Russia and Ukraine have signed deals to secure gas supplies to Ukraine until the end of March at prices below $385 per 1,000 cubic meters, ending months of talks, the European Commission said early Friday.
The price for new supplies is to be calculated according to the formula in the two countries' current contract with a $100 discount applied until end-March.
This will bring the price down to about $378/1,000 cu m until the end of the year, Russian energy minister Alexander Novak said after the signing in Brussels late Thursday.
Novak said the $100 reduction was from a discount on Russian export duties and that the Russian government would confirm this in a decree in the coming days.
Ukrainian energy minister Yuriy Prodan said after the signing that the price for the first quarter of 2015 under this deal would be $365/1,000 cu m.
Novak dismissed reports of a summer price agreement of $325/1,000 cu m, saying this had not been discussed. "The summer price will depend on the formula in the existing contract," he said.
Novak and Prodan confirmed the general conditions for supplying new gas and starting to pay off Ukraine's gas debt by signing a protocol with EU energy commissioner Guenther Oettinger, who has been moderating the talks.
At the same time the CEOs of Russian gas company Gazprom and Ukrainian gas company Naftogaz signed an addendum to their current supply contract specifying the technical details.
UKRAINE TO PAY BACK $3.1 BILLION
As part of the deal Ukraine has committed to pay off $3.1 billion of its gas debt to Russia by the end of the year, starting with $1.45 billion by the end of November and another $1.65 billion by the end of the year, the EC said.
These amounts are based on a preliminary price of $268.5/1,000 cu m, the EC said.
This is the price Ukraine was paying for first quarter 2014 deliveries, before Russia canceled discounts and the price rose to around $485/1,000 cu m from April 1.
Novak said that Ukraine's total gas debt under the terms of the current contract is $5.3 billion.
Ukraine is disputing this along with the second quarter price rise, and both sides have lodged counter-claims at Stockholm's arbitration court.
Ukraine foresees buying up to 4 billion cubic meters before the end of the year under the agreement, at a cost of some $1.5 billion, with no take-or-pay obligations, the EC said.
Russia stopped supplying Ukraine with gas in mid-June, as the gas price and debt dispute escalated into a stand-off. Ukraine's government has estimated it needs an extra 5 Bcm to see it through the winter.
Supplies would restart as soon as Ukraine makes the first debt repayment and transfers the pre-payment for new volumes, Prodan said.
EU leaders wanted the dispute resolved as they were worried it might disrupt Russian gas flows through Ukraine to the EU this winter, as has happened in previous disputes.
Russia supplies around 30% of the EU's gas, around half of which is transited through Ukraine.
GAS PRICE HIGHER THAN IN WEST
Prodan said the agreed prices until March were close to market prices.
A price of $378/1,000 cu m at Thursday's exchange rate would be equivalent to around Eur28.3/MWh, while $365/1,000 cu m would be equivalent to Eur27.3/MWh.
These are higher than Thursday's mid-points for the front-month November and front-quarter Q1 2015 contracts on the German NetConnect gas hub, assessed by Platts at Eur22.8/MWh and Eur23.95/MWh, respectively.
Western European spot gas prices have fallen, however, since the Ukrainians and Russians started negotiating prices earlier this year, softened by ample supply and low demand.
The average 2013 price at the Dutch TTF gas hub, for example, was around Eur27/MWh. This would be around $379/1,000 cu m based on the average exchange rate for 2013.
Ukraine has been buying as much as it can from western European suppliers this year, but there is not enough physical interconnection capacity available to replace all the missing Russian gas volumes.
NO DIRECT EU PAYMENT GUARANTEE
Oettinger said after the signing that the EU had not directly guaranteed Ukraine's payments for its gas debt or future gas supplies.
He said Ukraine had $3.1 billion of International Monetary Fund aid in a special account that would be used to pay off part of the gas debt.
Naftogaz had its own income to help pay for the new supplies, while Ukraine could also use aid received under the EU's general financial assistance program, for example, Oettinger said.
"Unprecedented levels of EU aid will be disbursed in a timely manner, and the IMF has reassured Ukraine that it can use all financial means at its disposal to pay for gas," the EC said.
The EU and IMF were discussing further financial aid programs for Ukraine, and such money could also be used to pay for gas, the EC said.
