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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 Playing Hardball With Gazprom In New Gas Deal

Ukraine plans to suspend its gas purchases from Russia on April 1, the day after the current contract expires, in an effort to strengthen Kiev’s bargaining position as the two countries negotiate a new deal that could lower the price of the fuel.

Ukraine has been shifting its reliance on gas from Russia to Europe, in large part because of growing tensions between the two countries that have previously led to interruptions in the flow of gas through a Ukrainian pipeline that also serves Western Europe.

Europe has been buying about half of its gas from Russia, and about 30 percent of its flows through Ukraine. Moscow has interrupted that flow three times in the past decade because of pricing disputes with Ukraine. Both Europe and Ukraine hope to end most or all Russian gas shipments by shifting to alternate sources of energy. Related: Natural Gas Prices To Crash Unless Rig Count Falls Fast

Ukraine believes gas it buys under the current contract with Russia’s state-owned Gazprom is too expensive and has been negotiating with Russia for a lower price for the fuel as well as higher transit fees for Russian gas to European customers.

The expiration of the current contract also coincides with the end of winter, when Ukraine needs to buy less gas for heating.

As a result, Ukrainian Energy Minister Volodymyr Demchyshyn told a news conference in Kiev on March 23 that the purchase of Russian gas will be suspended. “There is no need to buy Russian gas at the moment,” he said. “It makes no sense to buy it [Russian gas] at a higher price than we can buy it from Europe.” Related: Wall Street Losing Millions From Bad Energy Loans

This confident comment came two days after the minister said he believed Russia needed to compete with Ukraine’s new sources of gas in the European Union, reducing its reliance on Gazprom. The two sides have been meeting in Brussels to negotiate a new contract under the mediation of the European Commission, and Demchyshyn said a deal “is nearly complete from a technical standpoint.”

At the most recent meeting on Friday, Russian negotiators said Moscow would consider discounting the price set in the current contract. The current contract has Ukraine paying $329 per 1,000 cubic meters of gas during January through March 2015. Russia had previously said that on April 1 the price would rise to $348 per 1,000 cubic meters of gas. Related: Is Rosneft The Best Buy On The Global Markets?

Demchyshyn told Reuters that at current market prices, “in order to be competitive, [Russians] need to go … between $240 and $250” per 1,000 cubic meters of gas.

In fact, Demchyshyn said, as energy prices keep falling, he expects the price of gas to go as low as between $210 and $220 in the third quarter of this year.

“The Russian side understands that they need to be price-competitive,” he said. “As long as their price will be higher than the market price – the price for the gas that we can get from Europe – we won’t need Russian gas.”

By Andy Tully of Oilprice.com

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