Wednesday, November 26, 2014

Difficult times ahead for Ukraine's upcoming heating season

The de facto third gas war between Ukraine and Russia is only a part of a broader, difficult situation for the whole Ukrainian energy sector. This winter may prove to be one of the toughest for Ukraine, as its survival will require important sacrifices in terms of finances, cross-sectorial coordination, and society’s compliance. The challenge, however, lies not only in enduring the 2014/2015 heating season, but in ensuring that such a situation will not be repeated in the following years. The EU will help Ukraine provided that the latter commits to European rules.

Russian gas, which Ukraine stopped receiving on June 16, may reappear on the Ukrainian market according to trilateral Ukraine–Russia–EU meeting agreements. Gazprom will resume gas deliveries to Ukraine if Kiev covers its debt and pre-pays for deliveries at a price of $378 per 1,000 cubic metres (cm) in 2014, and $365 per 1,000 cm in the first quarter of 2015. Accordingly, but only in the event of significant gas shortages, Ukraine will consider purchasing up to 4 billion cubic meters (bcm), provided that Russia is able to allocate such amounts for export. Nevertheless, Ukraine approaches the heating season with its energy sector heavily undermined by the conflict with Russia, and still unclear prospects for survival during the winter of 2014/2015. The current crisis forced the Ukrainian government to reorganise its energy sector temporarily and, under pressure of the forthcoming winter, to take immediate supply-side and demand-side measures. Even though the status quo is unsustainable as a policy in the long term, the primary goal of the current energy policy is to ensure energy security for Ukrainian citizens.

The Search for Gas Supplies. Ukraine’s main problem is the availability of sufficient gas supplies, since domestic production and gas stocks can cover only 50–70% of Ukraine's needs. Ukraine’s own production of around 20 bcm annually has little (2–3%) margin to be increased this year. Possessing the largest gas storage facilities in Europe (31 bcm), Ukraine managed to pump nearly 17 bcm into storage, but from the beginning of the heating period on October 20 had already started withdrawing gas from it. The total amount includes active and buffer gas (5–6 bcm), which is important for the undisrupted functioning of underground gas storage facilities (UGSF). There are claims on ownership (made by oligarch Dmytro Firtash’s Group DF) of around 5 bcm gas in UGSF, challenging the further availability of sufficient gas for the winter.

In the absence of Russian gas, Ukraine has for the past few months been relying on reverse flows from Slovakia, Hungary and Poland, which currently account for the annual technical capacity of respectively 11.5 bcm, 6 bcm and 1.5 bcm. These are however short-term (often interruptible) contracts for the de facto re-export of Russian gas, subject to fluctuations due to pressure by Gazprom, which questions their legality. Finally, the short-term and relatively small-volume deal signed on October 3 with Norwegian Statoil allows Ukrainian Naftogaz to acquire 11 million cubic meters (mcm) of gas per day (for around $340 per 1,000 cm), under the mechanism of volume substitution through Slovakia. The outlook, though more positive, still does not guarantee closing the 3–4 bcm gap.

Complete story at - Difficult times ahead for Ukraine's upcoming heating season

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