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.
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…