Ukraine Energy Crisis Will Hit Soon and Hard
It's broke, late on payments, and the winter has arrived
This article originally appeared at Business New Europe
Ukraine still has to pay for more than 1bn cubic meters of natural gas that it needs in December, worth some $385m, outgoing energy minister Yury Prodan said on December 2, as a cold spell hit the country.
Power generators are introducing rolling outages to cut consumption because of fuel shortages.
Night time temperatures in the capital city Kyiv dropped to below -15C, with daytime temperatures at around -5C, forcing the crisis-hit country to draw extensively on its underground storage facilities.
Prodan said that Naftogaz could transfer the December funds by the coming weekend, although the deadline for advance payments is believed to be the first of the month. On December 1 Prodan spoke of Ukraine needing 1bn-1.5bn cu m, costing $385m- $577.5m. Russian energy minister Aleksandr Novak confirmed to Reuters that no payments had been received from Ukraine.
Ukraine's natural gas reserves in storage are already down 16%, by 2.63bn cu m, since the start of the heating season on October 20, according to the latest data from transport operator Ukrtransgaz, a Naftogaz subsidiary.
In order to get the cash to make payments, the government has put together a basket of emergency measures - latterly obliging the 150 largest gas consumers and all state companies to buy gas exclusively from Naftogaz, rather than independent traders and private domestic producers, and to make payments in advance. The list includes giant chemicals plants, which together are reported to consume nearly as much gas as the population of Ukraine.
Naftogaz has often been described as a financial 'black hole' for the country, because it supplies gas to households and utilities at prices far below the price it purchases the gas from Russia, leading to an enormous deficit that is paid by direct government transfers.
Ukraine's international donors are demanding from its government as a condition for further funding that the gas price subsidies cease. In spring 2014 a reform government raised the price of gas supplied to the population and utilities in order to receive loans from the International Monetary Fund.
But the subsequent steep devaluation of the hryvnia has entirely nixed the effect of the price hike, prime minister Arseny Yatsenyuk told the government on November 26, since Ukraine pays hard currency for its gas imports.
Devaluation has now pushed Naftogaz's deficit to UAH103bn, or around $7bn, Yatsenyuk said.
"Measures on increasing the tariffs produced no results due to the plunge in the value of the hryvnia," he told ministers.
Yatsenyuk said that emergency measures had cut gas consumption by 20%.
Naftogaz is also under financial pressure because of a $1.8bn credit owed to Russian state-owned bank Gazprombank, for which Russia has said it may demand early repayment, due to alleged breach of the loan conditions.
The good news on the horizon for Naftogaz is that the current oil price collapse will bring lower gas prices in 2015, according to the oil-referenced pricing formula.
Cities across Ukraine, including the capital Kyiv, are currently suffering rolling power outages, as stocks of coal fall to critical levels, due to loss of suppliers in East Ukraine, and lack of hard currency funds. In addition, a malfunction at the Zaporizhia atomic power station caused one reactor to be taken from the grid.
According to reports on media portal Korrespondent, in part of the town of Chernigov near Kyiv power was out for three hours on December 2, in central Ukrainian Khelmnitsky for six hours, leaving homes in darkness, and street trams standing still.
In Kyiv, the power outages should effect only industrial users and other users not of critical importance, local power generator Kyivenerg said, with outages for 2 hours at a time.
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