Ukraine’s difficulty to make its “draconian” gas payments to Russia and refill its underground gas storage supplies for this winter may lead to another gas crisis that may indirectly affect gas supplies to the European Union, Robert Shetler-Jones, chief executive of Group DF that holds Ukrainian gas billionaire Dmitry Firtash’s business assets, told New Europe on June 10.
The European Commission last week sent a fact-finding mission to Moscow and Kiev to shed light on their gas payment dispute after a previous row led to Russian gas monopoly Gazprom turning off the natural gas taps for two weeks, hitting supplies in Europe. The Commission plans to discuss the mission’s findings during a summit with EU leaders on June 18-19.
Russia recently warned the EU its future supply reliability is dependent on the ability of Ukrainian state gas company Naftogaz Ukrainy to pay for its gas. Moscow has called in recent days on the EU to help Ukraine pay for its gas, or face a repeat of the January crisis.
The EU has said this is a commercial dispute and it is up to the two parties to resolve it, but it is becoming increasingly nervous by the Russia-Ukrainian gas saga. “If these two parties won’t come into a practical agreement it will affect the third party i.e. EU countries and the supply to them. And this is the dilemma the EU has,” Shetler-Jones said.
“It is very hard for them to get involved ... and they feel that if they do they’ll be drawn in what is essentially now rapidly becoming a very politicised position because you are talking about a country supplying gas to another country knowing full well that the terms of the new contract are very draconian and knowing almost full well that the country in question - Ukraine - is not in a position to make payments sufficient to cover future supplies of gas not only for immediate use but for storing volumes of gas to enable sufficient gas to be available for the winter months,” he said.
“In some ways Russia is quite rightly saying this is a problem you need to resolve it but also in some ways that’s a problem that has been caused by the very terms of the contract that they insisted Ukraine signed in January or Ukraine agreed to sign in January,” Shetler-Jones said.
Ukrainian Prime Minister Yulia Tymoshenko and her Russian counterpart Vladimir Putin agreed in January to remove Swiss-registered RosUkrEnergo AG, in which Firtash controls 45 percent, as an intermediary in gas supply contracts between the two countries.
Shetler-Jones defended RosUkrEnergo, saying that before it was removed from the process, supplies of gas continued uninterrupted and at a price that both parties were happy with. “However, this equation has been completely replaced by the new contract signed in January which not only doubled the price in the first quarter but also insisted that if Ukraine was in no position to make payment they would go to what they called pre-payment basis, which means basically Ukraine only gets the gas it paid for in advance. Now, given the worsening economic crisis in Ukraine, it is hard to see over the coming months how Ukraine can find sufficient funds not only to pay for gas it uses on a regular basis, but also more importantly the gas that needs to go into storage,” he said.
On May 22 Tymoshenko met with Putin during the CIS summit in Astana, but failed to negotiate the USD five billion loan from Russia needed to fill the underground storage facilities.
Reserves in these underground caves were used in the first quarter of 2009 to replace expensive imports from Russia, and are now mostly depleted. If Ukraine does not start putting gas in storage now there won’t be the capacity in the system to suddenly start pumping gas into storage because the system itself can’t handle all that gas in one go. “It has to trickle in over a long period of time and allow for capacity in the system,” Shetler-Jones explained.
During the height of the fall-winter heating season, Ukraine has to withdraw gas from storage because the existing pipeline system that supplies from Russia cannot handle the additional capacity required in Ukraine and Europe.
So far Naftogaz has promptly paid its recent monthly bills to Gazprom although Ukraine had to print money to pay the May tranche. However, Putin and Russian President Dmitry Medvedev warned EU leaders that this is about to end and that Naftogaz is on the verge of bankruptcy.
Speculation questioning Naftogaz’s ability to pay for Russian gas and collect revenues from selling gas in Ukraine, prompted company CEO Oleh Dubyna on June 5 to urge “politicians, experts and media representatives of different countries to stop blowing up hysteria concerning the Company activity in both internal and external markets.”
Meanwhile, EU energy ministers meeting in Luxembourg on July 12 called for tough new measures to bolster energy security after the bloc drifted into heavy dependence on Russian energy supplies over the last few decades.
The ministers also agreed an overhaul of 40-year-old rules on oil stocks. EU countries will circulate monthly stocks information and align the reporting system with that of the International Energy Agency (IEA). Total oil stocks must equal at least 90 days of average imports or 61 days of average consumption, and one third must be quickly available as oil products fine-tuned to the country’s particular consumption needs. Those stocks of products must be owned or easily controlled by the government.
But EU’s energy ministers failed to reach agreement on where to locate the headquarters of the Agency for Cooperation of Energy Regulators (ACER).  The contest is between three countries - Slovakia, Slovenia and Romania.