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Russia and Ukraine are scheduled to restart their gas transit negotiations today in Brussels, with the mediation of EU officials. The negotiations are closely watched as they concern the stability of natural gas supply to Europe.
While tensions between the two neighbors remain, Bloomberg reports there have been signs of a warming between Kiev and Moscow that might make the talks easier and lead to a mutually beneficial result.
“It’s hardly possible to agree on all conditions of the future contract in just one day, there will be many iterations in this process, and bargaining is likely to last until the end of the year.”
Gazprom’s gas transit contract with Naftogaz Ukrainy, which was the object of an arbitrage at a European court, expires at the end of this year and the new one needs renegotiating in light of the court ruling by the Stockholm Arbitration Court.
Gazprom has been obliged to pay Naftogaz US$2.56 billion for failing to supply Ukraine with the agreed amount of natural gas over a period of several years, and also for failing to pay the full transit fees for the gas it did pump in that direction.
The Ukrainian company’s victory was pyrrhic, however: of the original US$4.63 billion in payments due by Gazprom, the Stockholm court ruled that only US$2.56 billion would actually be paid out to Naftogaz, as Naftogaz had previously been ordered to pay about $2 billion to Gazprom for arrears. The court also obliged Naftogaz to buy 5 billion cubic meters of natural gas from the Russian company annually starting in 2018.
Now, the focus will be on supply amounts. The EU and Ukraine want Gazprom to continue shipping most of its gas for Europe via Ukraine. Gazprom, however, is building Nord Stream 2 precisely for the purpose of reducing its reliance on Ukraine as a transit partner, which is hardly surprising in light of the court saga.
Meanwhile, both Naftogaz and Gazprom are preparing for a worst-case scenario. Gazprom is stockpiling gas in European storage facilities, while Ukraine has contracted future deliveries with European traders, Bloomberg reported.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.
Such an outcome would enhance the security of the European Union’s gas supplies and enables Ukraine to continue earning transit fees from Russian gas supplies shipped to the EU through its gas transport system and also enables Gazprom to supply additional gas quantities to the EU through Nord Stream 2.
Furthermore, it could pave the way for a thaw in the frosty relations between Russia and Ukraine and for ending legal bickerings between Gazprom and Naftogaz Ykrainy.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London