. However, last year, the government increased rent payments to 55% of the sales price for private companies and to 70% for the state gas recovery of Ukrgazrecovery. Eventually, the segment began to shrink. The state company that accounts for 74% of total domestic recovery suffers decline, while the growth rate at private companies have slackened," Dmitry Marunich says. For the time being, there are two bills in the parliament. The bills look to either reduce or cancel rent payments. It is good for development of the oil and gas recovery sector, but where will the government take money to cover the budget deficit caused by the rent reduction.  As to the population, it will not stand another price hike.

The only way out is borrowings. However, it is not easy for Kiev to raise funds having as much as $125 billion debt. IMF endorsed a $17 billion aid to Ukraine yet in spring, but still delays with the $1.7 billion tranche, as Kiev has not fulfilled all the terms on saving and reform.  Another option is to issue Eurobonds for $1 billon under US guarantees.

Anyway, the Ukrainian government pretends that it has no reason to hurry even after Gazprom stopped gas supplies to Ukraine on July 1. Kiev explains this saying that the gas price for $247 per 1000 cubic meters for Q3 is not a market price and must be reduced to almost $200.

-Gazprom offers a lower price than it is at the gas exchanges in Central Europe when it averages $250-$260, Dmitry Marunich says. – The point is that even in case of tangible reduction of gas consumption in Ukraine, the reverse from Europe will not give an opportunity to refuse from the Russian gas. Therefore, the country’s leadership has resorted to soft blackmail of the EU. They say you need it more than us, so help us get a loan or sell Eurobonds to pay for the Russian gas, because Gazprom demands prepayment. Consequently, all the talks about gas are just talks that will stop as soon as Ukraine finds money for gas.

Vice-President of the European Commission for Energy Union Maroš Šefčovič said Kiev might be provided with 300 million EUR from the EBRD. Yet, it needs more than 1.5 billion EUR. Wherefrom to get the remaining billion? They are bargaining on the issue now. Meantime, the EU has increased pumping into its own gasholders by 1/3 already.  Experts say three weeks are left for Ukraine to settle the problems with gas pumping not to undermine the heating season in Europe and not to freeze its own people.

"Ukraine can pump up to 3 billion cubic meters of gas into gasholders monthly. Traditionally, it pumps 2 billion cubic meters," says Valentin Zemlyanskiy, Energy Programs Director, Center for World Economy and International Relations, Ukraine’s Academy of Sciences. "Therefore, if the negotiations for a loan and gas supply to Ukraine from Russia drag on until September, they will not have time to pump 7 billion cubic meters of gas and the heating season will be failed.  In case of cold winter, either Europe or Ukraine will lack gas."