Russia-Ukraine Interim Gas Accord Sought by EU as Winter Nears

Aug 28, 2014 7:01 pm ET

Aug. 29 (Bloomberg) -- The European Union will prod Russia to strike a temporary deal with Ukraine to allow natural-gas flows to resume while a court reviews arbitration cases.

As winter looms in Europe, EU Energy Commissioner Guenther Oettinger plans to discuss the proposal with Russian Energy Minister Alexander Novak in Moscow today, he said yesterday in an interview in Berlin. The temporary agreement could stay in place until an international court rules in the cases filed by Gazprom OAO and NAK Naftogaz Ukrainy, Oettinger said.

“Our gas relationship and partnership started in times of the Cold War,” he said. Now, the court in Stockholm “has to check these issues and come to a decision. It needs 12 or 15 months. We have to accept this process, but we should use this time in parallel.”

The EU, which depends on Russian gas piped through Ukraine for about 15 percent of its demand, has been trying to broker a deal to maintain shipments since May. After the last round of three-way talks failed in June, Russia cut supplies to Ukraine, citing $4.5 billion in unpaid bills at the time. While transit to the EU remains unaffected, concern is growing among the bloc’s governments over a possible disruption.

The EU is preparing for gas-crisis possibilities and “Russia stopping gas deliveries would be one such worst-case scenario,” Oettinger said yesterday in a speech in Berlin. Ukraine needs to pay off its gas debt while Russia shouldn’t use the gas dispute as “blackmail,” he said.

Conflict’s Shadow

Faced with armed conflict in Ukraine, the 28 EU governments agreed in June to take steps to increase supply security. EU countries are preparing for a stress test of Europe’s energy system to help overcome a potential cutoff in the 2014-15 winter.

The gas-pricing dispute followed a worsening crisis between Russia and Ukraine after Ukraine’s Kremlin-backed President Viktor Yanukovych was ousted in street protests. Gazprom then rescinded a gas discount it had previously granted Ukraine. Russian President Vladimir Putin also stripped Ukraine of a 2010 export-duty reduction that it exchanged for a lease on its Black Sea fleet’s port in Crimea, which Russia annexed in March.

Ukrainian President Petro Poroshenko yesterday called an emergency security meeting to defend against what he called a “de facto” Russian incursion after separatists gained ground in intensified fighting. The crisis in Ukraine comes as the EU discusses its energy and climate policies for the decade starting in 2020.

Energy Future

“The role gas may play in the next decades will be decided in the next weeks,” Oettinger said in the interview. “If there is a blackout, we have problems with heating, with gas power plants. The loser will be Europe. The loser will be Ukraine as well, the loser may be Russia.”

Under the EU’s last plan, which collapsed in June, Ukraine would pay its debt in installments, with $1 billion paid immediately and the rest by the year-end. Gazprom, which had previously extended the payment deadline for Ukraine, demanded that Ukraine pay $1.95 billion to partially settle its debt by mid-June.

Ukraine, which demands market-based prices, said after the talks failed that it was ready to accept the EU proposal of a price range between $300 and $385 per 1,000 cubic meters, still above the $286.5 that the country paid in the first quarter. Gazprom’s final offer was $385, the Russian company’s Chief Executive Officer Alexey Miller said June 16.

“In a cold and long winter, they need some imports from Russia of 8, 10 or 12 billion cubic meters,” Oettinger said. “Therefore, we need a pragmatic solution.”

--With assistance from Elena Mazneva in Moscow.