8. IF UKRAINE RAISES GAS TRANSPORTATION CHARGES RUSSIA’S MOVE TO INCREASE PRICE FOR NATURAL GAS, SUPPLIED TO UKRAINE, WILL BE UNREWARDING, ANALYSTS BE

Ukrinform, Kyiv, Ukraine,
Thu, December 22, 2005

The present rift between Ukraine and Russia over the price for Russian natural gas, supplied to Ukraine, and tariffs for transit piping of Russian gas to Europe via Ukraine’s gas transportation system may spell losses not only for Ukraine, but also for Russia, the Kyiv publication EnergoBusiness contends.

In the publication’s article, captioned “Swinging the Boat,” the newspaper notes that Moscow’s “gas attack” on Kyiv has nothing to do with economics.

This is an obvious attempt to discredit the incumbent Ukrainian authority and assist pro-Russian political forces in winning the March 2006 parliamentary elections, which will allow them to assume control over the Ukrainian government.

However, the Gazprom is primarily a business, meant for gaining profits. So, having calculated the costs of adequate raises in tariffs for transit transportation of Russian natural gas in response to raises in prices for natural gas, the Russian monopoly-company are racking their brains.

The general picture looks like anything but in their favor as Ukraine will likely lose nothing, provided it preserves the current gas price: transit transportation tariff ratio.

It looks like Turkmenistan may benefit from the Kyiv-Moscow conflict, as allowing to raise the price for Turkmen natural gas to the European level.

The EnegoBusiness cites estimates and computations by independent analysts with the consultant company East European Gas Analysis, who, for long, have been vetting the Gazprom company’s activities.

As they believe, over the past years the Gazprom paid the just price for its gas transportation via Ukraine’s territory, so changing the status quo would be unprofitable. Ukraine’s transit transportation tariffs for Russian natural gas have nothing to do with relevant international tariffs.

From the very beginning the tariffs were set at a level, which would allow to purchase predetermined amounts of Russian natural gas with the money, earned through transit services.

In other words, the costs of natural gas, which Gazprom supplied to Ukraine by way of settling for transit piping, were equal to the NaftoGaz Ukrainy company’s earnings from rendering transit transportation services to the Gazprom.

After 2000 Russian natural gas supplies to Ukraine to pay for Ukraine’s piping services were determined in amounts of 26 bn. cu. m. a year, priced at 50 USD per thousand cu. m. The transportation tariffs was set at 1.0937 USD per thousand cu. m. per 100 km.

Until 2004 the Gazprom kept shipping only 26 bn. cu. m. of gas to Ukraine by way of payment for Ukraine’s transit transportation services. Ukraine also imported gas for independent extractors and gas from Central Asia.

Since 2004 the Gazprom supplied the entire amount of Russian natural gas. In particular, and 2004 the Gazprom supplied 26 bn. cu. m. of gas to Ukraine, by way of reimbursing in transit services, priced at 50 USD per thousand cu. m., as well as six billion cu. m. for Ukraine’s money, priced at 80 USD per thousand cu. m.

In July 2004 the Gazprom and the NaftoGaz Ukraine signed an agreement on regulating Ukraine’s debt to the tune of 1.25 bn. USD.

In accordance with the agreement, in 2005 – 2009 the Gazprom’s amounts of natural gas supplies to Ukraine by way of reimbursing Ukraine’s transit services were to be reduced to 21 bn. cu. m. a year, with concurrent increases of supplies of Turkmen natural gas to Ukraine.

The difference of 5 bn. cu. m. a year (or 25 bn. cu. m. over five years) was supposed to be subtracted from Ukraine’s debt. The price for Russian natural gas was fixed at 50 USD per thousand cu. m.

In 2005 the Gazprom paid 1,550 M. USD to Ukraine for it transit services, including 1,300 M. USD in kind (Russian natural gas) and 250 M. USD with the money. In 2006 transit transportation of Russian natural gas via Ukraine’s pipelines will likely be in the same amount.

According to the analysts’ calculations, if the Gazprom raises the price for its natural gas the NaftoGaz Ukrainy will raise the tariffs for transit piping, with a view of earning enough to buy either 26 bn. cu., m. of gas or 21 bn. cu. m., which will depend on how the issue of Ukraine’s debt will be regulated.

In this case there will be three likely scenarios of further developments (A, B and C).

According to the East European Gas Analysis experts, to buy 26 bn. cu. m. of gas the Ukrainian party will have to raise the tariffs to 2.94 USD per thousand cu. m. per 100 km (“A” scenario).

This will be somewhat lower than what the Gazprom is paying in some European countries. For instance, in Austria the tariff stands at 3.40 USD per thousand cu. m. per 100 km.

As the experts note, even if the Gazprom raises the price to 200 USD per thousand cu. m. Ukraine’s adequate increase in the transportation tariffs will make these still lower than in some European countries.

In case the agreement on Ukraine’s debt repayment remains valid (“B” scenario) Ukraine will have to raise the tariff to 2.37 USD per thousand cu. m. per 100 km to buy 21 bn. cu. m. of gas.

Thus, even the most adverse scenario will reduce the Gazprom company’s cash incomings by 858 M. USD (“A” scenario). The Russian monopoly will lose at least 928 M. USD, if the B scenario materializes.

The C variant envisages Ukraine’s purchases of additional 5 bn. cu. m. of gas not from the Gazprom, but from Central Asiatic countries. The Russian party’s losses, as compared with 2005, will amount of 618 M. USD.

According to preliminary estimates, under the A variant the Gazprom will be able to offset about half of losses through raising tariffs for transit transportation of Turkmen gas to Ukraine via Russia’s territory.

The Gazprom’s losses will be caused by raises in sums of customs. However encouraging this may appear in terms of the Russian budget, a conflict of interests between the Gazprom and the Russian State will be inevitable as the State poses as the company’s major stockholder.

The Gazprom’s financial performance will deteriorate, which, on the eve of the stock market’s liberalization, will reduce the value of the State’s parcel.

Besides, the company’s worsening financial footing may be viewed by other stockholders, including foreigners, as a deliberate move, which may trigger complaints and litigation.

In the EnergoBusiness authors’ opinion, there is yet another aspect of the problem in question. Shortly, the Gazprom will sustain additional losses through inevitable raises in prices for gas, which Central Asiatic nations, including Kazakhstan, export.

Turkmenistan is keenly watching developments in Ukraine, so raises in prices the Russian natural gas will most certainly trigger a chain reaction in Central Asia.

Turkmenistan relies on the price for its natural gas at the Ukrainian frontier in price calculations. So, if the Gazprom raises the price for Russian gas to 160 USD, nothing can prevent Turkmenistan from charging 120 USD to 140 USD per thousand cu. . of its natural gas at the Kazakh – Russian frontier. In this case both imports or re-exports of Turkmen natural gas will be absolutely unrewarding.

Any attempts to bring pressure to bear on the Turkmen leader would be futile. As historic experience suggests, Saparmurat Niyazov can switch off gas supplies and wait.

This, the East European Gas Analysis experts conclude, if Ukraine takes adequate steps to raise transportation tariffs raising prices for Russian gas will be unprofitable to Russia.

Thus fact may explain the Gazprom’s current strategy, which is to make Ukraine accept global prices for gas, but not European tariffs for transit piping, which the NaftoGaz Ukrainy is pressing for. That is, the Russian party’s steps are aimed at disbalancing the existent parity in favor of Russia. The Gazprom says Ukraine must preserve the basal tariff for transit at 1.75 USD, which, incidentally, was set last century.

Russia views it as “European.” Nevertheless, it is only in Belarus that lower transit tariffs can be found. Russia pays 0.75 USD per thousand cu. m. per 100 km to the BelTransGaz for transit piping of Russian gas via Belarus.

However, relations between Russia and Belarus are quite particular, whereas transit piping of Russian gas via Poland costs the Gazprom 2.34 USD per thousand cu. m. per 100 km. But the Russians are investing in Polish pipelines’ construction and hold 49 percent of the construction company’s stocks.

Small wonder, after Ukraine made public its plan to set the transportation tariff at 2.60 USD per thousand cu. m. per 100 km statements promptly followed by Gazprom vice chairman Aleksandr Medvedev that now the price of 160 USD per thousand cu. m. is ruled out.

Russia will raise it to 217 USD / 230 USD. That would be an exorbitant price as equal to the price of gas at the German frontier and there will be no grounds to further raise it.

Yet, Ukraine will be able to raise its tariffs. So, Ukraine’s stand in the negotiations with Russia appears more advantageous than Russia’s the EnergyBusiness notes. -30-

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