Gazprom and Naftogaz sign gas supply deal excluding Ukrgazenergo and keeping prices at $179.50

Gazprom and Ukraine sign a gas supply dealUpdate (3/15/08): As noted by IIU in the comments below, the Zerkalo Nedely weekly has an article by Alla Yeremenko on the agreement and includes a low-quality scan of the document. While the gas storage fees charged Naftogaz are likely going to be reexamined (they are scandalously low), Tymoshenko said that the transit fees charged to Gazprom will remain the same for this year. (However, you can expect a large increase for next year’s contract, coinciding with Gazprom’s increase in gas price in turn stemming from Central Asian producers asking for a higher price.) Yeremenko also notes that this agreement still requires both commercial and technical contracts to be drawn up and signed — indeed, this document lacks many specifics.

The ambiguity in the supplier of gas at the Ukrainian border that I mention below is somewhat explained in the document: the 49.8 bcm of Central Asian gas will be supplied either by Gazprom or by RosUkrEnergo. Hence, proclamations hailing the removal of RosUkrEnergo are premature.

Other points from the document:

  • Naftogaz has until today (Saturday, three days from the signing) to figure out a framework on the “repayment” (through barter) of expensive “Russian” gas from the first two months of this year. (This may actually be three days following the “acceptance” of the agreement — see below.)
  • Transit fees for “Central Asian” gas to Ukraine are to be figured based on a few different distance options, all significantly less than the actual distance between the two regions. This reaffirms that Gazprom is merely using gas substitution rather than supplying Ukraine with the actual gas from Central Asia.
  • The agreement has to be accepted by Ukraine’s Cabinet of Ministers, Naftogaz didn’t have the authority to fully authorize it itself. Tymoshenko says this will happen on Wednesday, after a series of consultations. Hopefully the extra time will prevent any surprises from popping up later on into the deal…


Gazprom and Ukraine sign a gas supply dealAll it took was assuring Gazprom access to Ukraine’s industrial gas market…

From (my translation and emphasis):

Gazpom and Naftogaz Ukrainy signed an Agreement on the development of relations within the gas sphere

Chairman of the [management] board of Gazprom Alexei Miller and chairman of the board of Naftogaz Ukrainy Oleg Dubina signed an Agreement on the development of relations within the gas sphere.

In accordance with the agreement, from March to December of 2008 Ukraine will be supplied gas from Central Asian sources in volumes not less than 49.8 billion cubic meters for the price of $179.50 per thousand cubic meters. The purchaser of this gas on the border of Ukraine will be Naftogaz [NOT Ukrgazenergo]. In doing so, the supplies of Central Asian gas in January-February in the volume of 5.2 bcm [out of 9.1 total] will be fully documented and paid for based on the contracts of RosUkrEnergo and UkrGazEnergo.

In addition to the volumes of Central Asian gas, Naftogaz will formulate a contract with RosUkrEnergo on the sale of Russian gas delivered to Ukraine in January and February of 2008 on the base price of $315 per thousand cubic meters, the calculations of which can be realized by the return of corresponding volumes of gas.

From April 1st, 2008, a subsidiary or affiliated company of Gazprom will yearly provide direct deliveries of gas to industrial consumers of Ukraine in volumes not less than 7.5 billion cubic meters.

Negotiations on the terms of gas delivery to Ukraine in 2009 and following years will continue, taking into consideration the evolving nature of the purchase price of Central Asian gas.

Based on this:

  • RosUkrEnergo is still in the picture. Notice the statement says the remaining volumes of gas this year “will be supplied from Central Asian sources,” but without clarifying by whom. This suggests that this part of the structure will likely remain the same.
  • Ukrgazenergo is out of the picture. Their main role–buying gas at the border of Ukraine and Russia from RUE–is explicitly handed over to Naftogaz.
  • The debt scare that was used to push for this latest round of negotiations will be settled as it normally is, with discrepancies caused by seasonal variations accounted for over time through corresponding volumes of gas. This means $315 may be used as a calibrating price, with no expectation of actual money changing hands. It is unclear where this leaves the contract signed by Naftogaz and RosUkrEnergo.
  • Gazprom will make up from losing its 25% stake in Ukrgazenergo (since it looks like the company is on its way out) by being granted a license to sell about 25% of the volumes of gas Ukrgazenergo was selling (around 35 bcm). However, (ominously) the maximum size of the license isn’t mentioned. Previously, the regulatory commission has stated that no singular company (perhaps excluding Naftogaz?) can hold a license covering more than 35% of Ukraine’s market. Based on 70 bcm of consumption, this would be 24.5 bcm. However, if it is based on the unregulated market only (i.e. excluding communal services and residential consumers), the maximum would be about half that number.

Update: Tymoshenko’s congratulatory announcement praised the removal of Ukrgazenergo and the $179.50 price, but any talk of the fate of RosUkrEnergo was conspicuously absent…


12 responses to “Gazprom and Naftogaz sign gas supply deal excluding Ukrgazenergo and keeping prices at $179.50

  1. Pingback: Kremlin, Inc » Ukraine capitulates on $321 for Russian gas but negotiations continue

  2. New Mirror Weekly is out and it has an image of the signed contract (though really hard to read).


  3. As information comes in could you elucidate regarding the following “by being granted a license to sell about 25% of the volumes of gas Ukrgazenergo was selling”

    at what price will they be selling? to whom in industry will they be selling (there is the potential for the economic to be political as it would be a competitive advantage to force your competitor or non-supporter to purchase gas for their company at a higher rate directly from Gazprom)? as well as the following “The agreement guarantees Gazprom minimum annual gas sales in Ukraine of 7.5 billion cubic meters”

    Many thanks !

  4. english language translation of Mirror Weekly article

    Nemtsov: Russian part in RosUkrEnergo looks as improper as Ukrainian one

  5. “The Man Behind the Middlemen
    by Staff and wire reports , Kyiv Post
    Mar 19 2008, 23:56
    Dmytro Firtash, 42, rose into the international spotlight from obscurity in 2006 when he admitted his role in supplying gas to Ukraine.

    Staff and wire reports — Perhaps no one person will be more affected by the March 12 agreement that may eliminate gas intermediaries between Russia and Ukraine as billionaire Dmytro Firtash.

    As owner of a 45 percent stake in gas intermediary RosUkrEnergo (50 percent owned by Russia’s Gazprom), Firtash has much to lose should Ukraine’s premier, Yulia Tymoshenko, succeed in removing middlemen from the lucrative gas trade between Ukraine, Russia and Central Asian product.

    Firtash, 42, rose into the international spotlight from obscurity in 2006 when he admitted his role in supplying gas to Ukraine and exporting significant amounts to European markets for top dollar.

    Why Russia’s Gazprom, and possibly Ukrainian officials, have entrusted him as a major owner in companies that earn hundreds of millions of dollars in profit annually in the region’s gas trade remains a mystery.

    Tymoshenko has led the charge to squeeze Firtash out of this position, alleging corruption.

    Cheered by Western authorities who questioned the gas trade’s transparency, Tymoshenko is inching closer towards claiming victory against Firtash, whom she has repeatedly singled out by name as her target.

    She convinced Gazprom to remove a RosUkrEnergo subsidiary, UkrGazEnergo, from monopolizing gas supply to Ukrainian industry.

    But in the March 12 agreement she leaves it up to Gazprom to decide how long RosUkrEnergo remains as a supplier of gas to Ukraine.

    Meanwhile, many of Firtash’s businesses, such as chemical factories, a growing web of gas trading companies in Eastern Europe and a venture to build gas-powered generators to export electricity to Europe, are dependent on access to competitively priced natural gas.

    If Tymoshenko succeeds in completely squeezing Firtash out, the billionaire’s big plans could run out of gas.”

  6. Ukraine prohibits Naftogaz from transporting gas through RosUkrEnergo(Part 2)

    There has been buzz that there might be another gas shut off between Gazprom and Ukraine, what is your opinion of the likelihood of this happening?

  7. Thanks for the comments — been wrapped up in an article I just finished and organizing a trip for some students here. Lots of stuff I want to write about, but likely won’t get to it until Sunday. Haven’t been keeping up with much of the gas stuff (interesting developments with Ukrtatnafta, too) so can’t say about the shutoff. But I can’t imagine either side really wants to go through it all again. Though Naftogaz was quite confident they were in the right (and were prepared to dip into “European” flow once it got to a certain level, is what I heard). But if I were Europe, I’d be fed up with it. Hell, if I were Ukraine or Russia, I would be too.

  8. I do hope that u r able to see the videos from the HURI conference. Found the following interesting as it was about Gazprom corporate culture – Kupchinsky’s comments 9 min. total.

  9. I’m looking forward to watching the videos — I saw the article on the conference by Yeremenko in the MW last week.

    As for your earlier questions, Ukrgazenergo was originally granted a license to sell 35 bcm per year, at “unregulated” prices. This is a misnomer used to represent industrial users (it’s still capped, but higher than residential / communal / public building prices) and it’s partly governed by market competition because of other gas traders.

    A quarter of 35 is just over 8, similar to the figure suggested for Gazprom’s presence in Ukriane. While it could very well be guided by political means, if economics play no role in the decisions of Gazprom’s gas seller then it will suffer as other traders (and potentially Naftogaz, via a subsidiary) step in.

    Last year / 2006, when Ukrgazenergo had a much stronger market position, it was able to more strongly influence individual companies. Apparently, Privat-connected enterprises were complaining about extra high prices and even shutoffs.

    Now the industrial price is capped at around $220 I think. Ideally, market competition pushes that price for consumers down a bit.

  10. Pingback: Kremlin, Inc » Dip in Ukrainian exchange rate blamed on Ukrgazenergo, gas sphere shakeups

  11. Pingback: Kremlin, Inc » Naftogaz’s financials are creating worry as Ukraine and Russia struggle to finalize their gas deal

  12. Pingback: Kremlin, Inc » Gazprom enters Ukraine’s gas market, but overall picture remains unclear

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