Russian Ukraine Gas Cut Off Beginning to Worry the EU

This article originally appeared at OilPrice.com

The European Union is urging Moscow to resume negotiations quickly in an effort to resolve its latest pricing dispute with Kiev that has suspended gas to Ukraine for the fourth time in the past decade.

Addressing Ukraine’s Parliament on July 3, Martin Schulz, the president of the EU Parliament, referred to the breakdown in the talks in Vienna on Tuesday over the reduced size of the discount that Russia’s Gazprom was offering cash-strapped Ukraine.

As a result, Aleksey Miller, the CEO of Russia’s state-run energy giant Gazprom, was ending gas deliveries to Ukraine effective July 1 because Naftogaz hadrefused to pay in advance for further gas deliveries. “Gazprom will not deliver gas to Ukraine at any price without prepayment,” he said.

Gazprom had planned to keep offering Ukraine a discount for its gas, though a smaller one. The plan was to have Naftogaz pay $247 per thousand cubic meter of gas, $40 below Gazprom’s current market rate. Until now, Naftogaz had had a $100 discount on the same volume of gas and wanted keep paying the lower price.

Aleksander Novak, Russia’s energy minister, said maintaining the larger discount would have been “unjustified” because it would be selling its gas to Ukraine below the rate Gazprom charges other Russian neighbors.

As a result, Volodymyr Demchyshyn, Ukraine’s energy minister, said at the Vienna talks that Naftogaz would look elsewhere for its gas supplies. And Naftogaz issued a statement saying, “Since … the terms of further Russian gas deliveries to Ukraine were not agreed at today’s trilateral talks in Vienna, Naftogaz is suspending purchases from the Russian company.”

For now, at least, Kiev has room to make such bargains because, with summer just begun, the country’s demand for gas is at an annual low, giving it the opportunity to bargain for better terms.

Ukraine says it is not as reliant on Russian gas as it once was. Its representatives at the Vienna talks said it has imported no more than one-third of its gas from Gazprom so far this year because it has found less expensive gas from other countries in Europe.

That gas, in fact, was originally supplied to these nations by Russia, and the customers were reselling it to Ukraine. Moscow, however, says it is illegal for its customers to sell these “reverse supplies,” as they are called.

In the meantime, Naftogaz said that despite the halt in Russian gas to Ukraine, it would continue supplying the energy to Russia’s customers in Western Europe, for which the Ukrainian company earns a transit fee. But that’s no guarantee that flows to the EU won’t be affected eventually.

This is the fourth time in the past decade that a pricing or political dispute between Kiev and Moscow has halted the flow of gas to Ukraine. Similar disagreements led to delivery suspension in 2006, 2008 and 2014.

These cutoffs didn’t hurt only Ukraine. Gazprom’s customers in Western Europe occasionally suffered from low gas supplies in the midst of winter. This has prompted the EU to search for alternative sources of fuel. At the same time, and Russia is exploring alternative pipelines to accommodate its valuable European customers.