Gazprom steps up gas rhetoric following Ukraine’s steps toward removing intermediaries

Note: Been trying to get this up for a while, but battling computer problems. I’ll be gone for a few days, so will post it relatively unfinished — please forgive typos / undeveloped thoughts.  Also, there’s an extensive article in the Zerkalo Nedely about the issue, including statements from Dubina saying that Naftogaz doesn’t have any gas in storage — presumably, he is suggesting that the gas that is there belongs instead to Ukrgazenergo, or even RUE.

Half of Kommersant’s front page on Friday was filled by the headline “Crime and Punishment” and a menacing photo of Gazprom president Alexei Miller looking down upon the reader — not a good sign for the Ukrainian government in the continuing “gas war.” Gazprom is now threatening to shut off supplies of Russian natural gas to Ukraine on Monday Feb. 11th — a day before President Yushchenko visits Moscow –should Naftogaz not settle a $1.5 billion bill.

There are a few things to unpack about this threat:

  • Gazprom would halt the flow of Russian gas to Ukraine, but allow Central Asian gas to continue into the country.
  • Gazprom spokesman Sergei Kuprianov originally said that Ukraine owes Russia $1.5 billion, but even RosUkrEnergo admitted that Ukraine’s Naftogaz has no direct dealings with the Russian gas giant. Instead, the debt is likely between Naftogaz and Ukrgazenergo, which then owes RosUkrEnergo, which owes Gazprom.
  • $500 million was allegedly piled up since January 1st, due largely to higher concentrations of significantly more expensive Russian gas in the mix supplied to Ukraine. $1 billion is left over from last year. About halfway through January, Ukraine was looking at an overage of about $100 million based on increased precentages of Russian gas. Extrapolating that out to today, however, doesn’t reach the $500 million figure suggested by Gazprom.
  • Gazprom cited the debt as the reason for the threatened shutoff, rather than any actions by the Ukrainian government about changing the gas scheme.
  • Ukrainian PM Yulia Tymoshenko assured the public and Europe that Ukraine held sufficient volumes of gas in storage to cover both domestic consumption and European demand via Ukraine’s transit system in the event of a shut-off.

Russian gas now accounts for roughly a quarter of the supplies coming into Ukraine, an above-average percentage allegedly due to lower volumes of Central Asian gas available because of a regional cold snap (Friday’s high temperature in Ashgabat: 7 C). Exactly how much of the gas “cocktail” (mixed by RosUkrEnergo) should be Russian, however, is a bit difficult to discern. One set of figures suggests 18%. However, this is based on the importation of 75 billion cubic meters (bcm) of gas, which would correspond to Ukraine’s entire consumption (not accounting for about 20 bcm in domestic production). Earlier reports put the total import figure at 62 bcm, while another source says 58 bcm. In either of these cases, likely only a few bcm would come from Russia. The pricing system agreed upon between Russian and Ukraine at the end of last year posits an average purchase price of $140 per thousand cubic meters (mcm) with a retail price at the Ukrainian border of $179.50. Given that Russia is charging $315 per mcm of gas, there is little way for RUE to make a profit relying very much on supplies from Gazprom.

However, it appears that’s what it has been doing, and it passed the price increases down the line to Ukrgazenergo. This would appear to be in violation of the contractual terms — RUE agreed to provide gas at the Russian-Ukrainian border for $179.50, accepting this to be a reasonable price based on predictions. If those predictions don’t pan out, then the trader should be left with the consequences.

RUE may be trying to compensate for the high prices by taking advantage of its re-export quotas and selling some gas to the European market (at about twice the Ukrainian price). According to Korrespondent, RUE has already used up nearly half of its re-export quota for the year:

From this volume [of 58 total bcm], 55 bcm of Central Asian gas should be supplied to consumers in Ukraine. Only after fulfilling the needs of Ukrainian consumers does RosUkrEnergo have the right to export the remaining 3 bcm of gas to the countries of Europe.

Today, RosUkrEnergo has already exported 1.494 bcm — that is, half of the yearly volumes earmarked for export.

Indeed, Ukraine has emphasized that it has not overstepped its own allotment, saying that Ukrainian consumers have bought 4.72 bcm of gas so far this year, below the 4.85 bcm of Central Asian gas that was planned according to the contract. Therefore, Ukraine argues, it should not be charged for “extra” Russian gas since the total volume is still within the “normal” bounds. Instead, it is the trader’s fault for failing to mix the gas in the contractual manner.

RUE appears to be attempting to re-export as much gas as possible, stooping to buying extra quantities of Russian gas, attempting to pass the price on to the Ukrainian side, while making profit off sales of cheaper gas to Europe. RUE may very well recognize that its days are finally numbered, and is undertaking these actions in order to make as much money as quickly as possible, without much regard to the future.

While Ukraine has been making noises of removing RUE and its subsidiary Ukrgasenergo from the gas scheme since Tymoshenko became PM, recent actions in the Ukrainian government appear to have hastened the removal process of the intermediaries.

Last week an all-day session of Ukraine’s National Security and Defense Council — President Yushchenko’s answer to PM Tymoshenko’s Cabinet of Ministers — discussed national energy company Naftogaz Ukrainy and the natural gas trade, including the use of intermediaries between Central Asian producers and Ukrainian consumers. Tymoshenko, who has long been calling for the removal of RosUkrEnergo, announced that the council had reached an agreement on the necessity of the gradual removal of these figures from the gas scheme.

“A decision was taken to move away from the services of the companies RosUkrEnergo … and other intermediaries, which are absolutely ineffective and destructive for Ukraine’s gas transport system, and to move towards direct contracts,” she told a news conference.

Talks on the matter, she said, would “involve the government and will take place gradually in order not to destabilise any of the processes, including the transport of gas across Ukraine’s territory and transit”.

Tymoshenko has apparently begun the process of investigating the legality of the decrees that established Ukrgazenergo as a key player in the gas market. She hopes to replace the trader with Naftogaz, and eventually work her way up to getting rid of RUE as well.

Naftogaz, apparently feeling out the possibility of shifting to direct Central Asian purchases, is planning on holding negotiations with Turkmenistan and Uzbekistan about providing 5 billion cubic meters (bcm). This would roughly correspond to the 5.76 bcm Naftogaz is expecting to sell to Ukrainian consumers on the unregulated market, as stipulated by the the National Committee for Regulation of Energy (NKRE).

While Gazprom essentially has a monopoly on purchasing Central Asian gas (either for re-export or for Russia’s domestic consumption), two players have key connections to the two countries being approached as suppliers.

Ukraine’s Industrial Union of Donbass (IUD) had been importing about 3 bcm of natural gas per year from Uzbekistan, apparently up until last year. This gas was used to power their steel factories, with the refined product often used as barter for the fuel. Vitaly Gaiduk, a key figure in the IUD, is in line to become Tymoshenko’s deputy PM in charge of the energy sphere (though apparently Tymoshenko’s other deputy PM Alexander Turchinov has been consolidating his power within the Cabinet of Ministers and is currently filling that role). Gaiduk is also seen to be a strong supporter of Tymoshenko.

The sale of Turkmen gas, on the other hand, had been coordinated by the trader Itera up until 2004. Since then, Itera was kicked out of the scheme by Eural Trans Gas which eventually gave way to RosUkrEnergo. The firm, registered in Florida and led by an ex-cycling champion from Turkmenistan, allegedly used some contacts within Gazprom to obtain favorable transmission rates for its trading deals. Itera eventually expanded into upstream production and is now a relatively significant independent gas producer in Russia. However, it was this expansion that apparently soiled its relationship to Gazprom, as the strategies of Alexei Miller and Dimitry Medvedev (implemented in the early 2000s) called for the return of assets that had left Gazprom’s fold–including the Central Asian trade and many of Itera’s Russian gas fields. Since then, the two firms’ relationship has been relatively sour. However, Tymoshenko apparently shares connections with Itera’s head Igor Makarov from her time at UESU (United Energy System of Ukraine)

Naftogaz’s expansion into the Turkmen and Uzbek markets makes recent news of the re-emergence of Makarov and Bakai more understandable. Makarov shared a private jet with Oleg Dubina following his talks in Moscow a couple weeks ago. Also in the plane were other Itera and Naftogaz representatives. Meanwhile, Tymoshenko apparently enlisted the help of Bakai–who now holds Russian citizenship after fleeing Ukraine due to corruption charges–in the possibility of upcoming negotiations with Moscow. Bakai sits on the board of Oleg Deripaska’s Basic Element and is apparently also deals with Itera in that regard.

3 responses to “Gazprom steps up gas rhetoric following Ukraine’s steps toward removing intermediaries

  1. Pingback: Kremlin, Inc » Gas shutoff averted following last-minute deal between Yushchenko and Putin that replaces RosUkrEnergo

  2. Pingback: Kremlin, Inc » Ukraine continues to probe Turkmenistan for possible gas deal

  3. Pingback: Kremlin, Inc » Tymoshenko’s trip to Moscow

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