Tymoshenko’s trip to Moscow still leaves gas questions

Update (2/23/08): For an idea of the tone of the relationship between Tymoshenko and Yushchenko on gas issues, check out the video Ukrainiana posted of him scolding her on the eve of her Moscow trip (I am pretty certain that is when it’s from). That doesn’t stop her from wishing him a happy birthday, though.
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Ukrainian Prime Minister Yulia Tymoshenko spent Wednesday and Thursday in Moscow visiting with President Putin, PM Viktor Zubkov, Gazprom representatives and other Russian officials. Despite significant run-up before the trip from Vice PM Alexnder Turchinov, gas was not the main topic of conversation on the first day. Instead, the talks with Putin and Zubkov centered on shared economic concerns and future cooperation between the two countries.

On Thursday, however, Tymoshenko discussed the gas issue for about 5 hours, at first with Gazprom’s president Alexei Miller, then with deputy representatives from the company, and even officials from RosUkrEnergo and Ukrgazenergo. Following the talks, she went straight to the airport and declined to give a press conference on their results. Gazprom said only that no final agreement had been reached and that talks would be continuing.

Tymoshenko did give an update on the negotiations upon landing in Kyiv, however (my emphasis and translation):

“Regarding the first quarter (of 2008), we are settling within the next few weeks the agreements and will be removing one of the intermediaries — Ukrgazenergo. [RUE will remain in place, however, until the new scheme is finalized.] …

We extended further the negotiating process in order to create a long-term contract on the purchase of Central Asian gas from Gazprom Export, the 100%-owned subsidiary of Gazprom. And we will construct the relations so that we won’t have to conclude contracts every month, like last year, and instead we will try to reach a long-term contract [25-30 years] for the first quarter of 2008 and in such a manner come into stable security for Ukraine of gas without any intermediaries and for a price that is formed on the basis of the cost of Central Asian gas.

She also commented on the debts to Gazprom facing Ukraine and their manner of repayment, saying that the matter of debts from Nov-Dec of 2007 will be resolved within the next few days.

“The first thing we did, was to settle the last months of the preceding year, tomorrow we will take corresponding resolution (постановление), and already in a few days we will settle up the natural gas debts [accrued by] the previous government.”

However, she added that “the problems created by RosUkrEnergo and Ukrgazenergo are significantly deeper than was suggested by the government,” and also involve a debt situation allegedly created by the intermediaries surrounding the return of 4 billion cubic meters (bcm) of gas:

“The debt, unfortunately, is not only measured in US dollars, already exceeding $1.5 billion, but also in certain volumes of gas from the previous period that were consumed by Ukrgazenergo and RosUkrEnergo, and were withdrawn from the balance of Ukraine, and Ukraine, besides real money [the $1.5 billion], still owes billions of cubic meters of gas which must be returned in kind.” [She later clarified the volume as about 4 bcm.]

“The scale of looting by RosUkrEnergo and Ukrgazenergo will continue to be revealed through meetings like the one we held today.”

In talks today with her Cabinet of Ministers she reiterated the fault of the intermediaries in the case of this missing gas, which is now considered Naftogaz’s debt:

“It turns out that they [the intermediaries] had managed in previous years to use gas coming this year from Central Asia. They bought gas in advance and what did they do with it? Exported it or sent it to some other unknown place,” she told ministers.
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“Today, they have handed us an imbalance of 4 billion cubic metres, now considered debt for Naftogaz,” she said, referring to the financially troubled national oil and gas company. “They ran up huge debts and not just in terms of money.”

Tymoshenko apparently also blames the former leadership of Naftogaz for the situation, as she announced that her government will be soon send letters to Ukraine’s Prosecutor General’s Office urging a criminal investigation into officials “who chaired Naftogaz Ukrainy last year.” She alleges that individuals abused both gas and monetary resources and participated in “abuses in the system of Naftogaz, Ukrgazprom and Ukrgazenergo–all of this was absolutely illegal.” More repercussions are likely as she continues to hold meetings today.

This was Tymoshenko’s first visit to Moscow since returning to the PM position following last fall’s parliamentary elections. She had been expecting to visit about a month ago, but that trip was postponed due to an illness and, likely, pressure from Yushchenko to delay until after his own visit to the Kremlin. Before she left, Yushchenko, worried over rhetoric suggesting she will be starting the gas negotiations “from anew,” essentially warned her not to screw with the terms agreed he and Putin agreed on earlier and admonished her government for slow work on following through with the deal.

On the plane to Moscow, Tymoshenko brushed off Yushchenko’s words, instead suggesting that “the most important thing is that I am going [to Moscow] without any directives.” The presidential secretariat responded with worry (despite Yushchenko being out of the country by that point), and this tension may have led to the limited role the gas issue played in the first day of her visit.

Talks on the second day appear to follow Yushchenko’s wishes, as she acknowledged the necessity of paying off Ukraine’s gas debt (though she emphasized again that it was the fault of the last Yanukovich-led government) while apparently staying away from raising the possibility of increasing transit tariffs. She again emphasized the her long-standing desire to be free of intermediaries, but it remains unclear whether she would consider a 50/50 joint Gazprom-Naftogaz company coordinating Central Asian gas deliveries to be just as negative to the scheme as RUE.

Acceptance of the debt (and its repayment) and a toning down of rhetoric are important for securing cooperation in reaching a long-term deal that will bring stability to the scheme and aid in the Ukraine-Russia relationship. While Tymoshenko isn’t known for scaling back her fiery words, the results of this trip may yet lead positive, long-term results that will help her build the political capital to push at future issues. I am not yet ready to label her Moscow visit a failure (or “a fiasco“) solely because no break-through agreement was reached and instead negotiations are continuing. Indeed, the situation calls for protracted negotiations that are not governed by the crisis mentality of impending deadlines. This may or may not come about, but Tymoshenko appeared to make her own contributions to such a result.

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Choice bits from Putin’s “Annual Big Press Conference”

Russian President Vladimir Putin held his ritual mega-press conference for Russian and international press outlets last Thursday. He touched numerous issues dealing with Ukraine and energy politics, especially due to proximity of Yushchenko’s visit to the Kremlin and continued controversy over gas relations between the two countries.

Putin calls Ukraine’s steps towards NATO un-democratic since they don’t follow public opinion, dismisses Poland’s concerns over the Nordstream pipeline and a resurgent Russia, praises Yushchenko’s cooperation on the Ukrainian gas issue, believes corruption to be the most pervasive problem he’s faced as president, decries the politicization of European and Russian energy deals, scoffs at claims of his immense wealth, claims to be prepared to hold the post of PM under Medvedev, and accepts Chechnya’s 99% voter turnout–99% of whom voted for United Russia–in the last elections as a legitimate expression of yearning for “stability.”

There are also some interesting responses on the Kosovo issue, as well as plenty of fluff–it was Valentines Day, after all–that I didn’t quote.

Following the break are some choice excerpts from the transcript (my emphasis added).

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

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…

Belarus’ gas bill

Belarus has agreed to pay out a portion of the $456 million the country owes Gazprom for natural gas payments originally due by July 23rd. When it had become obvious Belarus was not going to pay by then, Lukashenka was given until today to coordinate the payment. This first chunk, $190 million, has bought Belarus an additional week to come up with the remaining money, at the cost of supposedly emptying the country’s reserve fund. From RIA Novosti:

Alexander Lukashenko said: “I have instructed the government to take $460 million from our reserve and pay for Russian gas supplies. This is not a major sum for the country.”

“Our reserve fund will be emptied, but other countries are ready to help us, including [Venezuelan President Hugo] Chavez and foreign commercial banks,” Lukashenko said.

(Venezuela hasn’t confirmed agreeing to an actual loan, but Chavez visited Minsk in June and apparently is seeking a $1 billion arms deal with Belarus, suggesting that future cooperation is possible.)

Belarus had been negotiating with Russia for a $1.5 billion loan that would be used to cover the gas cost, but talks fell through last week during PM-level meetings. Two Gazprom-connected banks had also offered Belarus loans to cover the payment, but they were refused by Minsk.

The obvious question for me is why Belarus didn’t pay the bill with the $625 million it received from Gazprom earlier this year as payment for a 12.5% stake in Beltransgaz, the first transaction in a series of four that would give Gazprom a 50% holding in Belarus’ domestic gas pipeline system. This arrangement was at the crux of the gas deal worked out at New Years, when the price and payment deadlines that are now the issue were worked out.

Belarus would keep its sub-European price levels for the gas it was receiving from Gazprom, but in return, it would have to allow the Russian gas company to acquire a stake in its domestic pipeline operator. Gazprom already controls the company that runs the major Yamal-Europe pipeline, which passes through Belarus and into Poland and Germany. That pipeline is where the majority of Russian gas exports through Belarus traverse, and is key for bypassing Ukraine (which has much more of a stranglehold on Russia’s export routes). Control over the domestic pipeline network is less important for securing the reliability (and profitability) of its exports, but it does give Gazprom more leverage in securing payment from its deliveries to the internal Belorussian market. It also strengthens Gazprom’s general hold on the region’s natural gas infrastructure, a goal it has been pursuing lately.

The deal reached back in January kept Belarus’ gas prices well below Western European (and Ukrainian, Georgian, etc.) prices, but at the cost of Beltransgaz. Lukashenka really had no option; his economy–what there is of it, at least–is largely kept afloat through Russian energy supplies that are in effect subsidized. Forcing a dramatic increase in price would devastate the country’s energy-intensive industry. In addition, Gazprom’s payments for Beltransgaz would correspond to Belarus’ gas bills, ensuring the beleaguered country would have the funds available to keep Gazprom happy and at bay, (at least for the next few years) as Belarus transitions into prices more in line with market forces.

What exactly happened to the $625 million Lukashenka was supposed to spend on his country’s gas bill is not clear (though I can guess…). Instead, Belarus is trying to play the victim and Gazprom is forced into the position of threatening a gas shutoff, which is quite damaging to its already suffering public image.

However, I have no pity for Belarus on this. They new this date was coming, and they should have kept the funds available for it. Despite suggestions that this pressure is corresponding to requests for Russian access to Belorussian privatization deals, or calls saying this is just a further example of energy blackmail, Gazprom really does have a case here.

Gazprom’s shutoff to Ukraine on Jan. 1, 2006 was incredibly harmful to its reputation, and should a further cut off be necessitated, the company needs to do a better job of explaining its position–and the Western press needs to do a better job of listening to it. It appears efforts are being made in that regard, as noted in the Wall Street Journal:

Foreign Minister Sergey Lavrov reassured his audience that Russia was a reliable energy supplier. “I would like to stress that Russia has never violated its obligations under any contract to deliver energy,” Mr. Lavrov was quoted as saying by Interfax.

Russia guaranteed energy supplies “to every country, not only friends or allies,” he said.

Quotes like these, however, along with any mention of the $2.5 billion deal for Beltransgaz that was meant to pay for this sort of thing, are only mentioned at the end of these articles.

Update: Kommersant reports that the $625 million was put into the reserve fund now being tapped for the gas payment. Apparently, Lukashenka also got some of the country’s largest businesses to “donate” $100 million a piece to the fund as well, suggesting that raiding the account for the $460 million bill should not bottom it out.

In May, the Belorussian vice-premier Vladimir Semashko said that the money paid for Beltransgaz “will not be returned to Gazprom — it will [instead] go into the National Development Fund.”

While the sentiment may be appreciated–using money from the sale of a key national asset for strategic national development–it also suggests a lack of foresight on the Belorussian side. Just how did they expect to pay the bill? The government is apparently receiving payments from individual domestic gas customers, it is just refusing to pass along that payment to Gazprom. Now it is forced to go back on its assertion of not using Gazprom money to repay the Russian company. Long term, Belarus will have to increase collection efforts, raise domestic prices, and diligently repay gas contracts–or else it will once again have to raid its depleted cookie jar.

Check out more coverage from David Marples on the EDM, including some reactions from charter97.org.