Kiev Should Stop Playing Politics With Gas Debt

Ukraine’s energy system can stay afloat only as long as the country’s underground gas-storage facilities are full. But by the end of the year the government in Kiev may start siphoning off natural gas destined for the European market.

The issue of natural gas has divided European opinion on the civil war in Ukraine. Brussels’ plan to force EU members into “energy solidarity” with the disintegrating state of Ukraine and to use illegal reversed gas flows is losing support. “The EU has no intention of repaying Ukraine’s debts for Russian gas,” said Dominique Ristori, the director general of the European Commission’s Directorate-General for Energy, adding that all debt problems should be settled through the International Monetary Fund.

The reference to the IMF is worthy of note. According to the Fund’s official statements, it will offer assistance to Kiev only if President Petro Poroshenko’s “Drang nach Osten” in the Donbass region is successful. Therefore, the end result of the civil war may affect Ukraine’s ability and willingness to pay its debts. The IMF has also given strict guidelines for Ukraine’s international reserves and has set cash-shortage limits for debt-ridden joint-stock gas company Naftogaz Ukraine.

(The IMF demanded an increase of up to 40 percent in residential gas rates by May 2015. The rates will go up 20 percent  every year until Naftogaz Ukraine’s gas debt has been paid.)

Historically, countries left on their own in talks with the IMF have often found themselves in danger of sovereign default. The IMF today is anything but a welfare institution -- it does not normally assist countries engaged in war.

Ukraine’s government will have to increase domestic gas prices to reach a level on par with the IMF’s standards. This means that in 2015, the Euromaidan babushkas will receive their first 250-euro monthly gas bills. Ukraine’s energy officials often mention their ambitious plans to use fracking or reverse flows from Slovakia and Poland to make up for any gas shortfalls. In reality, the so-called “big gas reverse from Slovakia” would provide for only about 15 percent of Ukraine’s gas needs (after deducting the natural-gas consumption in the Crimea and the Donbass region). In any event, the price of this reversed gas would probably be close to the European contract price.

Related Article: 5 Things Ukraine Must Do To Become Energy Independent

In regard to fracking, Ukraine’s shale projects are either half-dead or have been officially halted. The European Commission is much more skeptical about shale gas than it was two or three years ago. “Shale gas extraction will bring about no significant reduction in Europe's dependence on gas imports,” claimed European Energy Commissioner Günther Oettinger in an interview with B.Z. am Sonntag. Oettinger said that in the long-term future, Europe will be able to cover around one-tenth of its overall need for gas by using fracking technology.

Therefore, the government in Kiev may start siphoning European gas out of Ukraine’s transportation system in order to make up for a shortage of natural gas despite all its solemn promises. The media’s fear mongering will be used to portray social unrest as a threat to national security. Meanwhile, Ukraine’s smart prime minister, Arseniy Yatsenyuk, announced his resignation in response to parliament’s failure to pass gas legislation (abandoning the sinking ship of Ukraine’s economy just in time).  

In July, Ukrainian Energy Minister -- and Yatsenyuk’s successor -- Volodymyr Groysman, announced Kiev’s midterm plan. He does not think that either the $5.3 billion Ukraine currently owes for gas or its refusal to make regular payments “will stop Ukraine from buying gas from Russia.” In the light of Ukraine’s newfound European identity, Mr. Groysman should try this tactic during talks on receiving reverse gas supplies from Slovakia and Poland.

However, if the solidarity with Europe plan does not work out, Kiev’s last resort will be its notorious tactic of “taking without paying.”

“We know from experience that in winter and autumn Ukraine needs natural gas. And it may be -- if you’ll forgive me – that they will begin to steal it,” predicts Sergey Ivanov, the chief of staff of the presidential administration of Russia.

The punitive operation in eastern Ukraine has ruined the country’s reputation as a reliable transit route. The recent shoot down of a passenger airliner in Kiev’s zone of control is a sign that it’s actually a zone of chaos, and it’s widening. But the solution to the transit problem, at least, is obvious: Kiev should pay its bills and stop using political arguments in its gas talks.

By Igor Alexeev for Oilprice.com