Russian gas supplies via Ukraine to pick up as delivery talks complete: source

London — Russian gas supplies via Ukraine are expected to pick up in the coming weeks as state-controlled Gazprom finalizes renegotiations with its European customers over delivery points for Russian imports, an industry source with knowledge of the matter told S&P Global Platts on Wednesday.

Russian gas deliveries via Ukraine fell sharply in January despite a new gas transit agreement coming into force on January 1.

Transit volumes averaged just 65 million cu m/d last month, according to data from S&P Global Platts Analytics, despite Gazprom having agreed ship-or-pay volumes of 178 million cu m/d for 2020.

The source said the reason for the fall was that Gazprom had agreed with a number of its European customers new terms for delivery of Russian gas in anticipation of potential disruption to flows via Ukraine ahead of the expiry of the 2009 gas agreement with Naftogaz.

The majority of Russian gas flows into Europe via Ukraine pass through the Velke Kapusany interconnection point on the border between Ukraine and Slovakia.

"Deals were renegotiated with clients to change the delivery point away from Velke Kapusany to other points," the source said, adding that the lower flows via Ukraine was the "aftershock" of the possible transit crisis.

"All these contracts need to be renegotiated to return the delivery point to Velke Kapusany," the source said.

Now, the source said, most of the renegotiations are almost complete, signaling a return to higher flows via Ukraine.

Nominations for Russian flows via Velke Kapusany were up at 103 million cu m/d for Wednesday, according to Platts Analytics.

Gazprom could not be reached for immediate comment Wednesday.

Russian re-routing

Under long-term Russian gas supply contracts, the delivery point is part of the framework of the agreement.

However, contracts can be amended to change the point of delivery, which was the case during 2019 as Gazprom prepared for the eventuality of having to supply gas to its European customers via different routes.

These could include bringing gas south from the Nord Stream pipeline via OPAL and the newly commissioned EUGAL into central and eastern Europe, or from the Yamal-Europe corridor.

The source said the motivation for renegotiating the contracts was to "minimize the risk" of disruption to Russian gas supplies to Europe in the event of a "no deal" between Gazprom and Naftogaz.

Russian gas flows via Ukraine will step up, the source said. The only caveat, however, is the fact that European gas demand is particularly weak at present due to mild winter temperatures across the continent.

Storage behavior

Analysts have speculated that Gazprom has been meeting its supply obligations in Europe from its storage sites and booked storage in third-party facilities across the continent.

Gazprom planned to have injected at least 11.4 Bcm into gas storage facilities within Europe by the end of 2019, double the level of stocks it held at end-2018, to mitigate any risk from disruption to supplies via Ukraine.

The source said Gazprom was not using its stored gas, however, with volumes stockpiled in 2019 "untouched."

The source said Gazprom could retain its gas in storage across Europe for as long as it liked, with no obligation to withdraw.

With gas prices at the European hubs currently under Eur10/MWh -- and forecast to go even lower in the summer -- Russian contracted gas buyers, some with elements of oil indexation, are likely to have down-nominated their purchases in January to minimum take-or-pay levels.

This would also explain the big drop in Russian gas deliveries to Europe in 2020 so far.

Under the new transit deal with Naftogaz, Gazprom has to pay for any volumes not shipped under the "ship-or-pay" provision in the contract.

Serhiy Makohon, the head of Ukraine's new gas grid operator GTSOU, said Gazprom had paid for more than double the transit that it actually used in January.

Gazprom paid $175 million for transit in January and has pre-paid $164 million for transit in the shorter month of February.

Assuming a daily transit cost of $5.65 million, Gazprom is likely to have to pay $2.06 billion over the course of 2020.