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Moscow Hosts Summit as Gazprom Warns Ukraine on Gas Cut

Gazprom Neft_1

A two-day meeting designed to improve global energy security starts in Moscow today just as Russia threatens to halt natural gas shipments to Ukraine, risking disruption to European supplies.

At least 18 ministers from countries including Saudi Arabia, Iraq and Turkey will attend the International Energy Forum’s conference, where Europe will also be represented. They meet days after an ultimatum to Ukraine raised questions about Russia’s reliability as a supplier.

OAO Gazprom (OGZD), Russia’s state-run gas exporter, threatened this week to cut off supplies in June unless Kiev starts making payments on $2.2 billion in unpaid debt for Russian shipments. Ukraine is a key transit route for EU gas, with about 15 percent of the region’s fuel passing through the country’s pipelines. Russia’s aggressive stance has sent oil prices sharply higher amid calls from European politicians to develop more diversified energy sources.

“European leaders are clearly concerned by Russia’s willingness to use gas supplies as a political lever,” said Richard Mallinson, an analyst at Energy Aspects Ltd. in London.

Even before Russia’s threatened action, energy ministers from the Group of Seven nations said earlier this month they would try to diversify energy supplies in response to Ukraine. Yet such measures are seen as a last resort because the cost of bringing in supplies from around the globe could potentially double the price of natural gas in Europe.

Energy Outflows

“Russia is far too big for anybody else to make up for a significant loss of Russian energy outflows,” David Wech, managing director of JBC Energy GmbH in Vienna, said in an e-mail.

While the most obvious impact of the Ukraine crisis on energy security has been in the gas market, concern the situation will escalate into a outright conflict between Russia and its neighbor has added $3 to $5 a barrel to the price of oil, said Mike Wittner, the head of oil market research at Societe Generale SA.

Benchmark Brent crude oil traded at $109.88 a barrel yesterday, 7 percent higher than the start of the year.

Gazprom is demanding $1.7 billion in prepayment for June supplies, which it says was triggered by $3.5 billion in overdue payments for fuel delivered in 2013 and through April. Ukraine’s state oil and gas company NAK Naftogaz Ukrainy doesn’t recognize the full debt.

Russia says it’s justified in threatening to stop Ukrainian shipments because lack of payment breaches the terms of Gazprom’s supply contract.

“Russia has always fulfilled its commitments for energy deliveries,” Russian Energy Minister Alexander Novak said yesterday. “We are ready to provide security of supply as a reliable partner. We have always showed that and are ready to continue to work like that.”

Avoiding Moscow

The Riyadh-based IEF has 75 member countries that account for 90 percent of global supply and demand for oil and gas. It brings together members of the International Energy Agency, which represents industrialized countries, the Organization of Petroleum Exporting Countries and major economies outside those groups including Russia and China.

While European energy ministers have chosen to avoid traveling to Moscow, the IEA’s executive director, former Dutch economy minister Maria Van Der Hoeven, will represent their interests. EU energy ministers, meanwhile, are holding a separate meeting of their own in Athens this week.

Officials at the IEF including Secretary-General Aldo Flores-Quiroga didn’t return calls seeking comment on prospects for this week’s meeting, scheduled before relations between Ukraine and Russia started to deteriorate.

Private Discussions

While the fallout from Ukraine is likely to dominate private discussions, the public agenda of this week’s IEF meeting will address broader themes including the impact of shale fields on global energy markets, how to move to a low-carbon economy and the outlook for demand.

The IEF also will introduce JODI Gas, or the Joint Organizations Data Initiative, a project intended to help bring transparency to the international gas market.

The data project, which is supervised by the IEF and compiles data provided by member governments, is important because it helps the market become more predictable in the face of unexpected outages, Mallinson said.

(Source: Bloomberg)