Gazprom enters Ukraine’s gas market, but overall picture remains unclear

Late last month, Gazprom Sales Ukraine (Газпром сбыт Украина, or GSU) was granted a license by the National Energy Regulatory Commission (NKRE) to sell up to 7.5 billion cubic meters (bcm) of natural gas per year to Ukraine’s industrial consumers. The five-year license was a key part to the March agreement between Russia and Ukraine on the “development of relations within the gas sphere.”

The entry of Gazprom’s fully-owned subsidiary into Ukraine’s gas market was also meant to compensate for the exit of Ukrgazenergo, which previously dominated sales to the industrial sector with a yearly quota of 32 bcm. The removal of this gas trader–50% owned by the state-owned Naftogaz, 50% by RosUkrEnergo, which is itself 50/50 split between Gazprom and two Ukrainian businessmen–is supported by the Ukrainian government. Prime Minister Yulia Tymoshenko has been especially vocal in her opposition to such “middlemen,” seeking to completely liquidate Ukrgazenergo’s (and eventually RosUkrEnergo’s) presence in the Central Asia-Russia-Ukraine gas scheme.

Earlier this year, the NKRE slashed Ukrgazenergo’s quota to just over 5 bcm per year in an effort to drive the trader from the market and open room for Naftogaz’s on gas sales division, Gaz Ukrainy. An additional point in the bilateral gas sphere agreement saw Ukrgazenergo lose another of its key tasks, buying gas on the Russian-Ukrainian border from RosUkrEnergo. This transaction is also being taken over by Naftogaz.

However, the shift towards a greater Naftogaz presence has been far from graceful.

First there was confusion among consumers over whom to pay stemming from overlapping assertions and a muddled legal situation. A cement factory complained that “we in fact have two actual agreements with both companies [Gaz Ukrainy and Ukrgazenergo]. But the ODU [United (gas) Distribution Administration, controlled by Naftogaz] can shut the valve off at any moment.” Citing this reason, the factory decided to pay Gaz Ukrainy despite a fax from Ukrgazenergo asserting ownership over the gas that the plant was receiving.

Indeed, Naftogaz’s control over the gas distribution pipes allowed them to limit supplies to factories hesitating to sign on with Gaz Ukrainy. Such tactics prompted protests in front of Naftogaz’s office and warnings of catastrophic accidents resulting from the decreased gas pressure.

The majority of the protesting factories are set to sign on for supplies from GSU, and interest in working with Gazprom subsidiary–as versus Naftogaz–is reportedly high. About twenty companies sought contracts with GSU, according to a company source, more than the quota would allow for. The attraction apparently stems from a continuation of Ukrgazenergo’s policy of giving the consumers a 10-day payment window as opposed to Gaz Ukrainy’s 100% prepayment terms. Gaz Ukrainy is also reportedly charging a higher price than what the companies paid Ukrgazenergo.

Despite this reorganization, Ukrgazenergo cannot be counted out yet.

An April 18th ruling from the Kyiv district administrative court struck down the NKRE’s limitation of Ukrgazenergo’s sales quota. This decision re-opens the door for Ukrgazenergo, at least partially. “Essentially,” an industry participant told Kommersant, “three major players have emerged on the internal market instead of two.” While it has lost its direct purchases from RosUkrEnergo (essentially, its ability to import the gas), Ukrgazenergo allegedly has about 7 bcm of gas in underground storage that they can sell on the market.

Ukrgazenergo could also purchase gas from Naftogaz for resale to consumers, like GSU is doing now. The margin for sales by Naftogaz to GSU is set at $0.01 per thousand cubic meters (mcm) by the gas sphere agreement, making the price $179.51. It is unclear what the internal Naftogaz-Gaz Ukrainy margin is or how much Naftogaz will sell gas to other market participants such as Ukrgazenergo and smaller gas trading firms (typically with quotas of 1-2 bcm or less). Ukrgazenergo had apparently been charging about $185 before being removed as a middleman.

While the internal market has yet to be completely sorted out, a major obstacle in negotiations with Gazprom has apparently been passed–Tymoshenko announced in late April that Ukraine had (finally) fully paid off its debt for imported gas. This had been a tripping point for nailing down a longer-term agreement between Naftogaz and Gazprom, and hopefully signals the resolution of some of the company’s financial difficulties.

The announcement coincided with the visit to Kyiv by Russia’s PM Viktor Zubkov, his last such trip before he’s expected to be replaced by outgoing President Vladimir Putin. Energy topics were high on the list for discussion between the two Prime Ministers. Ten bilateral priorities were drawn up from the meeting, with the gas issue the second one mentioned (right below WTO cooperation):

The second priority concerns the fact that after regulating tactical gas problems we should turn to the establishment of strategic cooperation. And this second priority – signing strategic long-term agreements on natural gas supplies to Ukraine and transit of the Russian natural gas through the territory of Ukraine to the European countries. It would be better to sign this agreement for 10 and more years in order to see how much prospective and progressive our move toward each other is.

Oil issues also came up (abridged English version):

Ukraine in its turn agreed to work through the conflict surrounding the Kremenchug oil refinery and by the end of April form a working group with representatives from Ukraine’s Ministry of Fuel and Energy, the State Property Fund, Ministry of Justice and Russia’s Ministry of Industry and Energy and the Federal Property Agency “for the preparation of suggestions for the normalization of work at Ukrtatnafta.”

And by the first of July, Russia’s Ministry of Industry and Energy and Ukraine’s Ministry of Fuel and Energy will hold consultations in order to “better the competitive terms of transporting oil” for both transport to Europe as well as supply to Ukrainian refineries without levying VAT.

The two governments will also work on another long-term nuclear fuel deal, despite Ukraine’s plans to buy fuel for its nuclear plants from Westinghouse beginning in 2010 and the country’s aspirations to eventually develop its own supply.

Activity in Kyiv has picked up some since the Easter and May Day holidays, but Friday’s Victory Day celebration is just around the corner.  The extended vacation time has made getting responses and clarifications particularly different.  As people begin returning to work, I’ll keep trying to find out more, particularly in regards to the relatively productive visit of Zubkov and the next step for Ukrgazenergo.

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