Decrease in global oil prices puts ‘breakthrough’ in gas talks between Kyiv and Moscow under doubt

“Ukraine will have gas, Ukraine will have heat,” stated President Petro Poroshenko after returning from Milan, where last Friday he held meetings with his Russian colleague Vladimir Putin. The reason for optimism on part of the head of state were the agreements to resume buying Russian gas after a six-month break starting the first quarter of 2015 under the conditions of advance payments at a price of $385 per 1 thousand cubic meters. Such is the price of fuel until March 31. For the summer period, Petro Poroshenko hopes to accord the price at a level of $325 per thousand cubic meters with Russia. This will, however, necessitate additional discussions. The Russian Ministry for Energy divulged other details regarding the results of the bilateral meeting that took place in Milan between the Russian and Ukrainian delegations. According to the report, Kyiv agreed to all main parameters proposed by the Russian side. In particular, Ukraine is obliged to pay $1,45 billion to pay off the current debt by the end of October and another $1,65 billion by the end of 2014. According to Poroshenko, Kyiv may use the loans given by the IMF and international financial organizations to cover the monetary deficit to buy Russian gas.

Doubtful benefits

Taking into account the gas deficit in the impending heating season at a level of 5 billion cubic meters Arseniy Yatseniuk’s government warns about, the President’s statement testifies to a breakthrough in Ukraine-Russia relations. As the countries have been unable to accord the cost of supplies from Gazprom to Naftogaz since the spring of the current year. Because of the payment debt, the Russian company stopped supplying fuel to the Ukrainian market starting June 16, 2014. Therefore, problems arose with the formation of gas reserves for a successful survival of the coming winter. However, the latest tendencies on the oil market may negate the achievements in gas agreements Petro Poroshenko claimed. The gas cost calculations according to the formula in most Gazprom contracts are tied to oil prices: the higher the oil prices, the higher the gas prices. Starting June of the current year the oil prices have fallen over 20%. Therefore there are preconditions that starting January 2015 Gazprom export prices will also fall. Sergey Komilev, head of the contract structuring and price formation department for analysis and optimization at Gazprom Export published an article in the latest issue of the Gazprom corporate magazine, wherein he claims: “If oil prices fall for any reason… the gas hub prices will follow them.” Following such logic, according to calculations made by Mikhail Korchemkin from East European Gas Analysis, the spot prices on gas in the early spring should fall below $200 per thousand cubic meters, taking into account the latest gas market dynamics. Which means that the cost of Russian gas for Ukraine at a level of $385 per thousand cubic meters may turn out to be too high; just like the price of $485 per thousand cubic meters determined according to the current contract between Gazprom and Naftogaz signed in 2009, and whose reasonability Naftogaz is currently debating in the Stockholm Court.

Conditions should be detailed

Naftogaz insists that the price on Russian gas should be tied not to oil prices, as is prescribed in the current agreement with Gazprom, but to the price of gas on European spot markets. Such a tendency in price formation in regard to supplies of gas is relevant in EU countries in the recent years. According to the International Gas Union, in 2005 the percentage of oil indexing in price formation on European gas markets constituted about 78%, and the percentage of spot gas indexation – about 15%. In 2013 the percentage of oil indexation fell to 43%, and the spot percentage grew to 53%. In May 2014 a contract was signed with a full abolition of ties to the oil prices between Gazprom and the Italian company ENI. Partial spot indexation of prices has been implemented in the contracts of the Russian holding with E.ON, Wingas and GDF Suez. While the debate between Naftogaz and Gasprom regarding the conditions of gas price formation is being analyzed by the Stockholm Court, Ukraine and Russia are counting on signing a temporary contract. Vladimir Putin confirmed such an agreement with Petro Poroshenko. Besides, according to the Russian President, the Russian gas supplies in the second quarter of 2014 will be recalculated at a price of $385 per thousand cubic meters, which will lower the overall debt Naftogaz owes to Gazprom from $5,3 to $4,5 billion. But neither of the Presidents divulged the details which allowed to decrease the price on Russian gas for Ukraine by $100. In order to detail the parties’ positions, EU Commission Vice President Günter Oettinger will visit Kyiv today. This meeting will take place before yet another trilateral EU Commission – Ukraine – Russia meeting, which is planned for October 21 in Brussels. Arseniy Yatseniuk thinks that it is too early to report on the concrete details in gas agreements between Moscow and Kyiv. “It is too early to say that we have achieved agreements (on gas). The agreements are when there are signatures. So far, it’s just words,” the Prime Minister noted. Petro Poroshenko hopes that on Tuesday the Brussels meeting on gas ends with a good result. As there is an existing contract between Naftogaz and Gazprom for gas supplies (the Stockholm Court did not abolish its conditions), from the legal perspective, the companies cannot sign more agreements in this regard. Therefore there are signs of an intermediary appearing in the gas supply scheme. However, according to information available to Forbes, the Russian side intends to offer Gazprom Export as a Naftogaz counteragent in the temporary agreement, which coordinates gas supplies to foreign markets within the Gazprom holding structure.