Ukraine close to sealing Slovakia gas deal, restarts talks with Russia

The European Commission confirmed last week that Ukraine is close to striking a gas deal with Slovakia that could diversify supplies by about 10 billion cubic meters of gas. The plan envisions gas imports from Germany’s RWE that would flow through Slovakia and signifies 30 percent of Ukraine’s gas import needs.

Theoretically, Europe could reverse about 30 billion cubic meters of gas
every year using pipelines in Slovakia and Poland, Stefan Udish from Germany’s RWE
Supply & Trading told Dzerkalo Tyzhnia. RWE became the first European gas
supplier to Ukraine last autumn.

If sealed, the deal
means Ukraine will move away from its reliance on Russian gas, its virtual
monopoly supplier. Ukraine is currently paying more than $400 per thousand
cubic meters of gas and has imported on average 30 billion cubic meters over
the last two years.

This year, Ukraine is
slated to import 1.3 billion cubic meters of European gas. But Hungary and
Poland only have the capacity to transport 2 billion cubic meters through its
pipelines, said Yuriy Korolchuk, an expert from the Institute of Energy
Strategy.

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Gazprom moreover has
blocked efforts to transport gas from Slovakia. According to the Financial
Times, the situation could be partially Ukraine’s fault because years ago it
allowed Gazprom to install its own systems at the Ukraine-Slovak border.

“Unfortunately, the gas market in central and
eastern Europe is not liberalized enough,” Eduard Stavytsky, Ukraine’s energy
minister, told the Financial Times. “The problem is that Gazprom Export has its
meters on the border between (pipelines run by Ukraine’s) Ukrtransgas and
Eustream. Its data there is closed. However, as per the conditions of the
Energy Charter, they must open this data. When they do this all technical
issues will be resolved. There are no other issues.”

It still makes the deal
between Ukraine and Slovakia more political than economical.

From an economic
standpoint, Ukraine doesn’t win much by importing gas from Europe. The price on
Ukraine’s western border is hardly lower than that charged by Gazprom and could
even be more expensive when seasonal consumption spikes in the EU.

The price is likely to
be close to what Ukraine pays Hungary and Poland, said Denis Sakva, senior
analyst at Dragon Capital.

Ukraine paid just $2
less for European gas than Russian gas in August 2013, according to the State
Statistics Service. Ukraine paid an average of $399.30 per 1,000 cubic meters
for gas from Russia and $397.30 on average for gas from Europe, including
$388.60 from Germany, $405.90 from Hungary and $404 from Austria.

Yet experts said Ukraine
could still save money by buying European gas in the cheaper summer months at
spot prices and then store the blue fuel in vast storage facilities in western
Ukraine that have 32-35 billion cubic meters of storage capacity.

At the same time the possibility to transport gas through Slovakia is
still vital. Combined with supplies from Romania,
Hungary and Poland, the total gas could satisfy close to 30 percent of
Ukraine’s gas import needs, according to Dragon Capital.

“There are four pipelines with 80 billion cubic meters of capacity. Twenty
billion cubic meters are ‘free’ for now and could be used in a reverse regime,”
noted Korolchuk.

Ukraine and Russia restart gas price
talks

The news
of the pending Slovak deal comes on the back of negotiations this week that
Russia and Ukraine have jumpstarted over their 2009 gas supply contract,
Kommersant reports.

Ukraine
reportedly wants to reduce the gas price from more than $400 per 1,000 cubic
meters to $250-$260 and secure Russia’s commitment to pump close to 90 billion
cubic meters of export gas through Ukraine’s vast gas transportation system
yearly, Dragon Capital wrote in a note to investors.

These
developments came after Ukraine’s government backtracked last week on pursuing
a political association and free trade agreement with the European Union. According
to Dragon, in exchange for cheaper gas, Russia will insist on jointly managing
Ukraine’s gas transportation system and require Ukraine to denounce the Energy
Charter Treaty it ratified in 2010 with the EU. The latter will prevent Ukraine
from having to separate Naftogaz’s multiple functions of extracting, supplying
and transporting gas.

The
potential deal with Russia would allow the country to save $4.2-$5 billion in
gas import costs yearly at current levels, said Dragon. 

Main gas suppliers to Ukraine

Source: Energy and Coal
Industry Ministry, Energo Business magazine