The European Commission is trying to restart gas talks between Russia and Ukraine, but the same issue that caused a breakdown in June — a dispute over prices — is still keeping the two sides apart.
However, mounting urgency on both sides could help build a compromise: the Ukrainians want to top up their gas storage before the start of winter, while Russia is under growing pressure thanks to falling gas and oil prices.
Maroš Šefčovič, the Commission’s vice-president for energy union, is set to meet Ukrainian Energy Minister Volodymyr Demchyshyn on the sidelines of the Western Balkan Summit in Vienna on Thursday. Andriy Kobolev, the CEO of Ukrainian oil and gas company Naftogaz, will also be there, Commission officials said.
A bilateral meeting between the Commission and the Russian side is scheduled for September 11, said a Commission official.
The key issue is the price of Russian gas, but the dispute has become entangled in the terrible political relations between the two countries since Russia annexed Crimea last year and then supported a separatist rebellion in the east of the country.
When talks broke down in June, Russia had been offering gas at $287 per thousand cubic meters with a $40 discount until September, while Ukraine wanted to pay less than $247. Ukraine has made up for the halt in Russian deliveries by buying gas at about $255 per thousand cubic meters from Hungary and Slovakia. But Kiev still needs to fill its storage and prepare for winter.
Maroš Šefčovič, the Commission’s vice-president for energy union, is set to meet Ukrainian Energy Minister Volodymyr Demchyshyn
Current gas storage levels are at around 14.1 billion cubic meters, according to daily data put out by Gas Infrastructure Europe. The number to reach is 19 bcm, Miguel Arias Cañete, climate action and energy commissioner, told journalists recently.
But to fill the gap and inject another 5bcm, Ukraine needs over $1 billion, Mykhailo Bno-Airiian, head of the European integration department at Ukraine’s energy ministry, told POLITICO.
“We have a shortage of money and we need some financing,” he said.
There are plans for a $300 million loan from the European Bank for Reconstruction and Development, Bno-Airiian said. “We need more active support from the European Commission,” he said. “We are not talking about a present, but about a credit.”
The EU executive is looking to pick up the pieces from the last trilateral meeting in Vienna on June 30. The purpose of the Commission’s diplomatic initiative is to gauge the stance of the two sides and avoid another breakdown in talks.
“We will see after the two meetings if we will have a critical mass of convergence that is good enough to go into a trilateral,” a Commission official said on condition of anonymity.
While the initial meeting between Šefčovič and Demchyshyn is not expected to lead to major progress, it does potentially lay the groundwork for a new gas deal later in the fall, said Frank Umbach, research director at the European Centre for Energy and Resource Security at King’s College in London.
Arias Cañete said the Commission had sent the Russian and Ukrainian ministers a paper summarizing the points that still need agreement. Besides the financing mechanism and the price formula, it also includes the nature and duration of the protocol and the minimum gas volume purchase.
The Commission is keen to see the two sides work out a deal, as this would also safeguard gas transit to Europe. Russian gas accounts for around one-third of the bloc’s imports, and about half of that crosses Ukrainian territory.
The expectation is that a deal will be difficult to reach.
“In the short term perspective, I think the Russians will try to put as much pressure as possible on Ukraine, particularly as regards prices,” said Umbach.
However, Russia is also being squeezed. The fall in oil and gas prices has battered an economy already hurt by international sanctions. Ukraine is one of Russia’s largest gas customers, and Moscow cannot afford to permanently lose that business.
“If Russia would follow long-term strategic interests, it would take into account its own economic misery as a result of oil and gas price declines,” said Umbach. “This gap between Russia’s long-term strategic interests and its short-term tactical position with regards to price negotiations is widening.”