Gazprom declines to renew gas supply to Ukraine, cuts transit

Russian natural gas state monopoly Gazprom declined on
March 1 to renew gas supplies to Ukraine and returned the prepayment made by
Naftogaz, deputy CEO Aleksandr Medvedev said on March 1, as reported by the
Interfax-Ukraine news agency. Medvedev attributed its decision to the failure
of the two companies to agree on an addendum to their contract, which is vital
for the court-mandated renewal of gas supplies to Ukraine this month, stressing
that Gazprom was acting in a good faith in this situation.

In its turn, Naftogaz said it considers Gazprom’s
refusal to renew gas supplies as a breach of the ruling of the Stockholm court in December 2017,
which obliged Naftogaz to purchase from Russia no less than 4 bcm of gas
annually starting this year. “We invite our European partners to consider
whether it is wise to let this counterparty strengthen its influence, which is
already significant, on its market with the construction of Nord Stream 2,”
said a Naftogaz statement, citing its CEO Andriy Kobolev.

Moreover, Gazprom began reducing on March 1 the gas
pressure in Ukraine pipeline to a record-low level this year and 16% below the
minimum level stipulated by its transit contract, reported the same day
Ukrtransgaz, the pipeline operator. Under such conditions, which are
exacerbated by boosted domestic demand for gas in Ukraine due to severe frosts,
Ukraine is considering taking extraordinary measures to limit gas consumption
for March 3-4, Kobolev said.

Recall, Naftogaz has won a multibillion dollar court
battle on March 1 with Gazprom gaining net USD 2.56 bln. In particular, in the
Stockholm court ruled in December that Naftogaz owes Gazprom USD 2.02 bln
(plus fees) in litigation on a gas supply contract, while in February the court
ruled that Gazprom owes Naftogaz USD 4.67 bln
in litigation on a gas transit contract.

Alexander Paraschiy: So far, we
expect these two parties will be able to find common ground for Naftogaz to
recover direct gas deliveries from Russia, which Ukraine stopped in November
2015. As sad as it might seem, Gazprom’s actions look like petty backlash
against Ukraine for an adverse court ruling that was unrelated.

So far, Ukraine has enough natural gas stockpiles,
with almost 10 bcm, to cover a monthly 5 bcm consumption rate in the coldest
days. The government will be able to stabilize the domestic gas balance as soon
as severe frosts wane after this weekend. Therefore, we expect no negative
consequences for Ukraine from Gazprom’s latest bullying attempt.