RosUkrEnergo to remain Ukraine’s gas supplier

RosUkrEnergo’s tagline belies its reliance on personal connections to function in the lucrative Central Asia-Russia-Ukraine-Europe gas scheme – From rosukrenergo.com

On Friday an official from Ukraine’s presidential secretariat announced that RosUkrEnergo (RUE) would be supplying Ukraine with gas for the remainder of the year.

The continuation of this arrangement comes as a blow to Prime Minister Yulia Tymoshenko’s hopes to completely remove the maligned middleman.

While she has praised the expulsion of RUE’s 50%-owned subsidiary UkrGazEnergo from Ukraine’s domestic gas market, its place will partly be filled by a new Gazprom subsidiary authorized to directly market gas to Ukrainian consumers.

In the meantime, Naftogaz (Ukraine’s state-owned oil and gas company) is aggressively seeking to make deals with Ukraine’s major industrial consumers, likely in an effort to stymie Gazprom’s commercial ambitions.

Naftogaz confirmed that it signed a contract with RosUkrEnergo to purchase 49.8 billion cubic meters (bcm) of gas at a price of $179.50 per thousand cubic meters (mcm) through to the end of 2008.

Meanwhile, “Gazprom Sales [Marketing] Ukraine,” (“Газпром сбыт Украина,” or GSU — I haven’t seen that acronym used yet, so remember, you saw it here first) a fully-owned subsidiary of Gazprom, has registered in Ukraine and is in the process of gaining clearance to sell 7.5 bcm per year on the country’s “unregulated” industrial market. GSU will buy the gas from Naftogaz (who itself purchases it from RUE, which purchases it from Gazprom Export, which allegedly purchases it from Central Asia), though according to early drafts of the new gas scheme agreement, Naftogaz is limited to an extremely minimal price increase (pennies per mcm) on the sale to GSU.

The industrial sector of gas sales had been dominated by Ukrgazenergo, but intense regulatory and administrative pressure has essentially forced the gas trader to shut down operations. (Nonetheless, I am still in talks with Ukrgazenergo to arrange an interview, and will update accordingly.)

Naftogaz, via its subsidiary Gaz Ukrainy, is looking to fill as much of the void left by Ukrgazenergo as possible, lining up contracts from 90 of Ukraine’s top industrial gas users. It is unclear whether the holdouts of companies connected to RUE co-owner Dimitry Firtash have been resolved.

Late in March, Ukraine attempted to pressure RosUkrEnergo by halting the transit of gas owned by RUE through Ukraine destined for sale in Eastern and Central Europe. The Polish and Slovak consumers the gas was meant for lodged complaints, citing violations of the Energy Charter. It isn’t known if the new agreement with RUE protects the trader’s ability to transit gas through to Europe, a lucrative aspect of the scheme.

The early draft of the agreement reached between Gazprom and Naftogaz last month left the exact seller of gas at the Russia-Ukraine border–either Gazprom or RUE–ambiguous. While Tymoshenko was apparently able to erase the words “not less than” before the 7.5 bcm quota to be granted to Gazprom, removing RUE–with its rumored connections to the Yushchenko camp, organized crime, Gazprom management, former politicians, etc.–proved to be not so easy.

Note: No word on the potential technical default of Naftogaz, but the debt issue with Gazprom for gas sales during the first four months of this year–a couple billion dollars, apparently– remains a pressing issue. Meanwhile, the government is suggesting that domestic prices for gas raise by 3% and 5% (depending on volume consumed) per month, beginning in May (i.e. 21-35% by the end of the year). This, in combination with an increased presence in the industrial sales sector mentioned above, should help Naftogaz’s financial situation. Of course, 20% inflation rates and woeful bill collecting problems won’t help.

Also, Naftogaz has scheduled (another) attempt at a shareholders’ meeting for Ukrtatnafta, again with the aim of changing leadership and making sweeping administrative changes. The meeting is scheduled for May 29th (coincidentally, the day before my birthday). Meanwhile, the company announced the April 23rd auction of its 4.4 thousand sq. meter office building in Kremenchug, with a starting price of UAH 9.9 million (just under $2 million). Clearing out the shelves before the store gets taken over?

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