Russian Energy Minister Alexander Novak and his Ukrainian counterpart Volodymyr Demchyshyn had a constructive meeting today to kick off negotiations on a new package, said European Commission’s vice president for energy union, Maros Sefcovic, who hosted the talks. The goal for the EU and Ukraine is to reach a bridging deal that would stay in place until an arbitration court decides on a dispute between OAO Gazprom and NAK Naftogaz Ukrainy in a ruling expected in the fall of 2016.

With no plans for a deal to be reached by April 1, Russia is ready to consider extending the current discount for Ukraine of about 30 percent of the contract price, Novak told reporters in Brussels. He agreed to discuss the discount every quarter rather than fix it for a longer term, citing volatile prices.

“This is only the beginning of work on the summer package,” he said in comments broadcast by Rossiya 24 television after the meeting.
A new gas agreement between the two former Soviet allies would reduce the risk of supply disruption for the EU. Russian gas shipped via Ukraine accounts for more than 10 percent of Europe’s demand for the fuel. A potential halt in deliveries to Ukraine “isn’t crucial for now,” said Alexey Grivach, deputy head of National Energy Security Fund, a Moscow-based consulting company. “The point of no return” may come in August, he said.

Increased Imports

While Ukraine is able to cope without Russian gas in the summer months starting in June, it needs to increase imports and spend at least two months refilling underground storage before the next cold season, Grivach said by phone.

The talks are mired in politics amid a deadly, yearlong conflict in eastern Ukraine with pro-Russian separatists. EU leaders pledged Thursday to extend sanctions against Russia until the end of the year, attempting to pressure the Kremlin to uphold the cease-fire in eastern Ukraine. The government in Moscow has accused Ukraine of putting a peace accord at risk.

When Russia’s state-run OAO Gazprom halted gas deliveries to Ukraine for almost six months in June last year because of a payment dispute, fuel inventories in the smaller country and the EU were higher than now.

Similar gas-payment disagreements between the former Soviet states in 2006 and 2009 disrupted transit flows to Europe during freezing weather. Russia cut flows, accusing Ukraine of siphoning EU-bound gas from transit pipelines.

Alternate Supplies

Europe has grown less dependent on Russian fuel delivered through Ukraine because of new pipeline routes, reduced consumption and increased imports of liquefied natural gas by sea, according to the Institute of Energy Economics at University of Cologne.

The next round of three-way talks may take place April 13-14 in Berlin, Demchyshyn was quoted as saying by RIA Novosti. Ukraine will need EU’s assistance in securing funds from international financial institutions including the World Bank and the International Monetary Fund to refill storage, according to Demchyshyn.

“I think that during the next meeting some formal arrangements would be achieved,” he said. “I think that the issue of financing will be solved. We mean deals with fairly large amounts from $800 million to $1 billion.”

Ukraine needs as much as 19 billion cubic meters in underground gas inventories before the heating season, according to estimates by Naftogaz. That compares with 7.8 billion on March 18, Ukrainian data showed.

Price Discount

The current price discount from Russia -- as much as $100 per 1,000 cubic meters -- brokered by the EU in October brings the cost of fuel to $329 in the first quarter, a level close or even higher than a price Ukraine pays to the European traders, according to the country’s officials.

Ukraine has reduced its reliance on Russian gas in the past five years. It bought about 19 percent of the total fuel needs from Gazprom in January and February this year, and imported almost 24 percent from the EU. Most of the fuel was initially produced in Russia and delivered to Ukraine from Slovakia, Poland and Hungary in so-called reverse mode.

A deal won’t be easy, Grivach said. Gazprom and Naftogaz have been battling over issues, including debts and a price formula for their main supply contract through 2019, in Stockholm arbitration since the last year.

A joint statement agreed by negotiators today is the starting point for further discussion on conditions of Russian gas supply until the end of arbitrage proceedings, Naftogaz CEO Andriy Kobolyev said in a statement.

Complicating talks with Ukraine, Russia started direct gas supplies to its neighbor’s easternmost regions on Feb. 19 after Naftogaz cut deliveries to the rebel-held areas. Naftogaz declined to pay for the fuel, saying it couldn’t trace the volumes. The companies agreed last month to reach a deal on the shipments after their gas pact expires on March 31.