Kiev turned off its Gazprom gas tap today, snubbing the Russian supplier in talks to negotiate a new contract as an interim deal expired. The two sides can’t agree on a price—Gazprom is offering $247 per thousand cubic meters, roughly a $40 discount, while Ukraine is holding out for a better bargain and more favorable terms. Reuters reports:
A particularly divisive issue is Gazprom’s take-or-pay clause that requires Ukraine to buy a certain amount of gas regardless of its needs. Other sticking points are the length of any agreement and the legal form it takes.
Natural gas demand ebbs during warmer summer months, so there’s no danger of a supply shortage…yet. Ukraine plans to build up its reserves to roughly 19 billion cubic meters (bcm) by the fall in preparation for the spike in demand that colder weather will bring, and to do that it will need Russian gas. But thanks to recent efforts to bolster Europe’s gas pipeline network, Ukraine may be able to import that Russian gas from its European neighbors, bypassing direct sales from Gazprom. The WSJ reports:
[EU energy chief Maros Sefcovic] said preparations—especially reverse-flow arrangements with Hungary, Slovakia and Poland—ensured that gas supplies in Ukraine won’t be “endangered.”
Ukraine needs an additional 7 billion cubic meters of gas for the winter, and the reverse flows can supply about 1.8 BCM a month. “We have the capacity, we have the time, and we have the gas,” Mr. Sefcovic said.
Those reverse flows undercut Gazprom’s position at the negotiating table. In the past, the Russian gas firm has been able to strike different deals with different European customers as a way to divide and conquer the continent, but the Europeans’ ability to exchange gas among themselves after buying it from Gazprom enables the countries that are charged higher rates to buy less gas directly from the Russian company.
That doesn’t mean Gazprom won’t retaliate against those willing to help redirect gas to supply Ukraine; last fall Warsaw accused Gazprom of cutting its supplies to prevent reverse flows to Kiev. Like many in central and eastern Europe, Slovakia relies heavily on Gazprom supplies and as a result has expressed reluctance to upset Russia by diverting gas in any kind of “big reverse.”
Europe relies on Russia for roughly one-third of its gas supplies, some half of which transit Ukraine, making these negotiations a matter of interest for the entire continent. It seems that for now both sides will continue to posture, but in just a few short months the stakes will creep back up again.