Update on gas deal between Gazprom and Ukraine

I have a more in depth and technical post in the works, but I wanted to write a few comments on the recent gas deal between Gazprom and Ukraine now that a few more details have trickled out.

It appears now that the announcement of Gazprom of the (originally) $1.3 billion owed by Ukraine was indeed tied to the political transition surrounding Ukraine’s parliamentary elections. However, it was not meant as a “punishment” for the rising Yulia Tymoshenko, as has often been interpreted. Instead, the announcement of the debt — which Gazprom was considerate enough to wait until after the election to give — was in response to numerous comments made by Tymoshenko threatening the removal of the well-connected RosUkrEnergo (RUE) intermediary.

Ukraine has about $5 billion worth of gas in storage, according to Fuel and Energy Minister Yurii Boyko, and of that, $1.3 million had not been paid for yet. RUE is in charge of importing the gas from Gazprom and Central Asian states, so in theory, that debt is RUE’s, although in reality, it is passed down through it’s subsidiary UkrGazEnergo and into Naftogaz Ukrainy through those companies’ chains of ownership.

Hearing threats of the removal of RUE, Gazprom worried that the Tymoshenko-led government would take control over the unpaid-for gas currently in storage in Ukraine. By making the loud public announcement of the debt, Gazprom captured the government’s attention and was able to negotiate for the return of control of that gas.

Debts by gas intermediaries and distributors at this time of year are common, as they stockpile gas supplies ahead of the heating season. Typically, Gazprom has been consent to live with these floating IOUs, knowing it will get paid back as customers pay their gas bills over the course of the winter. A global credit squeeze may have inflated that typical debt, but the uncertainty over a shakeup within the gas market tipped the scales in the mind of Gazprom, forcing a response by their part.

The monetary portion of the debt — originally stated as over $900 million — now appears to be only $400 million, which is being covered by an interest-free advance payment by Gazprom to cover gas transportation costs through Ukraine for the fourth quarter. This money, given to Naftogaz, will work its way up the chain (Naftogaz to UGE to RUE to Gazprom) and end up essentially where it started.

The gas portion of the debt — that is, the volumes in storage being “returned” to Gazprom — is made up of two parts. One part, the original 8 billion cubic meters (bcm) announced at the time of the deal, is to be sold essentially “at cost” by Gazprom on the Ukrainian market. This alleviates fears (including those by me) that this gas transfer would leave Ukrainian customers short come the winter season.

The second part of the gas volumes consists of 4 bcm to be bought back by Gazprom at $150 per thousand cubic meters (mcm), and then re-exported to the European market where it is likely to be sold at around $250 per mcm, or more. This should net Gazprom at least $400 million, which is well below the over $2 billion mark bantered about by Russian PM Viktor Zubkov even when including the roughly $400 million repayment coming from Naftogaz via the advanced payment. The $2.2 billion figure given by Zubkov, then, likely stems from the overall “cost” of the total 12 bcm based on a price of $150 per mcm ($1.8 billion) plus the $400 million coming back to Gazprom. However, Gazprom isn’t receiving that money — it’s getting control over the gas instead of money.

Despite wide-ranging assertions, this whole deal has not been an attempt to strengthen Yanukovich’s hand in coalition negotiations (by many accounts, he did little to promote the Ukrainian side of the negotiating table), nor to bankrupt Naftogaz to force it to sell off its export pipeline network (Gazprom could have charged interest on the advance on transit payments if it desired further financial hardships for the Ukrainian company), nor to further entrench RUE in the gas scheme.

Indeed, plenty of people in the negotiating picture seem willing to do without RUE. Yurii Boyko suggested that his ministry would consider any profitable method of gas delivery; Tymoshenko has been very vocal of her desire to be rid of the company; just this Monday, Gazprom chairman Dmitry Medvedev said changes in the structure could be forthcoming and that the Russian company would be willing to do without the maligned intermediary.

Many commentators assume that because Gazprom is a 50% owner in RUE, its existence is at the behest of the Russian gas giant. However, reportedly RUE was established in the manner it was and then entrusted with its current responsibilites at the behest of influential Ukrainian interests — Gazprom apparently would have rather created a 50/50 joint venture with Naftogaz, rather than through a shadowy private Ukrainian businessman.

Historically, the use of middlemen in the Ukrainian gas market has been tied to the leverage Naftogaz holds over Gazprom’s export capabilities, as well as corruption within the industry. With the gradual opening of Ukraine’s economy and business practices –and with a big push by the incoming government — the creation of a transparent joint venture between Russia’s government-controlled Gazprom and Ukraine’s national energy company, Naftogaz, would serve the interests of both countries. That is, provided that neither side resorts to forms of blackmail while they both adhere to the general guidance provided by a fair market.

3 responses to “Update on gas deal between Gazprom and Ukraine

  1. Pingback: Kremlin, Inc » Shell backs out from investing in Ukraine via Regal

  2. Pingback: Kremlin, Inc: Shell backs out from investing in Ukraine via Regal » Royal Dutch Shell plc .com

  3. Pingback: Kremlin, Inc » Financially-strapped Naftogaz misses deadline, but Ukraine’s just-passed budget includes $2.4 billion lifeline

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