Moscow and Kiev Exchanging Offers to Reach a Compromise on Gas: Petrostrategies

Moscow and Kiev are actively exchanging offers to try and reach a compromise on gas. According to Petrostrategies, a French think tank specialized in energy issues, in the event that an agreement on gas is reached, Russia may open a major line of credit for Ukraine, worth several billion dollars. The article was published on the December 2 issue of the World Energy Weekly, a publication of Petrostrategies.

The outlines of a possible compromise agreement between Russia and Ukraine on gas issues are becoming clearer from week to week, only a month away from the existing gas transit contract’s expiration date (December 31, 2019). At present, the two capitals are actively exchanging offers and counter-offers, not only between the companies involved (Gazprom and Naftogaz) but also between the two governments. At this stage, the components of such a compromise (if one can be found) would appear to be as follows: Ukraine would resume direct purchases of Russian gas, which it stopped in November 2015; Gazprom would undertake to sell gas to Ukraine at substantial price discounts; and sums owed by the Russian company due to lost litigation (some $3 billion so far) would be paid to Ukraine’s Naftogaz in gas deliveries. These broad outlines seem to have been agreed on November 25, during a telephone conversation between Presidents Vladimir Putin of Russia and Volodymyr Zelensky of Ukraine.

It is not clear whether the two heads of state have also settled other outstanding issues, such as the transit of Russian gas through Ukraine after the December deadline, and the fate of disputes that have not yet been resolved by the courts. The starting positions of both parties to the negotiations are known. The Russians are prepared to conclude a long-term gas-transit agreement on limited volumes destined for central and eastern European countries, and a short-term agreement for additional volumes, which will then be progressively reduced as the Nord Stream 2 gasline takes over. The Ukrainians are asking for a ten-year transit contract for a minimum of 60 bcm/annum. The European Commission is proposing a ten-year transit contract, with an option to terminate after five years if tariffs rise too high, for a fixed volume of 40 to 60 bcm/annum.

In 2018, Russia piped 87 bcm/annum of gas through Ukraine. At the earliest, Nord Stream 2 will only be ready in a few months’ time, and will therefore not be able to operate throughout 2020. Consequently, it will only be able to transport some 25-30 bcm of gas next year and will not will reach its full capacity of 55 bcm in 2021. In principle, all things being equal, Gazprom will need to pipe some 50 bcm through Ukraine again in 2020, followed by about 30 bcm every year, starting in 2021. In addition, it will deliver volumes of gas directly to Ukraine if a sales agreement is concluded (15 bcm/annum?). The financial losses suffered by Ukraine as a result of the new situation would therefore be equal to the difference between the amount of gas actually transported so far and the volume that will be transmitted in the future, compensated (probably only partly) by a discount granted by the Russians on the price of gas sold directly to Kiev, and by the money that the Ukrainians will save if they stop receiving Russian gas via reverse flows.

Sources say that Russia may also open a major line of credit for Ukraine, worth several billion dollars. This loan would help to bail out the Ukrainian government and strengthen its position in negotiations with the IMF, which are difficult and marked by mutual mistrust. President Zelensky needs money to boost his country’s economy, and even a partial relaxation of tensions with Russia would help to promote its economic recovery. The Heads of State of Germany, France, Russia and Ukraine (known as the Normandy format, or Normandy contact group) are scheduled to meet in Paris on December 9. To further relax tensions, Moscow could return three Ukrainian ships that it boarded in the Kerch Strait in November 2018. The two capitals have already exchanged prisoners, and a few weeks ago, heavy weapons were withdrawn from both sides of the front line in eastern Ukraine.

Naftogaz is also showing signs of good will (or may just be resigning itself to the situation). For example, the Ukrainian company did not appeal when Denmark granted a license allowing the Nord Stream 2 gasline to pass through its territorial waters. It said on November 22 that it would appeal, but then missed the deadline (3 PM on November 27, 2019) without doing so. On November 28, Naftogaz’s executive director for relations with Gazprom, Yuriy Vitrenko, said that his country would not interrupt the flow of Russian gas if a transit agreement is not concluded in time. “Ukraine will not cut off gas. Ukraine has never cut off gas”, he said. A transit contract must be signed by December 13, he said. If this is not the case, “there should be some intermediate decision or some other kind of agreement”, said Vitrenko. However, he added that in the absence of an arrangement, any gas sent by Russia would be stored in Ukraine until “documentation” is presented allowing its destination to be ascertained.