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European Gas Prices Fall as Ukraine, Russia Deal Averts Crisis

Dina Khrennikova, Daryna Krasnolutska and Mathew Carr
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European Gas Prices Fall as Ukraine, Russia Deal Averts Crisis

(Bloomberg) -- European gas and power prices extended declines after a last-gasp accord between Russia and Ukraine on natural gas flows averted a winter supply crisis.

The two former Soviet allies late on Monday signed all agreements needed for flows to Gazprom PJSC’s main markets in the west to continue for the next five years. Steady shipments from Europe’s dominant supplier, coupled with record amounts of liquefied natural gas this year, mean that a glut of the fuel won’t end anytime soon.

“There’s no more transit risk,” said Thierry Bros, an associate at Harvard University’s Davis Center for Russian & Eurasian Studies. “We are in a world with a lot of LNG and piped gas and the Russians want to keep their market share in Europe.”

Benchmark Dutch gas prices dropped 0.7%, taking their record annual plunge to 44%. German power traded at its lowest level since May 2018.

Natural gas flows are a key feature in the fraught relationship between Russia and Ukraine and getting a final deal done before the end of the year will appease energy traders across Europe. Supplies to the region have been cut twice during in the past 13 years at times of peak demand because of financial and political disputes between the two neighboring countries.

“After five days of non-stop bilateral talks in Vienna, final decisions have been taken and final agreements reached,” Gazprom Chief Executive Officer Alexey Miller said in an emailed statement, adding that the package of agreements ensures that Russia ships gas via Ukraine beyond Dec. 31. The current transit deal expires on Jan. 1.

QuickTake: How Russia and Ukraine Averted a European Gas Crisis

Despite tense political relations, Ukraine remains the main export route for Russia’s gas to Europe. The nation will earn at least $7 billion from the transit deal in the next five years, Ukrainian President Volodymyr Zelenskiy said in a statement.

The deal is a “good and important signal” for European supply security, German Chancellor Angela Merkel said on Tuesday.

For the European Union, which is targeting an unprecedented shift to a green economy, the accord means uninterrupted flows of a fuel that is less polluting than other fossil fuels such as coal or oil, European Commission Vice President Maros Sefcovic said in an interview.

“Gas is considered as a very important transitional fuel. For the coming years it will play a very important role in our strive to be a carbon-neutral economy by the mid-century,” he said.

Russia has been the EU’s biggest, and often cheapest, energy supplier with Gazprom providing about 37% of region’s fuel last year.

Gazprom is seeking to reduce its reliance on Ukraine’s Soviet-era pipeline network to ship its gas and is building the Nord Stream 2 pipeline under the Baltic Sea directly to Germany. Work on that link, which had been planned to be completed this year, halted this month because of U.S. sanctions on the company laying it.

Eastern European nations have been strongly opposed to Nord Stream 2 as it could allow Gazprom to cut off their supply while continuing to supply its main markets in western Europe.

“The imposition of the U.S. sanctions related to Nord Stream 2 project” facilitated the negotiations, said Andriy Kobolyev, the chief executive officer of Ukrainian national gas company Naftogaz JSC.

The agreement built on the framework deal reached earlier in December with the help of European Union officials. The two nations have met all the pre-conditions outlined in that accord, including mutual legal issues, they said.

“The Ukrainian gas transportation system will be filled and that means energy security and welfare” for our citizens, Zelenskiy said.

However, Naftogaz is not dropping its claims against Russia regarding its assets seized in the Crimea Peninsula annexed in 2014, the Ukrainian company said.

The first bilateral talks between Zelenskiy and Russia’s Vladimir Putin earlier this month added impetus to get the deals done. The leaders met during the so-called Normandy peace talks with France and Germany about the military conflict in eastern Ukraine. That meeting also accelerated the process of a prisoner exchange between Ukraine and two breakaway regions supported by the Kremlin.

The Russian gas producer has paid Ukraine’s gas company Naftogaz $2.9 billion, as awarded by a Stockholm arbitration court in 2018. In return, Naftogaz withdrew its $12.2 billion legal claim relating to transit. At the same time, the Ukrainian government approved an “amicable agreement” with Gazprom on canceling an antitrust claim that has reached about $7.2 billion.

Legal Claims

Both companies have agreed not to start any new gas lawsuits against each other related to the current contract and to cancel all their current legal claims not subject to court rulings.

Ukraine will reserve a pipeline capacity of 65 billion cubic meters for Russian gas next year and 40 billion cubic meters a year in 2021-2024, according to the protocol. These are the minimum volumes, while the actual transit can be higher, Russia’s Energy Minister Alexander Novak said in an interview with RBC. There is also a “pump or pay” clause that ensures Ukrainian income, Naftogaz Chief Commercial Officer Yuriy Vitrenko said.

Last year Gazprom sent 87 billion cubic meters via Ukraine, just shy of all the annual demand in Germany, Europe’s biggest user of the fuel.

The companies also agreed to consider transit through 2034. An extension may be on the same terms as the five-year deal, according to Ukraine’s Energy Ministry.

The package of the gas agreements does not include a deal on direct Russian gas supplies to Ukraine.

“Naftogaz noted Gazprom’s interest in resuming gas supply to Ukraine” based on prices at the NetConnect Germany gas hub, the Ukrainian company said, confirming an earlier statement from the Russian producer.

--With assistance from Olga Tanas, Vanessa Dezem, Ewa Krukowska and Volodymyr Verbyany.

To contact the reporters on this story: Dina Khrennikova in Moscow at dkhrennikova@bloomberg.net;Daryna Krasnolutska in Kyiv at dkrasnolutsk@bloomberg.net;Mathew Carr in London at m.carr@bloomberg.net

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Lars Paulsson, John Deane

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