1. What’s at stake?
Ukraine earns $3 billion a year from carrying Russian gas to Europe and wants to hang onto the business with a new 10-year agreement for 60 billion cubic meters of annual shipments. Last year, Russian giant Gazprom PJSC sent 87 billion cubic meters -- more than 40% of its exports to Western Europe and Turkey -- via the pipeline network run by Ukraine’s Naftogaz JSC. Gazprom is countering with a proposal for a one-year transit contract at a mutually acceptable fee, cessation of ongoing legal battles and for Ukraine to start buying Russian gas again, which it stopped doing in 2015. European officials are mediating the discussions, which are tangled in broader conflict between Russia and Ukraine.
2. Where do things stand between them?
The relationship between the two countries has been fraught since the collapse of the Soviet Union almost three decades ago. They share a land-and-sea border of 2,300 kilometers (1,400 miles). Tensions flared in 2014 when protests in Kyiv led to the ouster of Ukraine’s Kremlin-backed president. Russia’s annexation of the Crimean Peninsula soured the mood further. Under President Vladimir Putin, Russia stoked conflict in breakaway regions of eastern Ukraine. Calling Russia an “aggressor state,” Ukraine wants support from the EU and U.S. to stop the military conflict and regain control over its eastern regions.
3. Why does a new gas deal matter for Europe?
The three-week gas cutoff in 2009 followed another showdown three years earlier and set off a crisis in the west. Worst hit were the Balkans, where authorities had to ration gas use, close factories and cut power. Other countries were forced to curb supply to industrial users. Slovakia even weighed restarting a Soviet-era nuclear plant it had closed in order to join the EU. To guard against a repeat, the EU has prioritized development of liquefied natural gas terminals and ensured that vulnerable states in the east and southeast, such as Bulgaria, have connections to alternative gas sources. Still, Russia continues to be a key supplier as domestic European production declines, accounting for almost 37% of natural gas in Europe. The availability of LNG remains subject to the appetite of other markets, such as Asia.
4. Why is Russia playing tough in negotiations?
The Kremlin recognizes that another gas shutoff would hurt Russia’s credibility as reliable supplier of energy. But it’s willing to take the risk because shipments through Ukraine are no longer as crucial. A new pipeline beneath the Baltic Sea, called Nord Stream 2, is near completion and will permit annual deliveries of as much as 55 billion cubic meters directly to Germany, doubling the capacity of an existing undersea pipe. Other Russian gas flows will go to Turkey -- and potentially on to southeastern Europe -- through the TurkStream line, which is due to open in early 2020. With the two new routes operating at full capacity, Gazprom could have little need for Naftogaz’s facilities. At the same time, Russia is also pivoting gas sales to Asia, with a new pipeline to China set to open.
5. What is Ukraine trying to get?
Gas transport fees account for 3% of Ukraine’s gross domestic product. Naftogaz is hoping to sign a long-term contract with Gazprom before Russia completes Nord Stream 2. It also wants Gazprom to repay a $3 billion debt, as ordered by a court in Stockholm, but says it’s willing to accept gas in lieu of money. To help win Russia’s business, Naftogaz has met European demands to “unbundle” its gas production and transit businesses. Doing so may also attract international companies to help manage the country’s gas storage facilities and 35,000 kilometers of pipelines -- one of the largest such networks in Europe.
6. What happens if there’s no deal?
Europe is prepared for any potential disruption. Gas storage sites are starting the winter season with stockpiles at their highest levels since at least 2010. A global LNG glut has brought record supplies of gas in its liquid form to the region. Together with the new infrastructure now available, a 2009-type crisis seems unlikely. The biggest potential impact is on spot prices, which would jump in the event of a cutoff. Depending on the length of the disruption, gas flows also could be redirected and European demand for LNG could spike.
7. How might this get resolved?
A breakthrough could come at the first-ever meeting between Russian President Vladimir Putin and Ukrainian leader Volodymyr Zelenskiy in Paris the week of Dec. 9. The leaders are set to meet their French and German counterparts within the framework of the “Normandy Format” talks aimed at ending the military conflict in eastern Ukraine. Putin and Zelenskiy spoke by phone in late November ahead of the meeting. While political issues dominated the agenda, the two also discussed gas transit. Their involvement could spur progress in the gas negotiations at the ministerial level.
--With assistance from Volodymyr Verbyany.
To contact the reporters on this story: Dina Khrennikova in Moscow at firstname.lastname@example.org;Anna Shiryaevskaya in London at email@example.com;Daryna Krasnolutska in Kyiv at firstname.lastname@example.org
To contact the editors responsible for this story: James Herron at email@example.com, Andy Reinhardt, Reed Landberg
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