Trilateral Gas Talks: Positive Comments, Negative Signs

The last round of negotiations between Ukraine and Russia has come to nothing, with European Commissioner Günther Oettinger suggesting once more that an interim gas deal is soon to come. Oettinger said he hopes the two countries will reach an agreement on Wednesday next week. 

According to the draft agreement, Ukraine would buy 4 billion cubic meters of gas from Russia at $385 per 1,000 cubic meters on prepayment conditions. 

“After the analysis conducted by all participants of the negotiations, we have come to a conclusion on what volumes would be delivered to Naftogaz until the end of a year. This is approximately 4 billion cubic meters of gas,” Oettinger said on Tuesday. 

His positive remarks however were reminiscent of his comments back in September when he said that “there is a high probability we will sign a deal by the end of next week.” Needless to say, negotiations in Berlin did not lead anywhere. 

After recalling the negotiations in the German capital and the three-point deal agreed in Milan last week, Oettinger sounded optimistic, but events seem to indicate that reality is more tangled than his enthusiastic political statements.

NEGATIVE SIGN 1: NAFTOGAZ INITIATED ARBITRATION PROCEDURE 

On Tuesday, Naftogaz initiated the arbitration procedure to adjust the company’s gas transit contract with Russia’s Gazprom.  

‘Certain provisions of the 2009 contract are in breach of Ukraine’s legislation adopted after the country joined the Energy Community in 2010. The accession protocol requires Ukraine to implement the provisions of the Third Energy Package by January 1, 2015,’ Naftogaz wrote on Tuesday, referring to the Arbitration Institute of the Stockholm Chamber of Commerce (SCC).

Ukrainian authorities recently reiterated that Kiev is ready to accept “a mutually acceptable solution on the basis of market pricing for gas and its transit.” The transit contract is an important element to take into consideration and the arbitration procedure could endanger a possible deal. 

Ukraine’s Arseniy Yatsenyuk said several times that temporary prices and terms can also be determined by the Stockholm arbitration court. 

The decision taken by Naftogaz on Tuesday is coherent with these comments by Yatsenyuk, who would clearly prefer an interim gas price fixed by the Stockholm arbitration court. This political sentiment clearly foretells another blow to the next round of trilateral negotiations in Brussels next week.

NEGATIVE SIGN 2: LITHUANIAN COMMENTS 

On Tuesday morning, Lithuania’s President Dalia Grybauskaite said that the Baltic country will be able to cope with its energy needs also without Russian gas. 

“Nobody will be able to blackmail or force us to pay the political price,” Grybauskaite said in Vilnius on Tuesday, adding that their new terminal can “fulfil about 90% of the three Baltic states’ gas supply needs.”

In this context, the relevant question is: Why Lithuania would send such a strong message if a peaceful settlement was close? 

NEGATIVE SIGN 3: UKRAINIAN PM SEES ROOM FOR WORST-CASE SCENARIO

Also on Tuesday, Yatsenyuk said that Ukraine has to get ready for the worst-case scenario. 

“Putin does not want to sign any agreement and Putin’s task is to get Ukrainians frozen… We must be prepared for the worst-case scenario,” the Ukrainian PM said from Lviv. 

His words indicated that the political conditions for a deal are not in place, contradicting previous statements by Ukrainian authorities.  

Earlier on Tuesday, Ukraine's President Petro Poroshenko had a phone conversation with the President of Russia, Vladimir Putin.

‘The Ukrainian and Russian leaders emphasized the necessity of ensuring full ceasefire and artillery silence,” the Office of Poroshenko wrote in the afternoon. 

Once more, despite the positive comments, the conciliatory words did not have any positive effect on the trilateral negotiations. 

NEGATIVE SIGN 4: PARAMETERS AGREED ALREADY A MONTH AGO

The Ukrainian government said on Tuesday that it has already reserved a total of $3.1 billion to pay for delivered gas as well as for new supplies. In other words, it said it has the funds to settle the debt. 

According to a tweet by Oettinger on Tuesday morning, the negotiations should have solved two major problems: i. paying off the debt and ii. gas supplies to Ukraine over winter. And there is the rub - if Kiev has the money to pay the debt and it really needs gas supplies, what is the real bone of contention, who is bluffing?

SO WHAT? 

Basically, the parts repeated on Tuesday what they said a month ago. In theory, Ukraine and Russia already agreed on the main parameters in September, and the lack of a deal so far indicates more a lack of political will, rather than a significantly divergent position. In this sense, Yatsenyuk is right. 

“As long as the document is no signed, it is too early to talk about any solution of the gas issue.” 

All this political dance could indeed be just a way to waste time and move closer to winter, when gas prices will clearly change and the consequences of the arm-wrestling will be far more visible, also on financial markets. 

Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci