GAZPROM WON'T HALT
Russian natural-gas giant OAO Gazprom won't stop pumping gas to its European customers even if Ukraine doesn't pay its arrears—-expected to reach $3.5 billion next month—but it can't guarantee those supplies will reach its intended customers, the company's Deputy Chief Executive Alexander Medvedev said Friday.
Russian state-controlled Gazprom supplies about 30% of Europe's gas needs, around half of which travels through pipes that cross Ukraine. Any disruption to those flows could have a significant impact on European customers, including utilities in Italy and Germany, and push up prices across the region. But Russia also depends on the revenues from its energy exports which account for around 50% of federal income.
Russia has cut off supplies to Ukraine twice in recent years, in 2006 and 2009, in both cases citing pricing disputes. The 2009 shut-off sent prices rising across Europe and triggered some gas shortages in Eastern Europe.
Mr. Medvedev, who was in London following meetings this week in Paris and Berlin with the chief executives of French utility giant GDF Suez SA and Germany's Wintershall Holding mbH, said that Gazprom intended to carry on supplying gas in accordance with its contracts. Wintershall is the oil and gas subsidiary of Germany's BASF SE.
"We have no other interest other than fulfilling our commitments. We are heavily dependent on revenues from Europe. It then becomes a question of whether Ukraine will comply with the transit contract and deliver the gas to the border of Ukraine or would they steal gas from the export pipe?" he said.
Under the terms of the contract Gazprom has with Ukraine's state-owned energy firm Naftogaz, nonpayment of arrears in May, which will rise to $3.5 billion from $2.2 billion currently, would trigger a move to Gazprom demanding prepayment for future gas supplies. If Ukraine then doesn't pay in advance for its next month's gas supply, Gazprom will cut supply for Ukraine, Mr. Medvedev said.
In addition to the nonpayment for gas that has already been delivered, Gazprom has billed Kiev $11.4 billion for gas it contracted to buy last year, but didn't take. This comes on top of $7.1 billion billed for gas Ukraine didn't take in 2012.
Mr. Medvedev said that the situation over gas arrears is already creating worries for Europe's gas supplies. Ukraine should be starting to fill up underground gas storage facilities in the west of the country now in preparation for shipment to Gazprom's European customers later in the year.
"The deficit in storage could create a severe problem next winter," he said.
Mr. Medvedev estimated that Naftogaz would have to pay a further $4 billion to $5 billion for gas over the next few months. The majority of that will be to pay for gas that will go into storage and a small amount for Ukraine's domestic demand.
The payment of arrears for gas already delivered should be top of the agenda at a possible upcoming meeting between Russia, Ukraine the European Union and representatives of the companies involved to hammer out a solution, Mr. Medvedev said.
The current row between Gazprom and Ukraine over unpaid gas bills comes as tensions have mounted between Ukraine and Russia with officials in Kiev saying they will move ahead with operations in the nation's east to counter pro-Russia separatists. President Barack Obama on Friday consulted with key European leaders about the crisis, signaling that additional sanctions against Russia for its annexation of Crimea are imminent.
Mr. Medvedev said that further sanctions, including reports of potential penalties against Russia's third largest bank Gazprombank which has links to Gazprom, wouldn't be helpful for either side.
"We're mutually dependent. If someone thinks to cut the revenue stream to Gazprom what is the logic? We will deliver the gas without paying? I don't understand—its an absurd situation," said Mr. Medvedev.
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