Russia And Ukraine Adopt Poker Faces As Questions Loom Over $7Bn Gas Bill

KIEV, Ukraine -- With billions of dollars of natural gas at stake, Ukraine and Russia seem to once again be putting brotherly Slavic love aside in favour of poker-faced brinkmanship. It’s been two weeks since the FT revealed that Russia’s Gazprom had slapped Ukraine with a whopping $7bn bill for natural gas not supplied in 2012. Strangely, Gazprom has not said much on the matter since then. It could yet challenge Ukraine through arbitration, yet Ukrainian officials appear unphased by the prospect. They claim to have a strong legal case and more leverage than ever in the past, and are already taking about further cutting Russian gas imports – buying, instead, large volumes of less expensive gas from other European suppliers. Supposedly, Gazprom’s view is that Kiev should pay the massive bill: it’s an automatic penalty for violating a “take or pay” clause from a 2009 supply contract that Kiev has long sought to renegotiate, citing discriminatory prices and other “unfair” conditions. Officials in Kiev are sticking to their original line, insisting their country has met all obligations having paid more than $10bn for gas actually imported last year from Gazprom. “We do not consider it appropriate to pay the $7bn bill, because we have no reasons for that. We complied with the required terms of the contract,” Eduard Stavytsky, energy minister, told journalists on Thursday. Having just two weeks ago inked an unconventional onshore gas exploration deal with Royal Dutch Shell worth a potential $10bn, Ukrainian officials say they are now swiftly moving to ink production sharing agreements with Chevron of the US, which hopes to explore potentially large shale gas reserves in western Ukraine. An offshore exploration deal with a consortium led by ExxonMobile of the US is also expected to be signed this year. Should commercially viable hydrocarbons be unearthed by these landmark projects, they could in the long-term break longstanding dependency of Ukraine’s energy intensive economy on Russian fuel imports. Another card Kiev is pulling out is the possibility, as early as the first quarter of this year, of further reducing its purchases of Russian gas by beginning large scale imports of less expensive blue fuel from Europe. Few in Kiev expect a repeat of the Russia-Ukraine 2006 or 2009 gas price disputes that disrupted EU supplies. Ukrainian officials say they are not giving up hope that Gazprom, faced with the long-term risk of losing one of its largest foreign customers, will agree this year to lower prices from current high levels that they say are discriminatory. If not, however, they say they are ready to begin using alternatives. Late last year, Ukrainian officials said preliminary agreements had been reached covering 5bcm to 8bcm of imports from other suppliers in 2013. On Thursday, Stavytsky said technicalities were currently being worked out with Hungary and Slovakia, adding that imports could commence in the first quarter of this year. “There are some technical issues with Slovakia, which we are dealing with, and virtually all issues with Hungary have already been settled,” he said. Yet even if Hungary and Slovakia sanction reverse gas flows allowing EU gas to flow backwards into Ukraine’s vast pipeline transit system, some sources say that EU companies will not be inclined to offend Gazprom by becoming an alternative supplier to Ukraine. In doing so they could violate contracts with Gazprom that restrict them from reselling gas to other customers. Time will tell if Ukraine’s talk is a bluff designed to gain leverage in price negotiations, or yet another paradigm shift in the complicated Russia-Ukraine energy equation. In a February 8 note to investors, Kiev-based investment bank Concorde Capital put it this way: As experience tells us, importing gas from the West does not look like a bargain alternative for Ukraine. Imported gas from Germany was just 1% ($5 per thousand cubic meters) cheaper than what was offered by Gazprom in November. Based on this, we estimate the December and January imports of European gas would have been less beneficial for [state-gas company] Naftogaz compared to the Russian alternative, as average spot prices in Europe were $9 per thousand cubic meters higher for these two months than in November. However, the European prices might seasonally decline in the spring, which would make the Western alternative more attractive. The key question is capacity to export gas from the West – so far we do not see any basis for Ukraine importing up to 5 bcm from the EU.