Ukraine capitulates on $321 for Russian gas but negotiations continue

Update (3/13/08): Scans of the “contract” can be found accompanying this article at Ekonomika.  Some critics are saying that since there is no Naftogaz stamp over Didenko’s signature, it is not valid and only represents a proposal by RosUkrEnergo.  It will be interesting to see how it fits into the new deal just signed in Moscow.  (Also, interestingly, the bank account numbers are not whited-out in the pictures accompanying the Kommersant paper edition.)

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Russia’s natural gas supply cuts to Ukraine last week were lifted after only two days following a vague agreement between Naftogaz and Gazprom that “solv[ed] the crisis situation in the gas area.” However, no solid terms were announced and negotiations are scheduled to continue this week to reach a more official agreement.

An article from today’s edition of Kommersant (shorter English version) has the details of a previously-unknown contract signed between Naftogaz and middleman RosUkrEnergo on March 6th, the day after supplies returned to normal. According to the article, Naftogaz has agreed to repay Gazprom for gas delivered to Ukraine since January 1st on two pay scales: for gas alleged to be of Russian origin, the company will pay $321 per thousand cubic meters (mcm); the remaining volumes, ostensibly from Central Asia, will be calculated from the $179.50 price agreed upon late last year.

While the exact volumes of Russian versus Central Asian gas are still being negotiated, Russian gas could account for roughly 4 billion cubic meters (bcm) out of the 9.1 so far delivered to Ukraine this year. This would put Naftogaz’s average price for gas at $240 per mcm for January and February of this year. Terms for the rest of the year are set to be negotiated starting tomorrow.

The print edition of the paper has partial scans of the faxed contract signed by vice chairman Igor Didenko of Naftogaz (interestingly, not the company’s head, Oleg Dubina) and RosUkrEnergo’s executive directors Dmitry Glebko and Konstantin Chuichenko (who is also on Gazprom’s board). I haven’t been able to find pictures of the contract online, however.

Gazprom is allegedly taking this as evidence of Naftogaz’s financial ability to pay for gas at European prices, and may press this issue during upcoming negotiations. (Ukraine may very well respond by demanding “European” prices for gas transit.)

Didenko apparently agreed to this price–which was higher even than the $315.50 price Gazprom was trying to charge–in order to pave the way for the removal of Ukrgazenergo (a 50/50 joint venture between RUE and Naftogaz) from Ukraine’s internal market. Paying for Russian gas at European prices has been an unofficial demand by Gazprom for acquiescence on the removal of middlemen within the gas supply scheme.

However, an analyst quoted in the Kommersant article suggested that this situation may create a two-tiered system, where Ukrgazenergo sells the gas it receives from RUE for $178.50 and Naftogaz sells “Russian” gas bought for $321. Given the price difference, it is hard to believe that Naftogaz would be able to compete commercially with Ukrgazenergo on the internal market.

Prime Minister Yuila Tymoshenko’s government has been actively working to “liquidate” Ukrgazenergo, to the benefit of Naftogaz. Ukraine’s National Energy Regulating Commission attempted to severely limit Ukrgazenergo’s allotted market share within Ukraine (from about 35 bcm per year to 5 bcm), and a suit on the issue between the commission and the gas trader is currently awaiting a hearing in Kyiv’s overworked administrative court. Tymoshenko’s vice premier asserted today that Ukrgazenergo’s license for the sale of gas at non-regulated prices had been revoked, but the company responded by calling him a liar.

Naftogaz responded to the article with a press release stating that Naftogaz isn’t going to be buying any “Russian” gas anyway, so the price isn’t a big deal (my translation):

Naftogaz notes that the publicized information relating to the purchase of Russian gas for Ukrainian consumers at the price of $321 per mcm is counter to the agreement reached between the Presidents of Ukraine and Russia and does not respond to reality. In the balance of the company [Naftogaz] for this year, there are no plans for selling volumes of Russian gas to Ukrainian consumers. According to the energy customs service, this year gas of Russian origin is not being cleared [растаможивался] into the Ukrainian customs territory

If indeed gas of Russian origin is not being sold within Ukraine, this would suggest it is instead either re-exported into Europe or being kept in storage. Though if Russian volumes of gas did make up 4 bcm out of the 9 bcm bought by Ukraine this year, it is hard to believe that domestic demand could have been satisfied by only the remaining 5 bcm of imports. (This underscores the difficulties in determining the origin of gas pumped through pipelines, particularly in the absence of clearly-delineated contracts and volumes.)

Assuming the price structure is expanded into the future, Naftogaz may be planning on simply re-exporting any gas it is forced to buy at “Russian” prices. It would then rely on the cheaper Central Asian blend (and domestic production) to supply internal consumers. In past years, the price of the gas “cocktail” supplied by RosUkrEnergo to Ukraine had included the cost of significantly higher-priced volumes of Russian gas. It is unclear why this year’s scheme has Russian gas being charged outside the system.

The negotiating delegation–which includes Didenko–plans to ensure that the price remains $179.50 during talks that resume in Moscow tomorrow. Bowing to the $315 Russian price for gas already delivered had been fodder in a public argument between Tymoshenko and President Yushchenko over the handling of gas issues.

Tymoshenko had claimed success at having escaped from the gas shut-off situation without agreeing to paying higher-than-contracted prices. She also intimated that Yushchenko was willing to accept the price Russia suggested. Yushchenko’s secretariat responded by posting the directives he had given her prior to her recent trip to Moscow, which included doing everything possible to secure the $179.50 price–steps that Yushchenko himself had taken during his own meeting with Putin earlier this year.

While Tymoshenko also wants a low price, she has stressed that any future deal should remove both RosUkrEnergo and Ukrgazenergo. She has been hesitant to endorse a plan to replace them with joint ventures between Naftogaz and Gazprom. It will be interesting to see what aspects of the President’s and Prime Minister’s visions for the gas scheme are stressed by the negotiating team–and eventually accepted by Gazprom.

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