Russia and Ukraine signed a $4.6 billion agreement in Brussels that secures natural gas supplies for Ukraine and, ultimately, much of Europe through March 2015. Ukraine will be required to pay $3.1 billion in two tranches by yearend for gas it previously bought from Russia’s Gazprom under the Oct. 30 deal.
It also will pay $1.5 billion in advance, with help from the European Commission, for as much as 4 billion cu m at a reduced price with no take-or-pay obligation after Russia agreed to lower export duties. “Unprecedented levels of [European Union] aid will be disbursed in a timely manner, and the International Monetary Fund has reassured Ukraine that it can use all financial means at its disposal to pay for gas,” the EC said.
“I would like to note that we’ve agreed on basic terms of a temporary so-called winter package, whereby we will resume gas supplies from November to March,” Russian Energy Minister Alexander Novak emphasized. “We’ve retained the positions which we previously stated and upheld.”
He said the $3.1 billion in prepayments covers gas supplied to Ukraine in November and December 2013 and April, May, and June. The agreement calls for a $1.45 billion payment without delay, with $1.65 billion due by yearend, Novak and the EC separately said.
Prepayment is part of the agreement’s basic terms, Novak indicated. “The position of the Russian side regarding prepayment has remained unchanged, meaning that all future deliveries during the winter must be prepaid,” he said. “The take-or-pay arrangement will not apply during this period, which we also agreed upon earlier.”
‘Convergence of interests’
EC leaders applauded the deal. “With our strong support, Ukraine and Russia have today found agreement on their outstanding energy debt issues, and on an interim solution that enables supplies to continue this winter,” Pres. Jose Manuel Barroso said. “I am glad that political responsibility, the logic of cooperation, and simple economic sense have prevailed.”
The agreement is important, but it’s only a temporary solution, Washington observers said on Oct. 31. “I’m reasonably confident it will last because there’s a convergence of interests on all sides,” said David Koranyi, deputy director of the Atlantic Council’s Eurasia Center. “There were several concerns on the Russian side, including whether another gas crisis this winter would have imperiled Gazprom’s reputation as a reliable supplier not only to Europe, but also to Asia.”
Tim Boersma, a fellow in the Energy Security Initiative at the Brookings Institution’s Foreign Policy Program, noted, “I think it’s good for all sides involved. There’s more to this, however: Assuming the deal holds through March, the underlying problems will still need to be addressed. It’s a good, temporary solution, but it will not solve all the problems.”
Ukraine’s government obviously is pleased to have a deal in place, Koranyi observed. “There have been some major improvements in Europe, particularly in terms of interconnectivity, since the last major deal in 2009, but it still will need to rely on Russia for a major part of its gas,” he told OGJ.
“The main concern in Europe now was to enter in an open-ended agreement,” Koranyi said. “Ukraine also wanted to wait until after its elections so this deal would not interfere in domestic politics. All the cards were on the table 2 weeks ago.”
Boersma noted that a recent Brookings policy brief concluded that Europe’s gas supply mix won’t change much without drastic policy interventions (OGJ Online, Oct. 15, 2014). “If you look at marginal costs, Russian gas will remain competitive in Europe for some time unless countries are willing to pay significant premiums,” he said. “The context in which gas trade takes place in Europe is changing, however. We’ve looked at Russia’s market share there, particularly in central and eastern Europe where competition has been hindered to a degree.”
Some European nations believe market integration won’t provide enough security, he told OGJ. “Countries like Poland and Lithuania have taken matters into their own hands and constructed LNG import terminals,” Boersma said. “Both cases seem to show that constructing more interconnectors isn’t going to cut it. That’s interesting, because neither country actually has given market integration a try.”
Contact Nick Snow at [email protected].
