Moscow Hosts Summit as Gazprom Warns Ukraine on Gas Cut: Energy

May 15, 2014 11:24 am ET

May 15 (Bloomberg) -- A two-day meeting designed to improve global energy security started in Moscow today just as Russia threatens to halt natural gas shipments to Ukraine, risking disruption to European supplies.

At least 18 ministers from countries including Saudi Arabia, Iraq and Turkey are attending the International Energy Forum’s conference. They meet days after an ultimatum to Ukraine raised questions about Russia’s reliability as a supplier. The U.K. delegation declined to attend to protest Russia’s role in Ukraine, IEF Secretary-General Aldo Flores-Quiroga said today.

“The IEF remains ready to facilitate producer-consumer dialogue regardless of circumstances,” Flores-Quiroga said.

OAO Gazprom, Russia’s state-run gas exporter, threatened to halt June supplies without advance payment after Kiev fell behind on payments for Russian shipments. Ukraine is a key transit route for EU gas, with about 15 percent of the region’s fuel passing through the country’s pipelines. Russia’s stance has sent oil prices higher amid calls from European politicians to develop more diversified energy sources.

“European leaders are clearly concerned by Russia’s willingness to use gas supplies as a political lever,” said Richard Mallinson, an analyst at Energy Aspects Ltd. in London.

Even before Russia’s threatened action, energy ministers from the Group of Seven nations said earlier this month they would try to diversify energy supplies in response to Ukraine. Yet such measures are seen as a last resort because the cost of bringing in supplies from around the globe could potentially double the price of natural gas in Europe.

Energy Outflows

“Russia is far too big for anybody else to make up for a significant loss of Russian energy outflows,” David Wech, managing director of JBC Energy GmbH in Vienna, said by e-mail.

While the most obvious impact of the Ukraine crisis on energy security has been in the gas market, concern the situation will escalate into outright conflict between Russia and its neighbor has added $3 to $5 a barrel to the price of oil, said Mike Wittner, the head of oil market research at Societe Generale SA.

Benchmark Brent crude oil traded at about $110 a barrel today, after falling to as little as $103.95 on April 2.

Gazprom is demanding prepayment for $1.7 billion of supplies in June, which it says was triggered by $3.5 billion in overdue payments for fuel delivered in 2013 and through April. Ukraine’s state oil and gas company NAK Naftogaz Ukrainy doesn’t recognize the full debt.

June Payment

“You need to pay for energy supplies,” Russian Prime Minister Dmitry Medvedev said today at the forum. “I hope all countries and consumers understand that, including those in attendance and those that are not here for various reasons, including Ukraine.”

Russia says it’s justified in threatening to stop Ukrainian shipments because lack of payment breaches the terms of Gazprom’s supply contract.

“Russia has always fulfilled its commitments for energy deliveries,” Energy Minister Alexander Novak said yesterday. “We are ready to provide security of supply as a reliable partner. We have always showed that and are ready to continue to work like that.”

The Riyadh-based IEF has 75 member countries that account for 90 percent of global supply and demand for oil and gas. It brings together members of the International Energy Agency, which represents industrialized countries, the Organization of Petroleum Exporting Countries and major economies outside those groups including Russia and China.

Avoiding Moscow

European energy ministers have chosen to avoid traveling to Moscow and are holding a separate meeting in Athens this week.

While the fallout from Ukraine is likely to dominate private discussions, the public agenda of this week’s IEF meeting addresses broader themes including the impact of shale fields on global energy markets, how to move to a low-carbon economy and the outlook for demand.

The IEF also will introduce JODI Gas, or the Joint Organizations Data Initiative, a project intended to help bring transparency to the international gas market.

The project, which is supervised by the IEF and compiles data provided by member governments, is important because it helps the market become more predictable in the face of unexpected outages, Energy Aspects’ Mallinson said.

--With assistance from Stephen Bierman in Moscow.