bne -

Slovakia announced on October 2 that it has set up deals to source extra gas supplies from the EU as it struggles to compensate for supply cuts from Russia. The move comes as Russian state-controlled giant Gazprom reiterated that it considers the re-export of gas by European customers illegal.

Following an emergency government session, Slovak Prime Minister Robert Fico told the press that state-controlled importer SPP recorded a drop of over 50% in flows of Russian gas for a second day, reports Reuters. The PM then announced that SPP had sealed a five-year deal with Eon to supply up to 2m cubic metres (cm) per day via Austria. 

He also suggested Slovakia can use reverse flows from the Czech Republic. Thanks to inter-connectors, the neighbouring Czechs can tap Russian gas sent via Germany. Slovakia is dependent on the mainline route that runs through Ukraine.

SPP also said it had bought gas on the spot market in Austria on October 1. The company said the new deals would significantly help diversify sourcing. "We are capable of securing over 30% of standard daily consumption ... from independent sources in the event of an extraordinary situation, and so greatly reduce our dependence on supplies from the east," Chairman Stefan Sabik said. 

Frontline

With the weather turning colder and more gas talks due between Russia and Ukraine, Slovakia has now moved onto the frontline. Alongside Poland and Hungary, the country has been sending gas from the EU to Ukraine via reverse flows. However, all three countries have reported reduced supplies from Russia through September. Hungary suddenly announced in late September that it was suspending reverse flows to Ukraine, accompanied by a deal for raised purchases from Gazprom. 

That put the spotlight firmly on Slovakia, as bne reported, with Moscow continuing its successful practice of splitting off individual member states to weaken EU policy and strategy. The surprise, thus far, is Bratislava's response.  

The Slovak government has close ties with Moscow (http://www.bne.eu/content/story/slovakias-precarious-balancing-act) and has been one of the leading opponents of EU sanctions against Russia over its actions in the Ukraine crisis. Bratislava - which like Budapest has recently secured control of the country's main importer of Russian gas - delayed opening reverse flows to Ukraine for months claiming it would break its contract with Gazprom. 

It finally agreed to a limited route in April - after gaining a gas price discount from Russia - thanks to pressure from Brussels and a phone call from the US vice president to Fico. Moscow even suggested at the time that it had no problem with the arrangement. Flows then started in early September.

Therefore, Fico's bullish response to the recent cut in supplies is surprising. He has condemned Russia's "political games" and insisted Slovakia will continue to send gas to Ukraine. 

He reiterated that stance on October 2. "We are convinced that, considering also gas prices which are not moving much, that this is a political war where gas is being used as a weapon," he asserted. "You know well where gas is flowing from." 

Slovakia is not only exposed to Russian pressure via reduced flows to its own storage, but it is hugely dependent on revenue from transiting Russian gas to the EU. Bratislava is clearly getting nervous that without a deal to turn Russian supplies to Ukraine back on, it faces another cut off this winter, just as it experienced in 2006 and 2009. 

Illegal

While Fico insists Slovakia will continue to send gas to Kyiv, pipeline operator Ukrtransgas said supplies from Slovakia dropped 11.6% on October 1, reports Ukrainian News.  

Ukraine is believed to have received 1.7bn cm of Russian gas this year in reverse flows from neighbouring Slovakia, Poland and Hungary, Gazprom's deputy Chairman Alexander Medvedev reported to the Russian Duma in a letter, according to Itar-Tass. The executive reiterated that the company considers this a violation of its contracts. The EU admitted in late September that reverse flows to Ukraine may need Gazprom's cooperation.

“There are all grounds to assert that Russian natural gas, aimed not for Ukrainian but European consumers, is being supplied to Ukraine as a rule, under a scheme of the so-called ‘virtual’ reverse, but with the movement of gas via the Ukraine-EU border. The legality of this scheme is doubtful,” Medvedev said.

The Duma’s deputy head of the Committee on Industries, Vladimir Gutenev, said Russian lawmakers are drafting a bill banning Russian exporters from supplying oil and gas to debtor countries and the states that “virtually” re-export hydrocarbons to debtor countries. 

That reflects threats from Russian officials in late September, on the eve the last meeting between Moscow and Kyiv on restarting gas supplies. The EU-brokered meeting, however, made little progress as the pair continue to argue over pricing and terms. Russia cut supplies to Ukraine in June, claiming it owes more than $5bn. Kyiv refutes that, pointing out that it lost gas assets when Russia annexed Crimea in March. 

The ongoing fight in eastern Ukraine, and wider geopolitical implications, clearly make a deal complicated. Moscow appears to hold the trump card in the short term, with the gas cut worsening Ukraine's crumbling economy and sparking increasing concern in Central and Eastern Europe that it risks being cut off during the winter. Analysts say that if Ukraine cuts consumption by 20%-30% and Europe re-exports about 10bn cubic meters over the course of winter, then Ukraine can squeak through without buying any gas from Russia. 

"The Ukrainian authorities had indicated that they [are] still 5bcm short of supplies required to see them through the winter - assuming an average winter," noted Tim Ash at Standard Bank. "This shortfall might have been filled through 'reverse flow' from Central Europe. However, recent restricted gas flows from Russia to Hungary, Poland and Slovakia now seems to have limited further significant supplies from this source. Ukraine may still be able to survive by further restricting demand but this will be very disruptive to economic activity."