More on Ukraine’s gas transit tariff issue

Samples of European transit tariffs - From zn.uaYulia Tymoshenko has fallen ill, reportedly with a temperature of around 101 degrees, and has canceled her Moscow meeting with Russian PM Viktor Zubov. (NSDC secretary Raisa Bohatyrynova will be going instead.) This likely suits Ukrainian president Viktor Yushchenko well, as he was miffed that her visit would directly proceed his own trip, scheduled for February 12th. Instead, Tymoshenko will likely travel to Moscow a week or two following Yushchenko’s visit. Gas issues are still expected to be a major topic of conversation for both leaders, who could use these next couple weeks to work out a common stance to present Russia.

Topping the list of differences between president and prime minister is the idea of increasing the transit cost charged to Gazrpom for natural gas traveling through Ukraine to Europe. Tymoshenko, and her loyal head at Naftogaz Oleg Dubina, have suggested raising the rate to $9.32 per thousand cubic meters (mcm) per 100 km, which is a steep increase from the current $1.70 charged.

Yushchenko has said that such an increase would be foolhardy and lead to a corresponding jump in the cost of gas charged to Ukraine. He called for the subject to “not even be discussed,” in a reference to the growing movement — stoked by Tymoshenko — for the price jump.

“While we are tied to Turkmen gas, the Ukrainian [gas] transit politics is special. Because the transit of 55 billion cubic meters (bcm) of gas from Turkmenistan to Ukraine along the distance of 2,500 km, that’s roughly the same cost of transit that Ukraine has for 127 bcm of Russian gas along the distance of 1,100 km of Ukrainian territory.”

He is worried that boosting the charge to Gazprom will in turn raise the transit price for Central Asian gas flowing through Russian territory to Ukraine — a cost that will get passed down to Ukrainian consumers.

Alla Yeremenko at Mirror Weekly draws issue with this characterization (the rest of the article is well worth a read, as well):

Nevertheless, Gazprom didn’t forget about its well known arguments. They say that if Ukraine increases the transit tariff on Russian gas, then they will increase the transit tariff on Asian gas and the price of their gas supplied to Ukraine.

It is hard to understand why V. Yushchenko still believes that Turkmenistan or other Asian gas is supplied to Ukraine. It has always been advantageous for Gazprom to intimidate Ukraine by saying that if we increase the transit tariff on Russian gas, then Gazprom will answer by increasing the transit tariff on Asian gas supplied to Ukraine. But there is no Asian gas in Ukraine! Even when Ukraine had direct contracts with Turkmenistan, gas was supplied according to a so-called substitution plan. There is no need for additional gas transportation for thousands of kilometers. Ukraine is buying gas at the Ukrainian-Russian border. Thus, the blackmail of a likewise increase in the transit tariff from the Russian side is a myth.

I have a post in the works relating to the Central Asian vs. Russian gas issue that I hope to have up by tomorrow. In the meantime, this serves as another example or how the system is rife with terms and agreements that say one thing but are understood to be another. Nonetheless, as long as Ukraine is saving money by buying “Central Asian” gas, it can’t pull out this argument as a defense for increases in tariff levels.

If Ukraine can’t break back into direct gas purchases from Central Asian producers, as Dubina has been attempting to do with Uzbekistan, than Ukraine may decide to drop the charade an agree to Russian prices. Last year, Gazprom apparently sold Russian gas to Ukraine for $230 per mcm, while this year Ukraine (that is, RUE at the border of Ukraine) is being charged $315 per mcm for “Russian” (vs. Central Asian) gas. The latest from Gazprom suggests that the removal of a middleman will result in the “European” price of $350 per mcm, significantly higher than the $179.50 currently charged to Ukraine.

Meanwhile, in response to the calls for a transit tariff of $9.32, Gazprom has bluntly stated that by around 2013, Russia will have the ability to drop transit levels through Ukraine by 75%, from 110 to 27 billion cubic meters per year.

This assertion is enabled by Gazprom’s growing confidence in the South Stream pipeline project, following agreements with Italy, Bulgaria, and just yesterday, Serbia. The combination of 30 bcm from South Stream with the 27 bcm from the initial pipe of Nordstream represents about half of the 110 bcm capacity of Ukraine’s transit system. Adding in a second Yamal-Europe pipe at around 33 bcm–a project that had been shelved due to progress with Nordstream–would account for the remaining difference cited by Gazprom. (A second 27 bcm line in Norstream would accomplish much the same goal, but more expensively.)

As LEvko notes, Gazprom’s production numbers are not rising fast enough to compensate for its proposed increases in export capabilities. This could potentially leave Ukraine’s pipes at well below capacity, particularly if Naftogaz decides to boost its transit tariff far above that charged by competing routes.

Following a large response from political and media outlets surrounding the $9.32 figure, Yuriy Vitrenko, a key analyst who contributed to its formation, wrote an extensive article (in English) explaining its origin including the formula used to derive it:

Transit tariff = (corrected fixed expenses + depreciation + capital value + transit rent + fuel gas costs) / (transit volume x average transit distance / 100)

where depreciation = value of GTS [gas transportation system] / depreciation term;

capital value = (value of GTS + value of land) x weighted average capital value rate.

In response to a major criticism of the figure–that it is leaps and bounds above European rates–the author stresses a difference in the capital value of Ukraine’s gas transportation system (GTS):

Capital value is derived by multiplying the sum of the average (past and current) GTS value and land value by the required weighted capital profitability before taxation.

The only principle of defining the transit tariffs used in Europe is to cover all feasible costs, first of all capital costs, of a certain operator providing transit.

It is obvious that according to these European principals, the Ukrainian gas transit rate should be much higher than European ones since in Ukraine one of the key factors – the capital value rate – is much higher than in Europe.

That is, the value of Ukraine’s GTS and the land it runs on is figured to be significantly higher than other European pipelines, accounting for high price.

The article contains a chart (only in Russian) showing a sampling of various European prices (with information coming from the ERGEG Gas Tariffs Report [.pdf] of July 2007) showing that the $9.32 price is in fact within the bounds of other tariffs charged.

European tariff rates - from zn.ua

Despite a range of profiles used in the analysis (it is unclear which profile the Mirror Weekly article used, since the numbers listed don’t exactly match up), none of them approach the scope and size (i.e. capacity, load volumes and distance) of Ukraine’s transmission system. The high-volume nature of the system makes comparisons to the smaller-scale European networks less analogous. Also, the report itself warns against using its findings too broadly:

The number of TSO’s [transmission system operator] which have been included in the comparison is limited (only 6). This means, for example, that the comparisons in this report with respect to the European average are only of limited value. The relative position of TSO’s may change when more TSO’s are included in the comparison. (p. 44)

A 2006 report by the Energy Charter lists some tariffs that can be used for further comparison, illustrating why the $9.32 price drew such surprise from analysts:

  • Belarus – 0.75 $/1000m3/100 km for Ukrainian transit
    0.46 $/1000m3 /100 km on the Yamal line transit
  • Bulgaria – 1.66 $/1000m3/100 km
  • Czech Republic – 2.9 $/1000m3/100 km
  • Poland – 2.74 $/1000m3/100 km in 2004 (falling to 1.00 by 2016)
  • Russia – 0.71 $/ 1000m3/100 km
  • Ukraine – 1.09 $/1000m3/100 km [this is the 2006 figure, raised to $1.60 in 2007 and currently set at $1.70]
  • Interconnector2.12 $/1000m3/100 km

Granted, these are only the tariffs listed for the distance-based commodity charge pipelines, as opposed the distance-based capacity charges typically applied within Western Europe transmission systems (listed between €0.18 and €0.74 /m3/hr/km/a). However, the report roughly converts the two systems into comparable terms and displays them in the following chart (from p. 65, click for larger version):

Comparison of European transit tariffs - from encharter.org, Gas Transit Tariffs in Selected ECT Countries (2006)

This is using the $1.09 figure for Ukraine. Adjusting it for an increase to last years figure ($1.60) boosts Ukraine’s tariff to 41 (i.e. just below Bulgaria) according to Simon Pirani in his Oxford Institute for Energy Studies June 2007 report, Ukraine’s Gas Sector (.pdf). Adding an additional $0.10 for this year would presumably further raise it slightly, but not significantly.

I’ve been working on parsing these various documents, but lack some of the technical experience to fully grasp their message. At this point, though, it’s still difficult for me to accept that Ukraine would be justified in charging $9.32 for a transit tariff. If anyone would like to disagree with me, though, please feel free to add your own comments and interpretations.

More later.

4 responses to “More on Ukraine’s gas transit tariff issue

  1. it’s not hard to understand why Yush said what he did about the transit rates for Ukranian gas central asia. The fiction is what counts and not the reality. From whichever of their myriad of resources Gazprom chose to actually supply Ukraine is irrelevant. The agreed price however is based on this formula (part Central Asia/part Russian)however fictitious it is in terms of actualy supply. In other words if Ukriaine ups the transit price, Gazprom ups Ukraine’s Gas price. Surely!

  2. Of course, Gazprom can dismiss with the fiction as it suits them more readily than Ukraine — as in, citing recent drops in Central Asian gas making it necessary to sell RUE much more expensive Russian gas, even if it’s still the same gas that Ukraine would have gotten before. Just push the problem farther down the supply chain…

  3. Hi – I just discovered your blog.

    About Yamal II — Medvedev this week pretty much put the nail in the coffin. But I still think it’s amazing that the Poles are offering a cut rate deal but Gazprom wants to pay a lot more for Nordstream, a project opposed by nearly every territory it transgresses.

    http://leopolis.blogspot.com/2008/01/jamal-extension-pipe.html

  4. Pingback: Kremlin, Inc » Russia cuts down talk of gas re-negotiations with Ukraine

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