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Russian-Ukrainian Relations Thaw Slightly Over New Gas Deal

Two weeks ago, Ukraine said it would suspend importing Russian gas when the countries’ contract expired on March 31, primarily because of the high price, especially when it can get the fuel at lower cost from Europe.

Apparently that pressure worked. The two countries’ state-owned gas companies, Ukraine’s Naftogaz and Russia’s Gazprom, signed a three-month contract on April 2 that would supply Ukraine with less costly gas from Russia through June.

And the gas will flow regardless of the $5 billion debt, disputed by Kiev, that Naftogaz owes to Gazprom, according to Alexander Novak, Russia’s energy minister. He said the debt, subject to an eventual ruling by an arbitration court in Stockholm, would not interfere with the April-June deliveries of gas to Ukraine.

Related: Gazprom Feeling The Heat From Sanctions And Low Energy Prices

“We currently have a prepayment system,” Novak said April 4. “As far as I am aware, they have paid $30 million, which means that there will be supplied gas for this amount.”

This is major departure from the history of sour relations between Kiev and Moscow over gas supplies, which are supplied via pipelines to Ukraine, which itself serves as a transit region for Russian gas to customers farther west in the European Union.

Three times – in 2006, 2009 and 2014 – disputes over Ukraine’s payments have led Russia to shut down the flow of gas, affecting not only Ukraine but the EU customers downstream. Traditionally the Europeans had relied on Russia for about 30 percent of their gas needs, with half of it flowing through Ukraine. Now that amount has reduced somewhat as the EU has found alternatives to Russian gas.

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The 2014 shutdown lasted six months until the European Commission (EC) helped Kiev and Moscow reach a temporary deal in October to provide Ukraine with gas through March 31, covering the country’s harsh winter.

Now Ukraine’s Naftogaz has another three months to stock up on fuel in case it falls short next winter. Novak said that probably would require Ukraine’s purchase of between 11 billion and 12 billion cubic meters this summer. That will begin with the purchase of 1 billion cubic meters of gas in April, he said, three times as much as it received in March.

Related: US Oil Demand Is Alive And Well

Under the new three-month deal, Naftogaz will pay even less for the fuel from Gazprom than it did under the “winter package” that expired on March 31. The new price will be $248 per 1,000 cubic meters, compared with $329 under the previous contract, Ukraine's Energy Ministry said April 2.

Ukrainian Energy Minister Volodymyr Demchyshyn called this a “victory” because it shifted the focus between the two countries to an economic rather than a political approach.

Anna-Kaisa Itkonen, a spokeswoman for the EC, agreed, calling Moscow’s offer of a lower price “good and welcome.”

By Andy Tully Of Oilprice.com

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