Category Archives: Central Asia

Ukraine continues to probe Turkmenistan for possible gas deal

Dubina and Taruta meeting with Turkmenistan's President - From turkmenistan.gov.tm Yesterday Naftogaz-head Oleg Dubina and his colleague from the Industrial Union of Donbass visited Turkmenistan to discuss joint Ukraine-Turkmen projects with Turkmen President Kurbanguly Berdymukhamedov. As I wrote about before, Naftogaz is continuing to look into the possibility of entering into direct agreements with Central Asian gas producers rather than through a Gazprom-involved intermediary. Despite this goal, work is continuing on nailing down a new supply deal with Gazprom, as Naftogaz submitted a re-worked plan for approval from the Russian side. This draft is expected to be rejected by Gazprom, however, due to significant disagreements over some of the terms (more on this later).

The Turkmenistan trip was headlined by renewed commitments from IUD head Sergei Taruta to invest nearly $300 million in a combined rail/car bridge and an engineering/communications tunnel near Ashgabat. Notably absent from the description of the meeting, however, are any comments from Dubina or talk of energy-sphere cooperation. The IUD (with which Dubina has connections) has been successful in the past in brokering construction and barter deals with Uzbekistan in return for gas supplies, and Ukraine may now be working at strengthening the economic connections between the two countries in an effort to lobby for direct gas sales.

Itera-head Igor Makarov meets with Turkmenistan's President - From turkmenistan.gov.tmWorth noting–and not mentioned in the articles I read about the event–is that the head of the natural gas firm Itera, Igor Makarov, also met with Berdymukhamedov on the same day. I already wrote about the plane trip Dubina, Taruta and Makarov shared–this coordinated visit to Turkmenistan may very well have been one of the results of their conversations aboard the private jet. Makarov mentioned constructing a new 5-star hotel, investing in a chemical plant and, almost as an afterthought, “the possibility of the company’s [Itera’s] involvement in developing the rich oil and gas deposits in the Caspian Sea shelf.”

Naftogaz faces difficulties in gaining a beachhead in Turkmen gas purchases as a contract with Gazprom essentially ties up all of Turkmenistan’s gas exports for the foreseeable future. Besides that, a recently-announced deal between Turkmenistan and China further calls into doubt the availability of any excess Turkmen gas and potentially raises the price Ukraine would have to offer in order to secure them.

The deal has China buying 10 billion cubic meters (bcm) at $195 per thousand cubic meters (mcm) beginning in the 3rd quarter of 2009, before climbing to 30 bcm annually following the completion of a new pipeline that was undertaken by the Chinese last year. Analysts predict the Chinese deal will raise the price Ukraine must pay for Turkmen gas to between $220-260 per mcm for either next year or 2010, well above the average cost of $140 per mcm being charged this year. When adding transportation costs of at least $30 per mcm, this brings the new price close to that being offered by Gazprom for strictly Russian supplies ($320 per mcm).

Cooperating with Itera on new Caspian gas developments could be a way for Ukraine to lessen its dependence on Russian involvement in the gas supply scheme. However, Naftogaz presumably lacks the financial resources for any large-scale investment at this time. (There are projects in Ukraine itself–most notably, on the Black Sea shelf–that could benefit from significant investment but are currently lacking.) It would be quite interesting to know what Dubina actually discussed with Berdymukhamedov…

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Financially-strapped Naftogaz misses deadline, but Ukraine’s just-passed budget includes $2.4 billion lifeline

Naftogaz's financial troubles continueJanuary 1st passed and Naftogaz apparently was not able to promulgate its 2006 IFRS report, a key provision in its $500 million 2009 Eurobond issue. Failing to do so now pushes Naftogaz into a technical default, which may lead to creditors demanding repayments of over $2 billion in loans. This, in turn, would surely bankrupt the troubled national energy company, underscoring recent comments by newly-elected Prime Minister Yulia Tymoshenko on the financial fragility of Naftogaz.

Oleg Dubina, recently named head of Naftogaz, met with Tymoshenko after the 1st and outlined many of his concerns, indicating that the firm had lost about UAH 2.5 billion in 2006 and UAH 5 billion in 2007 (about $500 million and $1 billion, respectively). Alarmingly, Dubina also said that Ukraine’s gas storage facilities, which are typically injected with extra gas during the fall in order to provide consistent service during the peak heating season, are dramatically low on supplies. This assertion — that there exists now only 617 million cubic meters of gas in state storage facilities — seems hard to believe given the roughly 20 billion cubic meters allegedly in place by the end of the fall. It appears that the uncertainty instead stems from questions over just who controls the gas that’s there, a possible repercussion of the confusing and unexpected gas storage / repayment issue that flared up between Gazprom, Naftogaz and RosUkrEnergo back in October. Also at issue, the storage sites have allegedly been leased out on 25-year terms at below “market” values, though this development originally surfaced during the previous round of gas re-negotiations (in late 2006).

Ukraine’s substantial storage capabilities are one of its overlooked assets, compared to the facilities’ more visible cousin, the high-pressure gas pipelines running from Russia to Europe across Ukrainian territory. However, if a deal more in line with European prices could be re-negotiated with the companies currently using the facilities (primarily Gazprom and its associates), this would create a well-needed additional revenue stream.

While Tymoshenko has suggested granting tax breaks to Naftogaz as it attempts to weather these financial difficulties (despite an actual tax burden increase for the firm, according to the new budget), the company will continue to face problems as it is forced to supply much of its gas to customers at small or negative margins. Tymoshenko has called for the creation of a commission to investigate the circumstances behind the large debts facing the company. Set to convene on the 9th and report its findings at the end of the month, the commission has its work cut out for it.

If the commission can discover any smoking guns associated with the leeching of profits from Naftogaz — besides general mismanagement and a near-impossible economic situation — then the firm may have a better chance at eventually reaching financial viability. The specter of bankruptcy for the company tasked with keeping Ukraine’s population warm this winter and power its industrial sector is rather unsettling.

However, despite the failure to publish its 2006 report, Naftogaz’s creditors have apparently not yet called in their debts. While partly this may be a result of struggles in communication between the western lending firms and a Naftogaz that, along with the rest of the country, is essentially shut down for the New Years and Orthodox Christmas holiday season, it may also stem from a meeting two major creditors had with Ukraine’s new government a couple weeks ago. They came away from talks with Tymoshenko assured that the government would offer a sovereign guarantee on the debt repayment. Sure enough, a clause in the recently-passed 2008 government budget provides for up to $2.4 billion in state funds in order to keep Naftogaz afloat.

This assurance — along with other personal promises made during the meeting — appear to be enough to keep the Eurobond holders from initiating a run on Naftogaz for now. The 2006 IFRS report should be near completion — one of the last hurdles was apparently the passing of Naftogaz’s deficit-free operating budget for 2008, which recently came through. With any luck, the report will be published soon, which will further calm down the firm’s creditors.

Meanwhile, Dubina’s attempts to reach a direct deal with Uzbekistan on supplies of natural gas now face a significant obstacle, as the Central Asian country inked a deal with Gazprom selling much of its export gas production to Russia. While prices (and exact volumes) were not disclosed, the cost offered by Gazprom is said to be in the level of other nearby countries, including Turkmenistan and Kazakhstan, and likely amounts to between $150 and $170 per thousand cubic meters. Dubina had allegedly offered $180 for Uzbek gas (likely between 5 and 10 billion cubic meters), understanding that transit costs through Russia would bump the price to about $220 at the Ukrainian border. This is higher than the $179.50 charged by RosUkrEnergo, but Dubina planned to re-export some of the Uzbek gas to the rest of Europe to make up the difference.

Now, however, this plan appears to face difficulties, as very little gas (maybe around 3 bcm, maybe none) will be left over after Uzbekistan supplies Gazprom and its own domestic consumption. Dubina may attempt to keep pushing, however, and try to at least establish a toehold for Naftogaz to re-enter direct gas negotiations with Central Asia. This could be a step — along with a conclusive governmental investigation in Naftogaz and associated changes, increased tariff collections from Ukraine’s gas consumers, and gradually rising gas costs for the country’s residential customers (Note: I’m not even going to get into the problems facing the domestic production sector.) — to normalizing an often contentious and flawed natural gas industry.

Gazprom and Ukraine reach deal on gas prices, while Tymoshenko objects

Boyko preparing for negotiations with Miller in Moscow - From kommersant.comMiller at Gazprom's negotiating table - From kommersant.com Ukraine and Gazprom have finally reached an agreement on the price of natural gas deliveries for next year, pegging $179.50 per thousand cubic meters (mcm) as the Ukraine / Russia border price, while bumping up transit rates 10 cents to $1.70 per mcm per 100 km. This rate not only covers the cost of transporting Gazprom’s gas through Ukraine for export in Europe, but also the cost of gas transiting through Russia for delivery to the Ukrainian market.

Volumes of the deal, however, were not enumerated — either the sides refused to disclose them, or the exact amount of gas had not been agreed upon (almost certainly the latter). As a result, there is currently no way of knowing how much Russia is actually charging for its gas, as the final number is only a representation of the price of the gas “cocktail” consisting of cheaper Central Asian supplies and more expensive Russian gas.

After meeting with President Yushchenko to receive last-minute instructions on Monday, Ukraine’s Fuel and Energy Minister Yuri Boiko flew to Moscow on Tuesday for the latest round of negotiations with Gazprom head Alexei Miller. The agreement apparently took over 5 hours to pound out. From Kommersant:

A Ukrainian source says that negotiations between Gazprom head Alexey Miller and Ukrainian Minister of Fuel and Energy Yury Boiko [began] yesterday morning with Gazprom proposing $180 per 1000 cu. m. and without changing the price of transit. The Ukrainian side countered with a proposal to raise the price of transit from $1.60 to $1.70 per 1000 cu. m. per 100 km. and lower [the mcm] price [by] $1-3. Negotiations lasted five hours. The minister was ready to leave when Gazprom offered a raise of $0.10 in the transit price. That concession led to a concession of $0.50 on the price of gas and an agreement.

According to an analyst from Brokercreditsevice, the raise in price is expected to cost Ukraine an additional $2.71 billion, with the boost in transit fees bringing in another $2.65 billion

While the deal is set to be concluded by UkrGaz-Energo today, the necessary documents were signed yesterday by RosUkrEnergo (RUE), the entity left in charge (as expected) of coordinating the trade. There had been rumblings of finally cutting out the maligned middleman, particularly due to the expected rise of Yulia Tymoshenko to Ukraine’s premiership. Indeed, she has panned the deal saying the price is too high, and is already calling for new negotiations with Russia. Tymoshenko in Ukraine's parliament - From kommersant.ua, by Alexander Techinsky

BYuT representative Sergei Terekhin explained that the soon-to-be-formed government is looking at invoking provisions of the Energy Charter as leverage in forcing negotiations and a lower price. Specifically, he says conditions within the charter provide for Ukraine buying Gazprom’s gas set to be exported to Europe at the Ukraine / Russia border and re-exporting it via Naftogaz, cutting out Gazprom from its European customers. From the profit made on this export, “we can subsidize our own industry, and the population will have a cheaper price of gas.”

He also suggested a compromise could be reached where Naftogaz takes over for RUE in the role of coordinating gas shipments from Central Asia through Russia. A source in Gazprom told Kommersant that this was unrealistic, especially since Russia hasn’t signed the Energy Charter, and it’s conditions apply to inter-European gas trade. He also said that the only way for Ukraine to get a cheaper price on gas would be to cede control of part of its high-pressure gas transportation network, through which about 3/4 of Russia’s gas exports to Europe pass.

Tymoshenko complained about Gazprom backing away from a previously “agreed” upon price of $160 per mcm, but this was discussed before the exact price of Turkmen gas was settled. Turkmenistan and Gazprom recently reached an agreement bumping up the price of Turkmen gas from $100 per mcm to $130 for the first half of 2008 and $150 for the second half. Uzbek and Kazakh prices will likely follow similar increases as those countries renegotiate their deals. Assuming an average price of $140 per mcm for Central Asian gas, plus about a $30 transit fee for transport to Ukraine, this leaves only a $9.50 margin for the middleman, even before factoring in the cost of more-expensive Russian gas.

This past year’s contract called for 55 bcm for Ukraine from Central Asia at $130 per mcm . That gas is bought at the Central Asian border with Russia by Gazpromexport, who then resells it to the intermediary RosUkrEnergo, who pays transit fees through Gazprom’s pipeline system to the Russia / Ukraine border, where the gas is then sold to Naftogaz. The previous pricing system, however, already left a very small margin for the middleman. From the in-depth Oxford Institute for Energy Studies report “Ukraine’s Gas Sector:”

Assuming that Turkmen gas costs $100/mcm at the Turkmen border [the publicized price], that Uzbek and Kazakh gas may cost more than that, and transit costs from central Asia are about $30 / mcm , industry analysts had some difficulty seeing where RosUkrEnergo would earn its margin.

RUE likely received some sort of external benefit for the deal, possibly its partnership with Naftogaz in the recently-created joint venture UkrGazEnergo, which is tasked to supply gas to most industrial customers in Ukraine. These consumers have a much higher payment rate and tariff level, making it a more lucrative sector than public utilities and residences, which are left to Naftogaz itself.

Of course, there is also a very real possibility that $130 is simply the publicly acknowledged price, and that in reality, Ukraine has been paying RUE more, possibly even as high as around $180 already. Due to the complexity of the market and opacity of the negotiations, however, this figure is hard to peg down concretely.

This small margin may also be the reason RUE only reported profits of under $70 million for the first quarter of 2007 (the latest results available), whereas the company had made around $800 million the year before. However, this may be a bit misleading given the cyclical and variable nature of finances within the industry, given the extreme seasonal shifts in demand.

According to Gazprom’s 2007 quarterly reports (RUE hasn’t published anything for the current year while Naftogaz still hasn’t published its 2006 report), Gazprom sold RUE 16 bcm of gas in the first quarter, 11.93 bcm in the second quarter and 10.95 bcm for the third quarter, totalling 38.88 bcm. In the fourth quarter of 2006, Gazprom sold RUE 11.34 bcm and due to similar weather patterns, it could probably be assumed that this year’s fourth quarter sales will be a near-equivalent volume. Sources in Gazprom and Naftogaz confirmed that Ukraine had bought less than 50 bcm of gas for the past year, despite the contract signed at the end of 2006 calling for volumes of 55 bcm from Central Asia. RUE may attempt to buy out the rest remaining 5 bcm provided buy the contract at the current cheap price, and store it for use next year. At $650 million, however, this may be too much for capital for the firm to muster, as it has already allegedly been facing credit problems.

Ukraine reported consuming about 65 bcm of gas for the year. Adding the 50 bcm of imported gas to the around 18 bcm of domestic production that Ukraine has lately been averaging, that leaves 3 bcm for re-export into Europe (or storage for later). Since gas sold in Europe is on average 6 times more expensive than gas sold in Ukraine (and 11 times more expensive than average Ukrainian residential gas prices), this re-export is a key profit producer for Ukraine.

Turkmenistan outlined ambitious production figures for the future, pledging to somehow quadruple its gas output by 2030 to 250 bcm. Last year, the country produced about 62 bcm, the vast majority of which was sent to Ukraine via Gazprom and RUE. Gazprom has essentially secured Turkmenistan’s entire gas output via contract, but look for Ukraine to attempt to elbow itself back into direct negotiations for Turkmen gas, especially with Tymoshenko now poised to come to power.

Much more later…