Non-negotiable: Kiev fuels a new gas war

Ukraine is short of gas. The supplies from Gazprom did not start on Mar 1. As a result, the country is cutting its gas consumption and is closing its schools and kindergartens. Naftogaz is going to buy gas from Europe, where it is twice as expensive due to extreme colds. Kiev says that Moscow is revenging on it for its loss in Stockholm and is waring that it will seize Gazprom’s assets in Europe. Experts say that the key problem is that Kiev is non-negotiable. It has refused to negotiate with Gazprom a supplementary agreement — a document that would consider the Stockholm arbiters' last verdict. Without that agreement, Moscow was simply unable to start the supplies even though Naftogaz had prepaid for them.

History of the conflict

On Mar 1, on the next day after the Stockholm arbiters' verdict, Gazprom said that it would not start gas supplies to Ukraine and gave Naftogaz back the money it had prepaid for them. The company’s argument was that there was no supplementary agreement considering the Stockholm arbiters' verdict on the gas contract: to reduce the maximum amount to be bought by Ukraine to 5bn c m a year, to exempt Naftogaz from the obligations to buy gas for Donbass, to let it buy re-exported gas and to tie the gas price to the cost of gas at the German NCG gas hub.

«As they say, an umbrella is needed on a rainy day. So, in this situation, we have to recover the amount paid by the company in full. And it is obvious that the shipments in March won’t start,» Deputy CEO of Gazprom Alexander Medvedev said.

Naftogaz reacted by threatening to claim compensation. The company’s CEO Andriy Kobolyev said that by refusing to comply with Stockholm’s verdict, Gazprom is making Naftogaz free not to comply with the «take or pay» rule. According to Ukraine’s Deputy Foreign Minister Olena Zerkal, Ukraine has already informed the EU of Russia’s refusal to meet its obligations.

«Gazprom has once again proved its dishonesty and is once again trying to double-cross us. But it won’t succeed this time! We have just sent a note to the EU on the use of an early warning mechanism to improve prevention and management in case of an energy crisis in accordance with Article 340 and Annex 26 of the Association Agreement,» Zerkal said.

Ukraine’s President Petro Poroshenko has instructed Kobolyev, the Prosecutor General’s Office, the Justice Ministry and the Foreign Ministry to seize Gazprom’s assets (for example, the assets of the Nord Stream 2 project) if the company refuses to comply with Stockholm’s verdict.

«They knew it could end like this»

«Gazprom's decision not to restart its gas supplies to Ukraine has nothing to do with the Stockholm arbiters' verdict on gas transit. Naftogaz was aware that the supplies might not be restarted on Mar 1,» says Dmitry Marunich, Co-Chair of the Energy Strategies Fund. «The Stockholm arbiters passed their verdict on the gas contract in late Dec 2017, which meant that the sides had to sign a supplementary agreement to the contract. But no such agreement was signed. A week ago, Kobolyev said that there was no progress in the negotiations. So, they were aware of the situation and it is logical that Gazprom has refused to restart the supplies,» Marunich says.

Ukrainian energy expert Yuri Korolchuk says that Naftogaz has fallen into the trap it has been preparing for Gazprom over the last four years. «They keep ignoring the negotiating process. When the court ruled that the sides had to negotiate new gas supply terms, Naftogaz did nothing towards this end and just waited for the Stockholm arbiters' verdict. Now Gazprom can do the same: it can ignore the talks and if needed can just meet the obligation to sump 4bn-5bn c m to Ukraine. But this may lead to new conflicts,» Korolchuk says.

And this is exactly what happened. «This winter was warm and the frosts of late February-early March were a big surprise to Naftogaz,» Marunich says.

Will the reverse gas from Europe save them?

Early this week, the air temperature in Ukraine dropped to minus 20 C. As a result, the country began consuming more gas. When Gazprom refused to restart its gas supplies to Ukraine, Naftogaz said that it was short of gas. «Our gas storage facilities are operating at full capacity. As a result, we are running short of gas. Of course, we can buy expensive gas from Europe, but we will later claim compensation from Gazprom for its refusal to comply with the contract. We expect a shortage of 10mn c m a day and we will hardly be able to cover it,» CEO of Naftogaz Andriy Kobolyev said.

«At its best, Ukraine consumed 350mn c m a year but today it has less than 10bn c m in stock and needs imported gas not only to cover the shortages but also to keep pressure in the gas network high so as to be able to take gas from the storage facilities. But in Europe it is also cold. Over the last eight days, Gazprom has kept establishing daily export records, while the spot gas prices in Europe have redoubled. At NCG, gas costs $ 577 per 1,000 c m,» says Marunich.

«We don’t know what a price Gazprom will charge for the new supplies to Ukraine, but it may well be the cost of this month’s futures. In late February, March futures in Europe cost $ 248 per 1,000 c m. But if Naftogaz is forced to buy spot gas from Europe, it will cost it twice as much. Naturally, it would like to buy gas from Gazprom,» according to expert from the Energy Center of Skolkovo Business School Alexander Sobko.

«You may ask if Europe has necessary gas for Ukraine. Theoretically, Naftogaz can buy gas from Slovakia, where there are some free capacities. Today, Europe is also short of gas but since reverse gas is the gas received from Russia, the Europeans can supply it to Ukraine. But this will require more time and money,» Sobko says.

Ukraine needs one more victory over Gazprom

The cold weather in Ukraine is expected to stay till Mar 6. In Europe, the colds are expected to stay till mid-March.

The colds will not leave Ukraine tomorrow. Photo from Naftogaz’s Facebook account

According to Ukraine’s Energy and Coal Industry Minister Ihor Nasalyk, the gas consumption in Ukraine will be limited till Mar 7. «Our energy companies will switch from gas to heavy oil. This will help us to save some 15mn-20mn c m a day,» the minister said.

The best thing that has come to the mind of the Naftogaz manager was to appeal to the patriotic feelings of the Ukrainians.

«Let's spoil that man’s (the Russian president’s) party. We have just three-four days left till the colds go away. Let’s reduce the temperature in our houses by one degree during the day and by two degrees at night. This will cut our total daily consumption by 8−9%. This is enough for us to ruin the Russians' attempt to blackmail us,» Naftogaz said on Facebook. And President Petro Poroshenko supported that urge.

According to Deputy Director of the National Energy Security Fund Alexey Grivach, the situation in Ukraine is quite complicated. «The frosts have caused big problems in Ukraine even though they claimed that they had a lot of gas in stock. This situation has proved once again that all of their statements about their energy independence were fiction,» the expert says. He doubts that the sides will sign the supplementary agreement. «The key obstacle to it is the controversial verdict on gas transit,» Grivach says.

In the meantime, Ukraine’s Deputy Foreign Minister Olena Zerkal said that the ministry had asked the EU to resume the Ukraine-EU-Russia gas talks.

«The Ukrainians need the Europeans' mediation so as to ensure stable gas transit but there are some lobbyists in Ukraine who may oppose this as they seek control over the transit revenues,» Grivach says.