Gazprom pipelines and export capacity

Газопроводы Газпрома и экспортные мощности

Gas pipelines of West Siberia

Газопроводы Западной Сибири

Export flows of Gazprom

Экспортные потоки

Spot, Gazprom, Brent

Цены на нефть и газ

End-use price of gas

Russia and USA

Daily gas production

Суточная добыча


Russian-Ukrainian Gas Dispute


Price of gas for Ukraine and future problems

Russian Gazprom and Ukrainian Naftogaz have signed two agreements that regulate the transit of Russian gas to Europe and supply to Ukraine for the period 2009-2018. In our view, because of a very short preparation time of one night, the agreements have two points that may cause serious problems later this year.

First, Naftogaz has absolutely no incentives to buy expensive gas in May-June and inject it into underground storage facilities, because the price in November-December will be much lower. One should keep in mind the following issues.

  • The existing pipelines of Gazprom are unable to deliver enough gas to meet the combined demand of Ukraine, Belarus, Moldova and Europe in winter.

  • Gas withdrawal from the storage facilities of Ukraine is a necessary component of winter supplies.

  • Shortage of gas in the underground storage facilities of Ukraine can put at risk the supply of Russian gas to Europe again next winter.

Our projections of the average price of European exports of Gazprom and the price for Ukraine are shown in Figure 1 and Table 1.

Figure 1. Price of Brent crude and the average price of European exports of Gazprom

Sources: Gazprom; EIA; East European Gas Analysis.

Table 1. Export price of gas, USD/mcm

 

2006

2008

2008

2008

2008

2009

2009

2009

2009

2009

 

Q1

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Ave

Europe and Turkey

243

346

400

460

500

384

246

180

176

241

Ukraine (1)

230

180

180

180

180

360

230

168

165

190

Average price of Brent crude, $/bbl

62

97

121

114

55

45

45

45

45

45

Data for Q3-Q4-2008 and 2009 are estimations of East European Gas Analysis.

(1) The price of 2008 was $179.50/mcm. In Q1-2006 - the price of gas produced in Russia.

The projections assume the price of Brent crude at $45 per barrel. Note that Ukraine is unlikely to buy any gas from Gazprom in Q1-2009 at the price of $360/mcm, because Naftogaz has enough fuel in the gas storage facilities to meet the low demand affected by the crisis. So, the average price of gas for Ukraine in 2009 is likely to be below $190/mcm.

In Q2-2009, when Naftogaz needs to buy 7-8 bcm of gas and inject it into storage facilities, the price of gas for Ukraine is likely to be $230/mcm, while that in Q4-2009 $165/mcm. The falling price is sending Naftogaz a strong and clear signal not to buy. There are two ways of solving this problem.

  1. Gazprom creates an incentive for Naftogaz to buy "summer gas" by giving a serious price discount. In my view, the price of "summer gas" should be about $100/mcm. Then the average price of gas for Ukraine in 2009 will be about $150/mcm.

  2. Gazprom signs a storage service contract with Naftogaz at European tariff with a 20% discount, which would be $70-90/mcm. The average price will be about $190/mcm.

There is still time to negotiate the storage deal. However, it has to be done by mid-April at the latest. Otherwise, there will be shortages of gas in Europe and/or Ukraine again next winter.

Second, Naftogaz sells transit services to Gazprom at dumping price because the Ukrainian transit tariff of $1.70/mcm per 100 km does not cover the cost of transit operations. It may run counter to the international obligations of Ukraine as a member-state of the World Trade Organization.

Mikhail Korchemkin

January 21, 2009

P.S. Currently, Rosukrenergo (RUE) owns some 11 bcm of gas injected in Ukrainian storage facilities. To withdraw this gas under a minimum European tariff, RUE would need to pay $1.3 billion. However, current Ukrainian storage tariff is set at 4% of the minimum European rate, which reduces the value of the storage contract to a mere $55 million. Apparently, the energy regulating authorities of Ukraine are interested in preserving the last remaining profits of the Swiss broker.

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Last modified: 12/07/14                    East European Gas Analysis 2006-2014                                           Email: info@eegas.com
Reproduction or use of materials is allowed only with reference to East European Gas Analysis or www.eegas.com