Russian gas main Source: Gazprom

Russian gas main Source: Gazprom

Russia offers $40 per Mcm discount on gas, but Ukraine says no

Russian state-owned energy giant Gazprom (ticker: OGZPY) announced that it is halting gas flows to Ukraine amid a pricing dispute. Gazprom CEO Alexi Miller said Gazprom has not received advanced payment for deliveries of natural gas for July, and will not deliver gas to Ukraine at any price without first receiving pre-payment, reports The New York Times.

On Monday, Russian Prime Minister Dmitri Medvedev announced that Russia would sell its gas to Ukraine for $247.18 per thousand cubic meters (Mcm), nearly a $40 discount on its regular pricing. Previously, Ukraine received a discount of $100 per Mcm of natural gas, partly for leasing rights to Russia’s Black Sea naval base located in Crimea. The discount was cancelled and prices were renegotiated following Russia’s annexation of the island region.

Ukraine’s state energy company, Naftogaz, said earlier in the week that it would no longer purchase Russian gas supplies due to disagreements in pricing and the breakdown of talks between Russia, Ukraine and the E.U. over a new contract.

Ukraine increases reverse flows by more than ten times

The Ukrainian midstream company Ukrtransgaz said yesterday that the country has been greatly reducing its imports of Russian gas in 2015. From January to June of this year, Ukraine reduced natural gas imports from Russia by 73.4% to 3.7 billion cubic meters, reports Russian Tass news agency.

Reverse gas flows from European countries have skyrocketed in the same period, increasing 10.5-fold from 2014. In the first six months of 2015, Ukraine imported 6.3 billion cubic meters of gas in reverse flows from European countries, up from just 600 million cubic meters in the first half of last year.

Europe not significantly affected

In the past as much as 80% of natural gas for Europe passed through Ukraine.

In the past as much as 80% of natural gas for Europe passed through Ukraine.

While Ukraine is a significant transport corridor for Russian gas to the European market, Ildar Davletshin, an oil and gas analyst at Renaissance Capital, said that the cutoff had “no critical implications short term in terms of consumption or gas flow to Europe.”

In an interview given to a German media outlet, Handelsblatt, Russian Energy Minister Alexander Novak said that Europe remains a key focus for Russia in energy development, reports Tass. “Russia has always been a reliable supplier of energy resources for Europe,” said Novak. “We intend now to broaden this cooperation on account of new gas pipelines,” he said, referring to the Nord Stream project expansion that will transport Russian gas to Germany.

Ukraine likely has enough natural gas in storage to make it through the summer when demand is low, but will need to work out a deal in the fall in order to meet demand during the colder winter months, said Dvaletshin.

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