Category Archives: Gas intermediaries

Dip in Ukrainian exchange rate blamed on Ukrgazenergo, gas sphere shakeups

The exchange rate of Ukraine's gryvna unexpectedly dipped last week - From yahoo finance

Over the past week and a half, the exchange rate of the Ukrainian gryvna (UAH) versus the US dollar has fallen by about 5% at exchange stations across Kyiv. While the official central bank rate has remained at UAH 5.05 to $1, most of the exchange booths littered across the city have dropped their selling rate to around UAH 4.80.. The buying rate has remained closer to UAH 5.00.

Besides frustrating those of us who get paid in dollars, the dip in the rate has a significant effect on the large number of Ukrainians who keep their savings in dollar form. Indeed, much of the economy is based off the dollar benchmark, with distrust in the local currency stemming from wide rate fluctuations and high inflation in the 1990s. The continued heavy reliance on the dollar in Ukraine has remained despite a relatively long period of stability. (Inflation levels are excessively high now, however.)

When exchanging some dollars last week, I asked the woman working at the booth if she knew of the reason for the decline. “No one knows,” she said, shrugging her shoulders. Now it appears the adjusted exchange rate can be traced back to–what else–problems in Ukraine’s natural gas sphere.

The lowered exchange booth rate is a reflection of the decline interbank exchange rate (represented in the graph above), punctuated by a sharp drop on March 24th to nearly UAH 4.90. The fall began last week, as a source in the National Bank of Ukraine (NBU) told Kommersant:

The market was expecting on the 20th or 21st of March the traditional output (offering) of Ukrgazenergo for the purchase of currency on the bank exchange, but the expected offer of grynas didn’t happen.

From what I understand, Ukrgazenergo usually will convert the gryvnas it receives for its gas sales within Ukraine to dollars, which it pays to RosUkrEnergo for gas imports (which are calculated on dollars, i.e. $179.50). Because Ukrgazenergo appears to be on its way out of the gas supply scheme, this influx of grynas didn’t occur and pushed the exchange rate down.

In response, the NBU allowed the state oil and gas company Naftogaz to exchange currency on the market in the place of Ukrgazenergo. It now appears that Naftogaz is continuing its gradual takeover of Ukrgazenergo’s duties, key to PM Yulia Tymoshenko’s goal of ridding Ukrgazenergo and gas intermediaries from the supply scheme.

Recall that the latest gas contract between Naftogaz and Gazprom explicitly gave the duties of purchasing gas at the Ukrainian border to Naftogaz, a job previously held by Ukrgazenergo. (Who they buy it from–Gazprom or RosUkrEnergo–is not specified.) This transition, which appears to be happening even though we are still waiting for all the technical and commercial contracts to be signed which would make the agreement official, seems to be the reason for the currency’s tumult.

Ukrgazenergo asserts that the reason it didn’t follow its traditional pattern is that it lacked the currency to due so, and should no longer be expected to fill this role. Its press secretary Vitaly Kisel asserted that the company hadn’t been receiving payment from Naftogaz since January:

“In accordance with the external economic contract, since the new year Ukrgazenergo buys natural gas solely for the needs of the industrial sector,” he said. “Naftogaz Ukrainy in its turn uses gas from the external supplier RosUkrEnergo for the consumption of the gas transport system, budget consumers, and the communal heating plants. It’s clear that in the absence of a contract for these categories of consumers, Naftogaz has not settled accounts with RosUkrEnergo for the gas nor has it purchased currency for this goal,” asserted Mr. Kisel.

Because the relevant contracts have not been drawn up, Naftogaz being allowed to convert currency on the exchange market is technically illegal, as participants must have documented proof of their economic transactions. In the interest of financial stability and continued gas flow, however, it appears that the NBU and the government nonetheless will allow Naftogaz to undertake this task.

The entry of Naftogaz into the exchange market, however, may have cost the energy company a few million dollars due to the purchase of dollars at the depressed rate. The company is also in the process of restructuring its financial operations to go through the state-owned Oshchadbank, with the goal of streamlining payment procedures.

Naftogaz’s currency bailout is also being connected to Tymoshenko’s program–administered via Oshchadbank–of returning portions of lost savings from the former USSR’s savings bank (Oshchadbank’s predecessor). This populist program is about to enter its second wave of repayments, and Tymoshenko was worried that the exchange rate dip would have resulted in uneven results. The original repayments of $200 were calibrated on a UAH 5.05 exchange, so Tymoshenko apparently demanded this next round also adhere to this same rate. Enter Naftogaz to drive the rate back up again, essentially killing two birds with one stone.

Tymoshenko and the current government have hinted at a gryva re-evaluation, strengthening its worth against the dollar in an effort to fight inflation. While they may eventually wish to drop the exchange rate to around UAH 4.80, now is apparently not the right time.

Meanwhile, the Ministry of Fuel and Energy put in price caps on gasoline, which has risen by about 20% in the past month or so. The price increases stem both from rising global oil prices as well as internal problems. Kremenchug’s output is still down, refineries are struggling to adapt to new quality control laws, and Ukrnafta–Ukraine’s largest oil producer–halted deliveries to its filling station network (the country’s largest) in late February.

Based on the oil sphere problems and the natural gas situation, it’s reasonable to suggest that stability in the energy sphere could help the country’s economy. Assuming, of course, that populist measures don’t tank it even further.

Note: Interesting commentary from current and former officials at the Kyiv International Energy Club Q-Club, a lobbying group concerned with promoting general increased energy sphere performance along with greater energy security for Ukraine.

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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…

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

From Gazprom.ru (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…

Ukraine capitulates on $321 for Russian gas but negotiations continue

Update (3/13/08): Scans of the “contract” can be found accompanying this article at Ekonomika.  Some critics are saying that since there is no Naftogaz stamp over Didenko’s signature, it is not valid and only represents a proposal by RosUkrEnergo.  It will be interesting to see how it fits into the new deal just signed in Moscow.  (Also, interestingly, the bank account numbers are not whited-out in the pictures accompanying the Kommersant paper edition.)

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Naftogaz signed a contract with RosUkrEnergo on the repayment of gas supplies Russia’s natural gas supply cuts to Ukraine last week were lifted after only two days following a vague agreement between Naftogaz and Gazprom that “solv[ed] the crisis situation in the gas area.” However, no solid terms were announced and negotiations are scheduled to continue this week to reach a more official agreement.

An article from today’s edition of Kommersant (shorter English version) has the details of a previously-unknown contract signed between Naftogaz and middleman RosUkrEnergo on March 6th, the day after supplies returned to normal. According to the article, Naftogaz has agreed to repay Gazprom for gas delivered to Ukraine since January 1st on two pay scales: for gas alleged to be of Russian origin, the company will pay $321 per thousand cubic meters (mcm); the remaining volumes, ostensibly from Central Asia, will be calculated from the $179.50 price agreed upon late last year.

While the exact volumes of Russian versus Central Asian gas are still being negotiated, Russian gas could account for roughly 4 billion cubic meters (bcm) out of the 9.1 so far delivered to Ukraine this year. This would put Naftogaz’s average price for gas at $240 per mcm for January and February of this year. Terms for the rest of the year are set to be negotiated starting tomorrow.

The print edition of the paper has partial scans of the faxed contract signed by vice chairman Igor Didenko of Naftogaz (interestingly, not the company’s head, Oleg Dubina) and RosUkrEnergo’s executive directors Dmitry Glebko and Konstantin Chuichenko (who is also on Gazprom’s board). I haven’t been able to find pictures of the contract online, however.

Gazprom is allegedly taking this as evidence of Naftogaz’s financial ability to pay for gas at European prices, and may press this issue during upcoming negotiations. (Ukraine may very well respond by demanding “European” prices for gas transit.)

Didenko apparently agreed to this price–which was higher even than the $315.50 price Gazprom was trying to charge–in order to pave the way for the removal of Ukrgazenergo (a 50/50 joint venture between RUE and Naftogaz) from Ukraine’s internal market. Paying for Russian gas at European prices has been an unofficial demand by Gazprom for acquiescence on the removal of middlemen within the gas supply scheme.

However, an analyst quoted in the Kommersant article suggested that this situation may create a two-tiered system, where Ukrgazenergo sells the gas it receives from RUE for $178.50 and Naftogaz sells “Russian” gas bought for $321. Given the price difference, it is hard to believe that Naftogaz would be able to compete commercially with Ukrgazenergo on the internal market.

Prime Minister Yuila Tymoshenko’s government has been actively working to “liquidate” Ukrgazenergo, to the benefit of Naftogaz. Ukraine’s National Energy Regulating Commission attempted to severely limit Ukrgazenergo’s allotted market share within Ukraine (from about 35 bcm per year to 5 bcm), and a suit on the issue between the commission and the gas trader is currently awaiting a hearing in Kyiv’s overworked administrative court. Tymoshenko’s vice premier asserted today that Ukrgazenergo’s license for the sale of gas at non-regulated prices had been revoked, but the company responded by calling him a liar.

Naftogaz responded to the article with a press release stating that Naftogaz isn’t going to be buying any “Russian” gas anyway, so the price isn’t a big deal (my translation):

Naftogaz notes that the publicized information relating to the purchase of Russian gas for Ukrainian consumers at the price of $321 per mcm is counter to the agreement reached between the Presidents of Ukraine and Russia and does not respond to reality. In the balance of the company [Naftogaz] for this year, there are no plans for selling volumes of Russian gas to Ukrainian consumers. According to the energy customs service, this year gas of Russian origin is not being cleared [растаможивался] into the Ukrainian customs territory

If indeed gas of Russian origin is not being sold within Ukraine, this would suggest it is instead either re-exported into Europe or being kept in storage. Though if Russian volumes of gas did make up 4 bcm out of the 9 bcm bought by Ukraine this year, it is hard to believe that domestic demand could have been satisfied by only the remaining 5 bcm of imports. (This underscores the difficulties in determining the origin of gas pumped through pipelines, particularly in the absence of clearly-delineated contracts and volumes.)

Assuming the price structure is expanded into the future, Naftogaz may be planning on simply re-exporting any gas it is forced to buy at “Russian” prices. It would then rely on the cheaper Central Asian blend (and domestic production) to supply internal consumers. In past years, the price of the gas “cocktail” supplied by RosUkrEnergo to Ukraine had included the cost of significantly higher-priced volumes of Russian gas. It is unclear why this year’s scheme has Russian gas being charged outside the system.

The negotiating delegation–which includes Didenko–plans to ensure that the price remains $179.50 during talks that resume in Moscow tomorrow. Bowing to the $315 Russian price for gas already delivered had been fodder in a public argument between Tymoshenko and President Yushchenko over the handling of gas issues.

Tymoshenko had claimed success at having escaped from the gas shut-off situation without agreeing to paying higher-than-contracted prices. She also intimated that Yushchenko was willing to accept the price Russia suggested. Yushchenko’s secretariat responded by posting the directives he had given her prior to her recent trip to Moscow, which included doing everything possible to secure the $179.50 price–steps that Yushchenko himself had taken during his own meeting with Putin earlier this year.

While Tymoshenko also wants a low price, she has stressed that any future deal should remove both RosUkrEnergo and Ukrgazenergo. She has been hesitant to endorse a plan to replace them with joint ventures between Naftogaz and Gazprom. It will be interesting to see what aspects of the President’s and Prime Minister’s visions for the gas scheme are stressed by the negotiating team–and eventually accepted by Gazprom.

Ukraine and Gazprom agree to end conflict after gas supplies drop further, allegedly affecting European deliveries

Update: Following direct phone talks between Naftogaz’s Oleg Dubina and Gazprom’s Alexei Miller, a resolution to this gas supply conflict is apparently on its way “soon.” Here’s more details on the vague “agreement” reached:

In particular, the sides have agreed that the gas supplies during January 1- March 1, 2008, will be paid for by Naftohaz Ukrayiny by the scheme [that] exist[ed] a[t] of beginning of the year. The problems with Russian natural gas supplies will be solved. The talks on other issues of collaboration in the gas sphere will continue.

Assuming supplies are back to normal by tomorrow, much of the post below won’t be too applicable. But feel free to read it anyway.

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Gas supplies remain at below-normal levels in Ukraine dueGazprom’s 25% cut in gas supplies (or 35%, depending on whom you believe) to Ukraine on Monday was followed by a further reduction in deliveries yesterday. Ukraine’s Naftogaz responded that it may retaliate by dipping into deliveries destined for Europe, which (according to Gazprom) apparently has already begun to happen today.

The level of gas from Russia has dropped by about 70 million cubic meters (Mcm) per day, which represents around half of Ukraine’s typical daily gas imports. Gazprom says it received a telegram (what century is this?) from Naftogaz saying that the Ukrainian state-owned company has diverted 60 Mcm per day from transit to Europe. Of this, 30 Mcm is designated as coming from Gazprom’s shipments west and 30 Mcm from RosUkrEnergo’s. These volumes represent about 8% of Gazprom’s average exports to Europe (358 Mcm / day) and the entire amount of exports for RosUkrEnergo. Gazprom is complaining that it is not being given access to data from gas transit monitoring stations in Ukraine to independently verify the discrepancies in volume.

Naftogaz asserts that the additional reduction of supplies is uncalled for, as it now cuts into the “Central Asian” portion of gas Ukraine is supposed to be receiving. For this time of year, the percentages are apparently supposed to be 25%-75%, Russian-Central Asian, but it’s doubtful there’s a contract anywhere that says that proportion is set in stone. Naftogaz also blames Ukrgazenergo and RosUkrEnergo–the two intermediaries coordinating the supply of gas imports to Ukraine–with stonewalling and hampering negotiation efforts.

It is believed that Ukraine has enough gas in storage (plus its domestic production) to satisfy demand for a few weeks before Ukrainian consumers will be affected. That would suggest that the reduction of transit supplies by Naftogaz is being done on principal–the belief that this act by Gazprom is illegal and hampers the Russian side’s negotiating stance–rather than out of need. Tymoshenko has assured Ukrainians that their heat and hot water will remain on, barring a conspiracy between Ukrgazenergo and RosUkrEnergo. Problems in Kirovgorod–heat allegedly shut down to “maternity wards, schools and kindergartens”–appear to be only political agitation.

The shortfalls of gas leaving Ukraine are unlikely to cause Gazprom to break the terms of its contracts with European consumers, as the volumes being sold up until a few days ago were in all likely hood above well the minimum stipulated amounts (which are determined over given lengths of time, rather than by daily flow). Also, Naftogaz announced that transit volumes through Ukraine had been up significantly for the past two months, suggesting the average deliveries could still fall within contractual amounts even with a period of lessoned supplies. Regardless, the structure of the contracts has Gazprom responsible for the delivery of its gas to European consumers. That won’t stop the Russian company from charging Naftogaz with illegal activities and seeking recompense, but the downstream customers are obliged to complain first to Gazprom.

This isn’t to say Ukraine isn’t at fault, nor that it won’t generate ill-will from European consumers. Both sides are investing heavily in PR efforts to publicize their arguments and reassure observers, but it is unclear at this point how they will play out. A spokesman for the US government characterized the situation as a “commercial conflict” that should be resolved via “commercial means.” While decrying the use of supply cuts, this nevertheless strays from the overtly political undertones accompanying most coverage of the January 2006 shut off.

Most international press has connected the current cut in supplies to debt accusations made by Gazprom. My last post attempted to show that this emphasis on the money portion of the conflict is being overblown. Instead, the main point of contention is the future composition of the gas supply scheme. (Naftogaz’s spokesman reaffirmed this.) A few hundred million dollars is not a big issue when companies with revenues of tens of billions of dollars are at stake.

The deal that Gazprom is pressuring Tymoshenko to sign off on–and that the president’s have agreed to–would have Gazprom increasing its share in the domestic market from 25% to 50% and include access to Ukraine’s domestically-produced gas. Whether or not those concessions are included in the agreement reached to end this conflict will show which side emerged the winner.

Making sense of a gaseous situation

Note: A version of this article is posted at www.oilandgaseurasia.com.

Tymoshenko explaining her position on Ukraine's gas supply issue - From unian.netFollowing through on its threat, Gazprom today reduced supplies of natural gas to Ukraine by 25% due to unpaid debts and the failure of both sides to reach an agreement on the future of the gas scheme. The news stories covering the situation are rife with inconsistent numbers, timelines and explanations. Here is my own labored attempt at explaining how Ukraine and Gazprom have arrived at this point.

The main problem is that the agreement reached between Yuri Boyko and Alexei Miller in early December 2007 was never fully agreed upon and implemented by all parties involved. (The agreement was also incomplete, failing to address and formalize terms that relied on mutual cooperation in the past.) The key reason for this was the transition in Ukraine’s government following the September 30th parliamentary elections and the ensuing coalition deal that (eventually) propelled Yulia Tymoshenko to Prime Minister and replaced the Yanukovich-led government under which Boyko served.

Flowchart outlining Ukraine's gas supply scheme - From vedomosti.ru The transition period–which resulted in Yuri Prodan being appointed as new Fuel and Energy Minister and Oleg Dubina to the head of Naftogaz–also apparently disrupted the in-place structures for payment between the government, Naftogaz, and Ukrgazenergo (UGE). Disruptions to the money flow at this level traveled up the line to RosUkrEnergo (RUE) and on to Gazprom (see the excellent structural flowchart by Vedomosti for more information on the connections between these firms). Tymoshenko’s long-running pledge to clean up the gas scheme fed the instability and contributed to uncertainty by the involved parties towards the recently-struck gas deal.

As a result, Gazprom was unwilling to put up with debts and promises of repayment that had been typical in the scheme up to this point. It was also in the process of signing deals for a new bypass pipeline, South Stream, and was interested in painting Ukraine as an unreliable partner.

Ukraine’s President Viktor Yushchenko, uncomfortable with changing the status-quo and not eager to pave the way for a Tymoshenko “victory” in the flashpoint gas issue, reached a hand-shake agreement with his Russian counterpart Vladimir Putin aimed at defusing the situation by creating a compromise. Except for expelling private Ukrainian business interests, the structure of the scheme would essentially remain the same–as would the price charged to Ukraine. Tymoshenko originally embraced the new deal, but then realized–along with many other critics–that it resembled a redux of the January 4th, 2006 agreement that inserted RosUkrEnergo in the first place. Indeed, the scheme proposed by the presidents would increase Gazprom’s presence within Ukraine’s domestic market and not significantly improve Naftogaz’s own financial footing.

Tymoshenko dragged her feet on agreeing to the presidential deal while looking for ammunition to rework the terms in Ukraine’s favor. Gazprom sensed this delaying, and clamored for immediate debt-repayment. It further increased the sense of urgency by emphasizing that current gas supplies to Ukraine are being delivered without the presence of a contract. This is only partly true, as Central Asian gas is being supplied according to the terms of the deal reached in December of 2007; there apparently is no structure in place, however, to regulate excess purchases of Russian gas. (After Boyko and Miller reached their agreement, I noted that it only clarified the terms for Central Asian supplies and gave no figures for Russian gas. This appears to be an issue now.)

That is the surface overview. Here are some underlying issues feeding the situation:

  • An earlier conflict between Ukraine and Gazprom over unpaid debts was settled in October 2007 by returning 12 billion cubic meters (bcm) of gas in Ukraine’s storage facilities to Gazprom’s control after RUE and UGE were slow in coming up with funds (partly due to delays in repayment by Naftogaz) to pay for it. Gazprom earmarked 4 bcm for re-export to Europe while saving 8 bcm for sale within Ukraine. Gazprom considers that gas to be “Russian” now and has been charging Ukraine the $314 per thousand cubic meters (mcm) price (as opposed to $179.50 for Central Asian gas) to dip into those reserves this winter.
  • The inflexibility of production capabilities within Central Asian countries means that shortfalls of supply to Ukraine during the winter months are normal and are compensated by Russian gas. Ukraine received about 3 bcm of extra Russian supplies over the first 3 months of 2007, but this didn’t create the stir that it is now. As noted by LEvko, Yuri Boyko explains that this excess was typically repaid “in-kind” later in the year, with Ukraine exchanging control over corresponding volumes of Central Asian gas to Gazprom from regular deliveries when Ukrainian demand is lower. Because this provision was not included into the official contracts (which aren’t signed / being followed anyway), that isn’t the case this year. Assuming this issue gets settled, this would presumably mean that Ukraine will have excess volumes of gas later in the year which it could export west for profit to compensate for the current financial crunch.

These two factors have been artificially inflated to contribute to the antagonistic situation between Gazprom and Ukraine which has led to this current dispute. Adding in the political factors–Tymoshenko looking to make an impression during her second PM stint with both her and Yushchenko eying the presidency, and the election of Gazprom chairman Dimitry Medvedev as Putin’s replacement in Russia–further complicates the economic rationale. Geopolitical factors–pipelines, NATO, and spheres of influence–add yet another layer to the overall issue.

Ukrgazenergo on the ropes, but gas intermediaries in Ukraine aren’t yet TKO’d

(2/28/08) – Update on my attempts to talk with Ukrgazenergo appended at the end of the post…

Vladimir Klitchko getting a good punch in on Sultan Ibragimov, even as Ukraine's government continues to spar with Gazprom and intermediary companies on a new gas scheme - From klitchko.com Please excuse the metaphors, but they are in honor of Vladimir Klitchko’s recent boxing victory (for which he got hearty congratulations from Tymoshenko and Yushchenko while unifying three major heavyweight belts). Meanwhile, in the gas sphere…

For weeks the fate of natural gas trader Ukrgazenergo has looked pessimistic. Earlier this month, Ukrainian Prime Minister Yulia Tymoshenko’s government had called for investigations into the legality of the company’s founding while she vilified its management as “energy terrorists.” One Ukrgazenergo employee said that at this point the firm’s fate rested “with God.”

Ukrgazenergo is facing government pressure - From ukrgazenergo.com.uaNow Tymoshenko is working at helping God decide Ukrgazenergo’s fate, instructing government-connected consumers to not buy gas from the trader and for the customs service to not clear imported gas meant for Ukrgazenergo. Tymoshenko expects to have Ukrgazenergo “removed from the market” by the beginning of April. April 1st is also the deadline imposed by Gazprom for reaching an agreement on the new supply scheme, and these two actions are complementary in Tymoshenko’s eyes.

However, at one point the draft agreement between Gazprom and Naftogaz on the new makeup of the bilateral (plus Central Asia) gas scheme kept Ukrgazenergo essentially in place. Gazprom would simply buy out the shares of RosUkrEnergo to bring its holding up to 50%, on par with Naftogaz and in line with the agreement reached between presidents Viktor Yushchenko and Vladimir Putin. Statements from Tymoshenko’s apparatus, however, conflict with this notion and instead assert that no such intermediary is needed within Ukraine’s internal market. They cite some of the same arguments that I outlined earlier against the expanded role of Ukrgazenergo’s successor, particularly in light of Gazprom’s increased holding in the joint venture. (Alla Yeremenko has a piece in last week’s Mirror Weekly giving a similar run-down.)

The problem is now reconciling the arguments of Tymoshenko with Yushchenko’s stubborn adherence to the status-quo (and its associated prices, which are a known quantity and set relatively low) along with Gazprom’s ambition for increased profits. Uncertainty over the future composition has led to questions surrounding debts and volumes of gas consumed and currently in storage–no one knows if those structures that owe money will survive long enough to pay it. Tymoshenko predictably blames the intermediaries while former Fuel and Energy Minister Yuri Boyko (who is deeply involved in these same intermediaries) says that such accusations are merely misdirection meant to disguise the illegal practices (i.e. siphoning off gas) of Naftogaz.

Following prodding from Tymoshenko, Ukraine’s General Prosecutor’s Office has launched investigations into Naftogaz’s activities and is beginning with charges of theft within one of the state energy company’s subsidiaries costing the government over $35 million. Tymoshenko has stressed that the investigations should concentrate on problems arising from leadership connected to the last government. However, the head of Ukrgazenergo’s management board, Igor Voronin (an associate of Boyko and himself likely one of those targeted by Tymoshenko) sent a letter of his own to the prosecutor’s office alleging criminal behavior by the current management of Naftogaz.

Gazprom’s recently-released financial report for the first nine months of 2007 lists RosUkrEnergo with $217 million in profits on $7.4 billion of revenues (up from $5.7 billion for the same period last year). The report also lists $2.7 billion in short-term accounts receivable for Gazprom from RUE, which would correspond to the roughly $2.4 billion figure mentioned before.

Based on Gazprom’s quarterly reports, RUE bought 54.25 bcm from Gazprom during 2007 (just below its 55 bcm contract) — 16 bcm of gas in the first quarter, 11.93 bcm in the second quarter, 10.95 bcm for the third quarter and 15.45 bcm in the fourth quarter. Sources within Naftogaz and Gazprom say that Ukraine bought less than 50 bcm from RUE, leaving over 5 bcm for re-export. Alla Yeremenko suggests RUE exported about 7 bcm last year, which would lead to profits of around $1.5 billion based on the import-export margin between Ukraine and Eastern Europe.

It’s hard to believe that RUE’s profits jumped over $1.2 billion in the final quarter of 2007, as suggested when comparing the latest profit figure with the expected numbers from re-export. Instead, a good chunk of that would likely go towards RUE’s short-term debts to Gazprom, presumably as payments for gas already received. This would correspond to Gazprom’s desire to keep RUE involved in the re-export side of the scheme, ensuring that the trader has an income source to repay its debts.

I was hoping to confirm some of these figures and activities with RosUkrEnergo but was not able to get into contact with their office. Within the last week or two, it has removed the contact information for its Ukraine and Turkmen representatives from its website. I had earlier saved the information (and a google cache has it too):

Representation in Ukraine:
Ukraine, Kiev 01004, Krasnoarmeyskaya Street 1-3/2, building 6а, 3rd floor
Phone: +380 44 4952222
Fax: +380 44 4593866
Nikolai Sorokin – Head of representation

Representation in Turkmenistan:
Turkmenistan, Ashgabat 744036, Business Centre of the Administration of the government body of the president of Turkmenistan Saparmurat Turkmenbashi Shayoly 124, office 102
Phone: +993 12 456970
Fax: +993 12 456965
Abdullaev Islam Adamovich – Head of representation

No one answered the Kyiv phone number so I instead went to the address, which happens to be in the swanky Arena City / Mandarin Plaza complex that is owned by RUE-big wig Dimitry Firtash. I was unable to locate an office for RosUkrEnergo, but was instead directed to the offices for UkrGazEnergo within the same structure. While I was not able to get past security, I may be able to set up a future meeting with a company representative.

Of course, given Tymoshenko’s intention to remove it from existence, I may need to hurry…

Update: I returned to the Ukrgazenergo office today with a letter summarizing my research goals, background, and some basic questions.  A security guard from the previous time was nice enough to deliver the letter for me, and upon returning from the 6th floor he told me to wait.  About 15 minutes later, a representative came down to talk with me briefly (as he was leading me out the door), essentially saying that now was “not a good time” but to come back later–that a meeting could be possible.  I told him that I’d heard about a few troubles facing the company, and promised to return later.  He was very civil (though didn’t give me a name or contact information) and seemed possibly interested in potentially being helpful (enough qualifiers there?).  We’ll see…

Gazprom-Ukraine gas deal fallout leads to renewed pessimism from Ukrainian critics

While Naftogaz pushed back negotiations to this week amidst growing controversy over the dealDespite the transfer of $105 million on Thursday as the first step in paying off Ukraine’s $1 billion (at least) debt, talks between Gazprom and Naftogaz stalled and have been pushed back to this week over disagreements on the exact terms of the new deal. A draft agreement between the two firms obtained by Kommersant created a stir among Ukrainian observers over worries that little is being done to change the underlying problems and too much is being sacrificed to the Russian side.

Meanwhile, sensing discontent and potential stalling, Gazprom has set two new deadlines for the fulfillment of the major terms enumerated by last Tuesday’s Putin-Yushchenko agreementMarch 14th to pay off Ukraine’s entire debt and April 1st to sign an agreement on the new structure for the gas scheme set to replace RosUkrEnergo and Ukrgazenergo.

Gazprom is pushing for quick action on the Putin-Yushchenko gas agreement - From gazprom.comWhile the original Ukrainian response to Yushchenko’s deal with Putin that removed RosUkrEnergo and its cousin Ukrgazenergo from the gas supply scheme was enthusiastic–this had been a goal of PM Yulia Tymoshenko for years–emerging details of the plan have led to growing discontent and further questions about Yushchenko’s motivations in the gas sphere and the cost to Ukraine this new deal will create.

The arguments of the critics have varying levels of importance, but in general show that Ukraine has certainly failed to solve this enduringly thorny issue:

  • The new agreement does not remove the intermediaries, but only replaces them. Indeed, the working name for the new Gazprom-Naftogaz entity to replace RosUkrEnergo is RosUkrGaz AG, another Swiss-registered company. Hopefully, its new address won’t be 12 Loewelstrasse, Vienna — the same building as Centragas, Dimitry Firtash’s firm that controls half of RUE. (As documented by Global Witness, major ownership figures for EuralTransGas and its “successor” RUE shared this same building, leading to undeniable connection claims.)
  • The new joint venture will give Gazprom 50% access to Ukraine’s internal market, including sales of domestically produced gas. The 50/50 Gazprom-Naftogaz company set to replace Ukrgazenergo (if it is even replaced–the current proposal has Gazprom buying out RUE’s 50% share and keeping the structure in place) will be broadened to include sales of gas produced in Ukraine. Previously, these sales–relatively unprofitable as they were, due to government-imposed price caps–had been controlled solely by Naftogaz. A bigger deal, however, is the increased direct access to Ukrainian consumers for Gazprom, from under 25% (based on 25% control of Ukrgazenergo, which supplied most–but not all–of the market) to 50%.
  • Naftogaz’s share in this internal market remains the same–50%–while Ukraine only succeeded in replacing RUE’s share in the importing scheme. According to sources within RUE quoted by Kommersant, the intermediary was facing increasingly small margins in its Central Asia-Ukraine gas scheme, and was expecting to actually lose $20 million from this part of operations in 2008 due to increased costs for Kazakh gas.
  • RosUkrEnergo will continue to exist and exclusively hold the right to re-export volumes of Central Asian gas to Eastern Europe. The re-export of gas to the Eastern European market allowed RUE to make its profits–last year’s margins were about $170 per thousand cubic meter (mcm) in Europe versus $2 per mcm in Ukraine. RUE is apparently going to be allowed to export between 3-8 billion cubic meters of gas per year for at least the next two years, with profits expected to be between $500 million and $1.3 billion according to a Renaissance Capital analyst. Naftogaz, on the other hand, will only be able to sell the imported gas internally in the same ratios and ownership percentages (and limitations) as before. As with the Ukrgazenergo deal, once again Naftogaz will be stuck with the unprofitable side of the gas scheme.

Indeed, it appears that RosUkrEnergo is itself indebted to Gazprom by about $2.4 billion, and Gazprom is counting on RUE being able to re-export 7 bcm this year to cover that debt, which consists of the following:

  • About $1 billion in debts to Gazprom Export (the entity that sells the Central Asian gas to RUE) in the form of $350 million in overdue arrears and $600 million from the reclassification of Central Asian gas within Ukrainian storage facilities presumably stemming from last October’s gas debt deal.
  • Over $550 million from restructured debts for gas delivered to Ukraine between August and November 2006.
  • Nearly $380 million for 1.2 bcm of Russian gas delivered in January of this year at the cost of $314.60 per mcm.
  • $450 million in credit granted to RUE by Gazprom.
  • $53 million to ZMB GmbH, Gazprom’s German subsidiary.

Ukrainian Vice PM Alexander Turchinov on Friday pushed to award Naftogaz re-export rights in the place of RUE, and this appears to be one of the major sticking points in reaching the new gas scheme agreement. In addition to the re-export clause, he suggests that the deal should be in the form of an inter-governmental agreement (which could be signed during Yulia Tymoshenko’s visit to Moscow on Feb. 21st, assuming she recovers from her current illness) as opposed to a contract signed between Gazprom and Naftogaz.

Negotiations are set to continue this week between Valery Golubev and Igor Didenko, deputy heads for Gazprom and Naftogaz, respectively. As the draft agreement stands now, Naftogaz and the Ukrainian government stand little chance of resolving many of the issues that face the country’s gas scheme. Pushing for gas re-export rights would be a key step in boosting Naftogaz’s financial durability, but this promises to be a difficult proposition due to Gazprom’s interest in seeing RUE repay its own significant debts.

Addendum: Yushchenko, fresh off his deal with Putin in Moscow, is apparently frustrated with Tymoshenko’s attempts at involving herself within the gas scheme and is now looking into transferring control of Naftogaz from the Cabinet of Ministers (controlled by the Prime Minister) to the Presidential Secretariat. Some have suggested that his reticence to push for a substantial shakeup of the gas sphere stems from alleged involvement of his brother or other family members in highly-placed companies connected to the gas industry.  Yushchenko has himself suggests that Tymoshenko’s agitation has fueled discontent between Gazprom and Ukraine leading to renewed conflicts, whereas his only goal is to reach the lowest possible price and continued supplies for Ukrainian consumers.  However, in his desire to reach these ends, Yushchenko may very well be contributing to a system that deserves a more thorough overhaul–despite potential shock to the related markets.

Note: I bought a new computer, hopefully ending my string of technical difficulties that limited my posting schedule. I’m hoping to write something soon on Gazprom’s recently-released financial report for the first 9 months of 2007.