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

Important Changes in Russian Gas Business Environment

Clarifying the Math of Ukrainian Transit Tariff

Gazprom was paying a reasonable price for transit service in Ukraine. Now Gazprom insists on paying 220% more for the same service.

  • All publications and statements on the gas transit conflict between Russia and Ukraine give vague numbers on costs and benefits of the involved parties.

    • Lack of numerical arguments indicates that it is more a political than economic issue.

    • We believe it is about time to clarify the details.

  • First, the Ukrainian transit tariff was and is set at the rate, which allows Ukraine to generate enough cash for an agreed volume of gas. The transit tariff matches the price of gas delivered as payment for transit services, which means that the value of payment gas is equal to the transit revenue of Ukraine.

    • After 2000, payment gas volume was agreed at 26 bcmy and the price at $50/mcm. Transit tariff was set at $1.0937/mcm per 100 km.

    • Until 2004, Gazprom was delivering only 26 bcmy of payment gas. Ukraine was also importing gas from Central Asia and Russian independent gas producers.

    • In 2004, Gazprom delivered to Ukraine 26 bcm of payment gas at $50/mcm and sold additional 6 bcm for cash at the average price of $80/mcm. Gazprom continues deliveries of payment gas and exports for cash in 2005.

      • Additional sales for cash are required to compensate for the exports of RosUkrEnergo, a Switzerland-based joint venture between Raiffeisenbank of Austria and Gazprombank. Additional exports of 6 bcm a year are not required if RosUkrEnergo is replaced by a 100% daughter company of Gazprom.

  • In July 2004, Gazprom and NAK Naftogaz have settled the $1.25 billion debt of Ukraine.

    • According to the deal, payment gas volume for 2005-2009 is reduced to 21 bcmy.

    • The balance of 5 bcmy (or 25 bcm in five years) is considered as Ukrainian debt payment. Apparently, the payment gas price is fixed at $50/mcm.

    • The deal also assumes that Ukraine imports more gas from Turkmenistan.

    • Note that the debt settlement issue has not been mentioned in the current talks about the payment gas price.

  • Now Gazprom wants to raise the price of gas for Ukraine to $160/mcm and convert the transit payment into cash.

    • We consider this initiative of Gazprom as a mistake.

      Table 1: Effect of the Raise of Gas Price for Ukraine







    Price of payment gas


    50 160 160 160

    Payment gas volume




    21 21

    Value of payment gas

     $ million



    3360 3360

    Cash payment for transit services

    $ million



    3360 3360
    Total cost of transit service $ million 1550 4160 3360 3360
    Ukrainian transportation work thous. bcm * km 142 142 142 142
    Ukrainian transit tariff $/mcm/100km 1.09 2.94 2.37 2.37
    Additional import for cash bcm - - 5 -
    Additional gross revenue $ million - - 800 -
    Revenue net of export duty $ million - - 560 -

    Export duty of Gazprom

    $ million



    1248 1008

    Change of Gazprom cash flow from 2005

    $ million



    -298 -618
  • Table 1 illustrates the effects of Ukrainian price increase on the cash flow of Gazprom.

  • In 2005, Gazprom paid for Ukrainian transit services $1550 million, including $1300 million in payment gas and $250 million in cash.

    • $1550 million divided by the published tariff of $1.0937/mcm/100km results in the transportation work of 142 thousand bcm * km.

      • Similar result can be achieved through the calculation of transportation work using the length of major transit pipelines and the corresponding annual flows.

    • For the sake of simplicity, we assume that the transit transportation work remains the same in 2006, which means same volumes of Russian gas would cross Ukraine via same pipelines.

  • If Gazprom increases the price, it would be natural for NAK Naftogaz to raise the transit tariff.

    • Depending on the status of debt settlement, NAK Naftogaz would want to generate enough cash to buy either 26 bcm (case 2006A) or 21 bcm (cases 2006B and 2006C) of gas.

    • 2006B illustrates the best case for Gazprom when Ukraine imports additional 5 bcm from Gazprom.

      • Note that the debt settlement assumes that Ukraine increases imports from Turkmenistan, so additional imports from Gazprom are unlikely.

  • Having transportation work at the level of 2005 and the volume target of 26 bcm, Ukraine would need to raise the tariff to $2.94/mcm per 100 km (2006A).

    • Note that this is a way lower than tariffs paid by Gazprom in some European countries.

    • While Gazprom can go as high as to a four-time price increase (to about $200/mcm), a four-time increase of Ukrainian tariff would be still lower than some tariffs paid by Gazprom in Europe.

    • From this standpoint, we consider the negotiating position of Ukraine stronger than that of Gazprom.

  • A target of 21 bcmy (2006B - when the debt settlement stays valid) results in the tariff rate of $2.37/mcm per 100 km.

    • In 2004, Gazprom was paying $2.34/mcm per 100 km in Poland.

    • Note that Gazprom owns 49% of the Polish section of Yamal-Europe pipeline.

  • Cash flow of Gazprom decreases by $858 million under 2006A and $298 million under 2006B scenario.

    • Without revenues from sales of additional 5 bcm (case 2006C), Gazprom would lose $618 million.

    • Our preliminary calculations show that Gazprom can cut the loss by half by a corresponding increase of its transit tariff for Turkmen gas that goes to Ukraine through Russia.

  • The loss of Gazprom is due to the growth of tax collection by the state.

    • The state has a conflict of interests as shareholder and as tax collector.

    • Russian Federation wins, while all other shareholders of Gazprom lose.

    • Actually, the gain of Russian Federation is questionable.

      • It would be interesting to compare the tax annuity with the loss of value of Gazprom shares owned by the Russian Federation.

      • Note that the state is unable to spend all the tax it collects now.

    • Gazprom is likely to suffer additional losses because of an inevitable increase of price of imports from the states of Central Asia. The raise of import price will follow the introduction of high price for Ukraine.

  • It is unlikely that Gazprom could become a broker for Turkmenistan sales to Ukraine.

    • Turkmenistan is closely watching the Ukrainian situation.

    • New high price for Ukraine would cause a chain reaction in Central Asia.

    • Turkmenistan would calculate price of its gas as a netback from the price at Ukrainian border. It would result in $120-140/mcm at the Russian-Kazakhstan border. Imports and re-exports of gas at this price would be a loss.

    • Recent history teaches that Turkmenistan is capable to cut gas flow completely and wait.

  • In 1998, Gazprom reduced the price of payment gas for Ukraine from $80/mcm to $50/mcm and Ukraine reduced its transit tariff. This resulted in a major increase of cash flow and a growth of shareholders' value.

    • Currently, Gazprom plans to do exactly the opposite.

    • Management of Gazprom does not see sales of payment gas as the cost that should be reduced.

  • We have already pointed out that the price of $50/mcm is below the cost of Russian gas delivered to the Ukrainian border.

    • Dumping price is against the rules of the World Trade Organization.

    • Dumping price also contravenes the tax code of the Russian Federation, though Gazprom usually wins all trials.

    • There are ways to cut the cost of gas below $50/mcm, but current management of Gazprom has no record of cutting costs.

    • More details can be found in the first issue of Russian Gas Quarterly.

    • Naturally, all export sales for cash should be based on the market price of gas.

      • Note that volumes available for additional sales to Ukraine are limited.

  • In our view, Gazprom is heading to a legal trap it has created.

    • Minority shareholders will have opportunities to sue Gazprom either one way or another.

Last modified: 12/07/14                    East European Gas Analysis 2006-2014                                           Email:
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