17 June 2014, News Wires – The boss of Gazprom has warned of a potential risk to disruption of gas exports to Europe after the Russian gas giant carried out its threat to cut off supplies to Ukraine as lawsuits were issued by both sides after the breakdown of debt payment talks earlier on Monday.
Ukraine’s Energy Minister Yuri Prodan confirmed that supplies to Ukraine “have been reduced to zero”, although he guaranteed reliable gas flows would continue to Russia’s European clients who receive imports through pipelines via Ukraine, according to Reuters.
However, Gazprom executive chairman Alexei Miller warned there was “not an insignificant risk” that gas deliveries to European clients could be disrupted if Ukraine fails to carry out its contractual obligation to ensure uninterrupted flows to the continent.
He also blamed the Kiev government for taking an “unconstructive” stance in the failed talks to agree on a gas price for future supplies, claiming it wanted “an ultra-low price” and “adopted a position that can only be called blackmail”.
Gazprom had demanded that Ukraine state-owned gas utility Naftogaz pay nearly half of an accumulated $4.5 billion debt by an early-morning deadline or risk having its supplies cut off, with the company saying it would now be demanding upfront payments for future supplies.
The Russian gas giant has now filed a lawsuit with Stockholm arbitration court to recover its entire debt while Naftogaz has taken similar action in the same court to reclaim an alleged $6 billion in export overpayments to Gazprom.
A long-term reduction of supply could hit European Union consumers, which get about a third of their gas needs from Russia, around half of it through pipelines that cross Ukraine.
Earlier price disputes led to the ‘gas wars’ in 2006 and 2009, and Russian accusations that Ukraine stole gas destined for the rest of Europe.
EU Energy Commissioner Guenther Oettinger, who brokered the failed talks overnight, said in Vienna the EU might have a problem and urged Russia to reconsider a compromise proposal involving an initial $1 billion payment by Kiev followed by monthly debt repayments.
He said he was confident of gas supplies and also held out the prospect of further talks to solve the row, although this would now appear a more remote prospect given both sides are resorting to litigation.
However, Russian Prime Minister Dmitry Medvedev said talks could start only when Naftogaz had paid its debt in full.
His Ukrainian counterpart Arseny Yatseniuk accused Russia of deliberately blocking a deal to cause Kiev supply problems next winter, when temperatures plunge and heating needs increase.
“But it is not about gas. It is a general Russian plan to destroy Ukraine,” Yatseniuk said. “It is yet another step against the Ukrainian state and against Ukrainian independence.”
Ukraine has almost 14 billion cubic metres of gas in underground storage, enough to meet its needs until December, according to Naftogaz.
Professor Michael Bradshaw of the UK’s Warwick Business School said there was not an immediate threat to European gas supplies as the continent has high storage levels after a mild winter but there could be “a significant effect on gas supplies and prices this winter” if the dispute drags on.
“Everyone is a loser in this stalemate. It is doing Russia reputational damage and the EU is stiffening its resolve to reduce its reliance on Russian gas, but many European companies have contracts into the 2020s with Gazprom,” he said.
“The only way out is for the EU to persuade Ukraine to accept an agreement and be financial guarantors.
“In the longer term Ukraine has to reduce its structural dependence on Russia through domestic reforms, otherwise it will always be vulnerable to political factors,” he added.
The gas talks broke down in Kiev in the early hours of Monday, with the sides unable to reach agreement on price and on changes to a 2009 contract that locked Ukraine into paying the highest price in Europe.
Kiev wants to pay $268.50 per thousand cubic metres of gas but last week agreed to pay $326 for an interim period until a lasting deal was reached.
Moscow had sought to keep the price at the 2009 contract level of $485 but had offered to waive an export duty, bringing down prices by about a fifth to $385, broadly in line with what Russia charges other European states.
Kiev said waiving the duty rather than agreeing a new contract price meant Moscow could use the threat of cancelling the waiver to keep Ukraine under its thumb.
The failure of the talks has further fuelled rising tensions between the two countries after a Ukrainian military plane was shot down at the weekend by pro-Russian separatists in the east of the country with the loss of all 49 onboard.