Amid Ukraine protests, energy sector tilts toward Russia

Ukrainian energy company Naftogaz said it agreed with Russian gas giant Gazprom to defer payments for winter gas supplies until early 2014. With Ukraine embroiled in protests, and Europe making headway on energy diversification strategies, the move signals a tilt by Kiev back to its former Kremlin patrons.

Naftogaz Chief Executive Officer Yevgeny Bakulin said his company agreed with Gazprom to hold off on settling natural gas debts for imports since October in order to cope with "problems and issues" in the region.

Ukraine racked up millions of dollars in debt to Gazprom for natural gas deliveries during the summer. The Naftogaz director said the government's priority at the time was ongoing pro-EU protest in Kiev not its debt to Russia. (Related article: This Week in Energy: Landmark EU-Ukraine Agreement Officially Dead) 

Ukrainian legislators in November suspended efforts to sign free trade and association agreements with the European Union, sparking major protests in Kiev. Ukrainian Prime Minister Mykola Azarov, who survived a no-confidence vote Tuesday, said the agreement with the EU was suspended because of "a significant reduction in trade with the Russian Federation," which he said hurt the Ukrainian economy. 

Azarov said he wanted to continue negotiations with the EU to see what kind of support the European body could offer in negotiating with the International Monetary Fund. Last month, the prime minister said the IMF was too harsh with its terms of financial assistance for cash-strapped Ukraine.

Ukraine is facing a major budget deficit. In October, the IMF warned Ukraine that its energy sector, linked strongly to Russia, was in desperate need of reform. It advised the government to raise gas tariffs for households until it can balance its books.

The Naftogaz deferment means a repeat of a 2009 gas crisis in the EU won't occur this winter. Europe gets about 20 percent of its natural gas needs met by Russia, though most of that gas runs through a Soviet-era transmission network in Ukraine. A Ukrainian deal ending the 2009 row landed then Prime Minister Yulia Tymoshenko in prison on corruption charges. Kiev said her deal left Ukraine with an unbearable gas debt obligation to Russia. Europe, in turn, turned to rival suppliers in the Caspian region to add diversity to an energy sector that counts Ukraine among its weakest links.

Kjetil Tungland, managing director of a consortium managing the Trans-Adriatic natural gas pipeline project, said this week the Greek government ratified an agreement to host its section of the 540-mile pipeline. TAP is part of the so-called Southern Corridor of gas transit options from Azerbaijan. (Related article: Russia Takes Steps to Increase LNG Exports)

"This is a significant step forward in delivering a project that will have notable positive impact on Greece, the region as well as European energy objectives," he said.

A BP-led consortium picked TAP as its conduit for Azeri natural gas earlier this year. That gas corridor will effectively sideline Ukraine from the European energy sector once it goes into service in 2019. European leaders in November said a gas pipeline deal with Slovakia may help Ukraine break away from Russia but Kiev's decision to suspend the association agreement suggests it's bound too tightly to Russia to cut loose. On Wednesday, the European Commission said it approved the acquisition of German and Dutch gas supply and storage joint ventures by Gazprom, which could suggest the EU has washed its hands of Ukraine.  While energy companies like Chevron are gearing up to explore Ukraine's shale natural gas potential, the EU's diversification efforts, as well as Kiev's red-curtain pivot, means Ukraine's energy future may already be decided.

Original article: http://oilprice.com/Geopolitics/Europe/Ukraines-Energy-Sector-Retreats-Behind-Iron-Curtain.html