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Andy Tully

Andy Tully

Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com

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Ukraine Won’t Be Bullied By Russia Over Gas Deal

Russia says it is considering a request by the European Commission (EC), relayed by Ukraine’s state-owned gas company Naftogaz, to extend its current discount for the gas it sells to Ukraine.

The EC proposal, received by Russia’s state-owned Gazprom on March 27, was to have the discount last for another full year, through the end of March 2016. But Russian energy Minister Alexander Novak said March 30 that any extension would probably be for only three months.

“The Russian government will prepare a decision in the near future,” Novak said in an interview on Russian state television. “The issue will be solved as soon as possible.” Related: Forget Rig Counts And OPEC, Media Bias Is Driving Oil Down

The EC gave no specific reason for its proposal, but its members in Western Europe get much of their gas from Russia through Ukrainian pipelines. In the meantime, Ukraine has been at odds with Russia for a decade over the price of gas and has been looking for alternative sources.

Kiev says it is now getting enough affordable gas from Europe, including Poland, and hopes to get Turkmenistan to resume deliveries.

As a result, on March 23, Ukrainian Energy Minister Volodymyr Demchyshyn said his country would suspend the purchase of Russian gas on April 1, the day after the current contract expires. “There is no need to buy Russian gas at the moment,” he said. “It makes no sense to buy it at a higher price than we can buy it from Europe.” Related: US Oil Demand Is Alive And Well

Whatever its reasons, the EC wants that contract and its lower price extended. Alexei Miller, Gazprom’s CEO, said the government in Moscow is considering the proposal, but added, “We believe a three-month term is optimal” because of the lower demand for gas in the spring and summer and the current unpredictability of gas prices.

And despite its search for alternatives to Russian gas, Naftogaz issued a statement saying it “welcomes the proposal to extend the so-called ‘winter package’ ” for another full year.

Maros Sefcovic, the EC’s vice president for energy union, told both Gazprom and Naftogaz that the commission is planning trilateral talks including the European Union, Russia and Ukraine in mid-April to consider the proposal for extending the gas contract between Moscow and Kiev. Russian Prime Minister Dmitry Medvedev said Moscow would not consider any extension until after such talks. Related: A Look At The Future Of Nuclear Power

Novak, the Russian energy minister, said Naftogaz won’t be prepared for next winter unless it stores at least 12 billion cubic meters of gas. Both neighbors estimate that that would cost Ukraine about $3 billion in payments to Russia if the there was an agreement to extend the current discount. Novak also said he expects the EU to help Ukraine buy whatever gas it needs.

Russia has three times suspended the flow of gas through Ukraine in the past decade, in 2006, 2009 and 2014. The first two suspensions also affected Russia’s Western European customers. The 2014 suspension began in June and didn’t end until December, when Russia agreed to an EU proposal to reduce the Ukraine’s price for gas by up to $100 per 1,000 cubic meters, or about a 30 percent discount.

By Andy Tully of Oilprice.com

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  • Lee James on April 01 2015 said:
    Russia regularly uses its petroleum as a weapon. Russia would seem to have the Ukraine by the jugular. Now the pipeline seems to have some "loop feed," from Europe. Ukraine is fighting for its life. The question is, how much energy leverage does Russia have? And will Russia choose the petroleum weapon?

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