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Gazprom cuts gas supply to Ukraine

Hydrocarbon Engineering,

Gazprom halted supplies of natural gas to Ukraine as of 10am Moscow time on 16 June. The supplier had previously stipulated that Ukraine had to pay upfront for its gas supplies, after the country failed to settle its huge debt to Russia.

Gazprom has asked Ukraine’s Naftogaz to pay US$ 1.95 billion of the US$ 4.5 billion it claims to be owed. The company has now filed a lawsuit against Ukraine for the larger sum with an arbitration court in Stockholm.

Katya Zapletnyuk, editor of ICIS Heren European Gas Markets (EGM), commented: “While Ukraine’s desire to negotiate the price down is understandable, its poor record of respecting contractual obligations undermine its credibility.”

The Ukrainian prime minister, Arseniy P. Yatsenyuk, holds a different view. According to him, “this is a general plan for the destruction of Ukraine”. He said the decision was the latest in a series of steps that “began with the annexation of Crimea, the Donbass terrorists, supplying Russian weapons and sending Russian bandits to the territory of Ukraine”.

Kiev had said that it would make the US$ 1.95 billion payment demanded on Monday if Russia agreed to cut its ongoing rate to US$ 326/1000 m3. However, Putin insisted that he would sell gas at a rate of no lower than US$ 385/1000 m3.

EU Energy Commissioner, Guenther Oettinger, offered a compromise that would involve Ukraine paying US$ 1 billion on 16 June, and the remainder in installments stretching through to the end of the year. However, Russia continued to insist on immediate payment of US$ 1.95 billion: a demand that Ukraine failed to meet.

Ukrainian Energy Minister Yuriy Prodan has indicated that the country is now trying to secure increased gas deliveries from alternative sources. The country has enough reserves to last until December.

Meanwhile, Gazprom has announced that it will continue to supply gas to the remainder of Europe. Gazprom’s chief, Alexei Miller, did however warn that there were now significant risks to gas transit to the EU through Ukraine.

15% of the fuel consumed in Europe is delivered via this route and Ukraine is contractually obligated to continue shipping the gas that transits its territory. Furthermore, even if the country does start siphoning off supplies, Russia has the capacity to increase the flow of gas through the North Stream pipeline that runs under the Baltic Sea to Germany.

The International Energy Agency (IEA) has suggested that Ukraine has its own reasons for keeping gas supplies to Europe flowing. The country is trying to become a European economic ally, and is due to sign an association agreement on 27 June. 

Hence it seems that, for now at least, natural gas supply to Europe (with the obvious exception of Ukraine) has not been compromised.

Written by Emma McAleavey.

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