Naftogaz is “moderately optimistic” after Brussels talks with Gazprom

The leading managers at Naftogaz (NAFTO) and Gazprom
(GAZP RX) met in Brussels for talks on Sept. 19 that drew moderately optimistic
reviews from Ukrainian officials afterwards. Arranged by the EU Commission, the
discussions aimed to produce a new gas transit agreement through Ukraine since
2020. The existing 10-year deal between Naftogaz and Gazprom expires at the end
of 2019, and Naftogaz wants to sign a new long-term agreement under EU rules.

Following the discussion, Naftogaz CEO Andriy Kobolyev
highlighted a breakthrough in Gazprom’s position which “for the first time
accepted the possibility to work according to European rules” as of 2020, if
such rules are fully implemented in Ukraine by the end of 2019. He stated that
by the next round of talks, the Ukrainian side will have to amend its
legislation accordingly. In its turn, Gazprom CEO Alexey Miller told Russian
media that the Ukrainian side “may fail to adopt EU gas regulations” by the
year’s end, in which case it’s worth extending the current transit deal for the
short term.

The next round of talks was agreed to be held in late
October, EU energy commissioner Maroš Šefčovič commented to the media.

“We are moderately optimistic,” Kobolyev commented
about the results of talks, adding that Naftogaz is also “prepared for the
worst-case scenario, better than ever.” Another Naftogaz top manager, Yuriy
Vitrenko, was less optimistic in his comments, writing in his blog that the
sides have not yet started the negotiations themselves. Vitrenko stated that
Gazprom still sees Ukraine’s refusal to implement a ruling of the Stockholm
arbitration court as a precondition for starting the new gas negotiations.

Alexander Paraschiy: The Russian
side’s “possible consent” to work according to EU rules in Ukraine since
January is apparently based on its expectations that Ukraine won’t be able to
adopt such rules in its national legislation in 2019. Its primary goal,
therefore, is to extend the existing transit deal up until Gazprom completes
the construction of Nord Steam 2, which bypasses Ukraine to Germany.

So even if Ukraine does its homework in adopting the
EU rules by the next negotiations in October, Gazprom will make some other
demands in order to sign a new contract. For instance, that could involve
Naftogaz rejecting a USD 2.6 bln compensation award
from Gazprom that it won in a Stockholm court ruling last year, as Vitrenko has
hinted. Therefore, we see little possibility for Naftogaz and Gazprom to reach
a deal by the end of 2019, unless the EU side exerts exceptional pressure on
Russians.