Russia Announces "Pay-First" Gas for Ukraine; Revised Estimates on How Long Ukraine's Gas Stockpile Will Last

Ukraine is now on a pay as you go system for natural gas following a breakdown in negotiations with Russia.

Ukraine is not under immediate threat having enough gas to last until September according to some reports, December in others.

Much depends on how cold, how fast Autumn turns into winter, and also on how much conservation Ukraine can manage in the meantime.

For now, I will accept Gazprom's estimate of mid-October rather than Ukraine's estimate of "until December" or earlier reports of "until September".

Please consider Russia Cuts Gas Supply to Ukraine as Tensions Soar.

Russia halted natural gas deliveries to Ukraine on Monday, spurning Ukraine's offer to pay some of its multibillion-dollar gas debt and demanding upfront payments for future supplies. Ukraine has enough reserves to last until December, according to the head of its state gas company Naftogaz.

Russia had demanded $1.95 billion by Monday for past-due bills. At talks over the weekend in Kiev, Ukraine was ready to accept a compromise of paying $1 billion now and more later, but Russia rejected the offer, the European Commission said.

Sergei Kupriyanov, spokesman for the Russian gas giant Gazprom, said since Ukraine missed the deadline, from now on it had to pay in advance for energy. Yet that's a nearly impossible demand for the cash-strapped nation, which is fighting an insurgency and investigating possibly billions lost to corruption under its former pro-Russian president, Viktor Yanukovych.

In 2013, Ukraine imported nearly 26 billion cubic meters of gas from Russia, just over half of its annual consumption.

Kupriyanov said Russian gas supplies for Europe will continue through Ukrainian pipelines as planned and warned Ukraine to make sure they reach European customers.

At a news conference in Moscow, Alexei Miller, the CEO of Gazprom, berated the Ukrainian government, saying it scoffed at compromise and was deliberately turning commercial negotiations into a political discourse.

"Ukraine will get as much gas as it pays for," Miller said Monday. "The risks to the (gas) transit are there and they're significant."

He said in order to prevent serious disruptions to energy supplies in winter, Ukraine needs to pump in gas to its underground storages before mid-October. The current amount of gas in storage is not enough for Europe to last through the winter, he said.

Ukrainian consumers, however, will be facing higher prices no matter what Russia does. Previous governments had sold gas to consumers at about a fifth of what Naftogaz pays for it — leaving little incentive to conserve and saddling the government with huge deficits.

Ukraine's new government is in the process of raising domestic gas prices, a condition of its $17 billion bailout loan from the International Monetary Fund.

Biting the Hand that Feeds You

Tensions are high enough already, yet Ukrainian Prime Minister Arseniy Yatsenyuk added fat tom the fire with his statement "We won't subsidize Gazprom," he said. "Ukrainians will not take $5 billion per year (out of their pockets) to let Russia spend this money on weapons, tanks and planes to bomb Ukrainian territory."

That's quite the charge. If Russia is indeed doing what Yatsenyuk stated, the two countries would be in an open state of warfare, and all gas would have been shut off long ago.

Meanwhile, Russia will keep the pipeline open provided gas flows through to Europe. The risk to Russia is substantial as the chance Ukraine siphons gas from the pipeline is high.

Last year, Russia offered gas to former prime minister Victor Yanukovych at a discounted rate, but that deal ended with his ouster.

It's ironic that Yatsenyuk complains about subsidizing Gazprom when Ukraine had a sweetheart deal and did not even pay discounted prices. Ukraine now owes Russia $4.458 billion for unpaid gas bills from the past two years.

I still expect cooler heads to prevail, with some agreement in due time, say the end of September or the middle of October, but there is always a chance things escalate out of control given reckless political comments and the downing of a Ukrainian jet by pro-Russia separatists.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com