Three-way talks on Ukraine's gas deal start in Berlin

By bne IntelliNews September 26, 2014

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Three-way talks to cut a new deal for Ukraine on gas supplies from Russia start today in Berlin between the European Union’s outgoing energy commissioner Guenther Oettinger, Russian Energy Minister Alexander Novak and Ukrainian Minister of Energy and Coal Industry Yuri Prodan. Already delayed several times, the talks will address the thorny question of how much Kyiv should pay Moscow for its essential gas deliveries. 

The question is pressing as the heating season is about to start in Ukraine, when its consumption of gas typically triples, and the country may not have enough gas to get through the winter without cutting consumption and buying some gas from Europe, according to recent studies

Russia switched off gas supplies to Ukraine in June, claiming that Ukraine owes $5.3bn in unpaid bills. The likelihood that Russia will cut winter gas supplies to Europe passing through Ukraine is “over 70%”, according to Andriy Kobolev, head of Ukraine's gas pipeline monopoly Naftogaz.  

Europe is especially keen to see the issue resolved as it will also suffer if a new deal cannot be reached. Ukraine is still shipping Russian gas to Europe via its pipelines, which transport around 80% of Russia's gas supplies to Europe. 

However, Russia is playing hard ball. Gazprom nearly halved the volumes of gas it was delivering to Poland earlier in September, in what was widely interpreted as a warning shot. Poland together with Hungary have got Ukraine through the summer by reversing flows in their pipeline to supply Kyiv with gas – a move the Kremlin objects to under the terms of its supply contract to Poland. 

If EU countries continue to re-export Russian supplied gas to Ukraine, Russia will cut supplies to the EU, Russia's energy minister Aleksandr Novak warned in an interview with German business daily Handelsblatt earlier this week. 

"Agreements [with EU countries] do not envisage re-export. We hope that our European partners will adhere to the conditions of their contracts. Only on this basis can we guarantee uninterrupted gas supplies to European consumers," Novak told Handelsblatt

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. 

On September 23 Oettinger said after an Energy Community's session in Kiev that the European energy system had been stress tested to see what was to be done in case of a hypothetical suspension of gas supplies from Russia. The stress tests were a "success," according to Oettinger, who also said  the EU expects to reach a compromise with Russia and was seeking the full amount of Russian gas supplies  at a market price.

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