Statement by Gazprom on Ukraine’s gas payment difficulties

Moscow, May 26, 2009 

Following a working meeting with Naftogaz Ukrainy CEO Oleg Dubina on the payment for Russian gas deliveries in Moscow yesterday, Alexei Miller, Gazprom Gazprom Management Committee Chairman, said the following:

“We consider the payment situation for Russian gas supplies to Ukraine in May as very, very serious. If there is a disruption with Ukraine’s payments, Gazprom has the legal right to switch to a 100% prepayment scheme.” 

Sergei Kupriyanov, Gazprom spokesperson, added: “The key issue at this moment is the timely and full payment for Russian gas, including the gas that Ukraine needs to replenish its underground storages. The information presented to Gazprom during the meeting showed the dire financial state of the Ukrainian company and once again confirmed that the questions arising with regard to Ukraine’s ability to pay for supplied Russian gas are well-founded. Naftogaz Ukrainy is finding it enormously difficult to pay its bill for May.

It should not be forgotten that Gazprom is a commercial company working with Naftogaz Ukrainy on the basis of commercial agreements and therefore has every reason to act in accordance with these agreements. This means if the Ukrainians are unable to pay for the supplied gas, Gazprom may automatically implement a 100% advance payment requirement in the future. 

The Gazprom Group fully understands the importance of this problem for Europe’s energy security and is already showing maximum goodwill by doing everything it can to prevent another crisis . This year Gazprom already allowed Ukraine to receive payment for transit in advance, and decided not to impose penalties on Naftogaz for violating the terms of the agreement from January-April with regard to the minimum volume of gas purchased.

For this reason, not only Gazprom, but also its European partner companies must take a keen interest in preventing financial difficulties of the Ukrainian company. This is a concern for Russia as well as the EU and its member states, since the reliability of gas supply from Russia and Europe’s energy security are at stake. 

In this situation we are hoping that the EU bodies will assume some responsibility for the situation rather than sidestep the possible difficulties as it did during the transit crisis that arose in Ukraine in early January 2009. We need to actively search for ways to work together to solve this problem.

This latest critical situation with Ukraine confirms once again the urgency of diversifying gas transit routes. The construction of new gas pipelines (Nord Stream, South Stream) will significantly reduce transit risks while reinforcing Russia as a reliable supplier in the interests of all parties—suppliers, customers and end consumers. The EU must act decisively to facilitate the completion of these projects.”

Background: 

Naftogaz Ukrainy was only able to pay one-third of the amount it owes for the month of April. In order to allow the Ukrainian company to pay the entire price of the supplied gas, the Gazprom Group made an additional advance payment for the transit of gas through Ukraine which covered Naftogaz’s bill for the month of April. Taking into account the advance payment made in January in the amount of $1.7 billion, Gazprom has now paid for the transit of gas through Ukraine in 2009 in full. The limit on this year’s advance payments has been exhausted.

What makes the situation more difficult now is that from January-April the Ukrainian company sold significantly more gas to domestic consumers than it had bought from Gazprom by drawing gas from its underground storages. Due to the seasonal peculiarities of the market, gas consumption will fall this summer, and payments to the supplier—Naftogaz Ukrainy—will fall along with them. Naftogaz will see its income falling while its expenses will be rising. 

In addition to the current supply Naftogaz will have to buy and pump about 19 bcm of gas into the storages in order to prepare for the winter. This gas will not only be for domestic consumption within Ukraine but also for the fulfilment of the Ukrainian company’s obligations to transport Russian gas to Europe.

Ukraine’s underground gas storages were nearly emptied in early January, when Ukraine was drawing a minimal amount of (at that time) more expensive Russian gas. Replenishing the storages is a key concern both for domestic consumption this coming winter and in guaranteeing gas transit to Europe. 

Taking into account Ukraine’s near-monopoly position in the transit of natural gas from Russia to Europe, the repercussions of Naftogaz’s financial problems are clearly not limited only to Naftogaz and its shareholder—the Ukrainian state but Europe as a whole.