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Economics of Russian-Ukrainian Gas Conflict:
Summary for Beginners
Questionable benefits
of Gazprom. Deal with Turkmenistan looks like a bluff.
There are many political statements on
financial gains of Gazprom and Russia after the raise of gas price for
Ukraine. We believe these hopes are groundless.
To begin with, Gazprom is not selling gas
to Ukraine since 1998. Before 1998, Gazprom had two categories of gas
transactions with Ukraine: (1) “free” gas delivered as payment for transit
services, and (2) export gas that supposed to be paid for. Deliveries of
“free” gas and export gas in one package created many opportunities for grey
schemes. According to Gazprom, only 38% of Ukrainian gas bills were paid.
From 1998, Gazprom is delivering only “free”
gas in payment for transit services. Export flows were handled first by “Itera”,
then by “Eural Trans Gas” and finally by “RosUkrEnergo”. The separation of
“free” gas from export gas has unveiled illegal off-takes, which were
formerly hidden in the flows of “free” gas. Remarkably, both Gazprom and
“Itera” gained from the separation of gas flows. Gazprom has eliminated the
problem of collecting money from bad clients and got additional revenues
from sales of gas transportation services. “Itera” took the cream of
Ukrainian market by selling gas only to the most reliable clients.
Gazprom was steadily decreasing the volumes of
payment gas from 30 bcm in the late 1990s to 26 bcm in 2004 and 21 bcm in
2005 (bcm = billion cubic meters). Specific volumes were negotiated between
the gas monopolies of Russia and Ukraine. From 1998, the parties used gas
price of $50/mcm and transit
tariff of $1.0937/mcm per 100 km (mcm = thousand cubic meters). Under these terms, transit expense of
Gazprom was roughly equal to the gas procurement expense of Ukraine. There
were no cash sales until 2004, when Gazprom exported additional 6 bcm at
$80/mcm as compensation for the re-exports of “RosUkrEnergo”. The reasons
for these re-exports and transfer of Gazprom’s profits to Switzerland are
unclear. However, re-export of “RosUkrEnergo” is the only reason for
additional sales of Gazprom to Ukraine. We expect these re-exports to stop
and do not take them into account.
As of late 2005, Gazprom is not receiving
any money for gas delivered to Ukraine and is paid in kind by transit
service. Turkmenistan is exporting gas to Ukraine for cash with
“RosUkrEnergo” acting as a broker.
Now Gazprom wants to raise the price of gas
for Ukraine from $50 to $230/mcm. Benefits of this step are doubtful, but
losses are obvious.
If Gazprom plans to sell the same 21
bcm at $230/mcm and pay just a share of revenue for transit service,
the management of Russian gas monopoly is very likely to be disappointed.
Ukrainian NAK “Naftogaz” can raise the transit tariff and introduce a
“European” tariff for the reservation of gas storage capacity. Formally,
Gazprom is not using the storage facilities now under the special low-cost
transit agreement. In reality, Ukrainian storage facilities provide the
export flow of Russian gas to Europe in winter. The difference between
export flows in winter and summer is about 100 million cubic meters a day,
while the gas flow to Ukraine is roughly the same through the year (see
chart). Gazprom
needs Ukrainian storage capacity more than NAK “Naftogaz” does. When the
transit terms change, Gazprom would have to pay for storage. In Europe,
storage capacity reservation for a year can cost anything from €100-150 per
one cubic meter per hour.
If Gazprom plans to sell more gas to
Ukraine, it should squeeze Turkmenistan out of
the market. The deal between Gazprom and Turkmenistan concluded on
December 29, 2005 looks like the move in this direction indeed. Gazprom
reports that it buys 15 bcm of Turkmen gas in the first quarter of 2006.
Actually, this is exactly the combined capacity of all pipelines running
from Turkmenistan to Russia, which means no other gas, including from
Uzbekistan and Kazakhstan, is getting through.
Moreover, a simple
analysis of
the gas balance of Turkmenistan indicates that the new agreement
is a bluff. In January-March 2006, Turkmenistan is capable to
produce about 6.0 bcm a month, at least 1.5 bcm/month of which should go for
domestic consumption. Exports to Iran take another 0.5 bcm/month. There
is no 15 bcm of Turkmen gas available for Gazprom in the first quarter of
2006.
We
advice to wait until Turkmenbashi confirms the volumetric and pricing
details of Gazprom's statement. There
is also something wrong with Gazprom buying Turkmen gas at
$85-$90 at the Russian border ($65 at the border of Turkmenistan) and reselling it to Ukraine at $230/mcm. Turkmenbashi is not that simple person. However, even such a profitable
resale would bring Gazprom a big total loss compared with the terms of 2005
(Table 1). The loss is bigger
if Turkmenistan gets its fair share, or if Ukraine
raises its transit tariff to the level paid by Gazprom in Bulgaria or
Austria. The tariff for reservation of Ukrainian storage capacity also has
space for an increase. In addition, Gazprom would
need to ban exports of Russian independent gas producers to Ukraine, because
the independents can offer much lower price than $230/mcm.
Table 1. Comparison
of Revenues and Expenses of Gazprom
|
Unit
|
$60/mcm
|
$230/mcm
|
| Ukrainian
transit expense: |
|
|
|
Volume of payment gas
|
bcm
|
26
|
26
|
Value of payment gas
|
$ billion
|
1.6
|
6.0
|
Ukrainian transit tariff
|
$/mcm/100km
|
1.09
|
3.00
|
Storage capacity reservation tariff
|
$/cub.m/hour/a
|
-
|
150.00
|
Payment in kind (by gas) for transit service
|
$ billion
|
(1.6)
|
-
|
Revenue from gas sale
|
$ billion
|
1.6
|
6.0
|
Cash payment for transit services
|
$ billion
|
-
|
(4.3)
|
Cash payment for storage reservation
|
$ billion
|
-
|
(2.1)
|
Total cash payment to Ukraine
|
$ billion
|
-
|
(6.4)
|
Export duty - 30%
|
$ billion
|
(0.5)
|
(1.8)
|
Total transit expense of Gazprom:
|
$ billion
|
(0.5)
|
(2.2)
|
|
Transit revenue: |
|
|
|
Transit volume from Turkmenistan
|
bcm
|
34
|
-
|
Transit tariff of Gazprom
|
$/mcm/100km
|
1.09
|
3.00
|
Transit revenue:
|
$ billion
|
0.3
|
-
|
|
Resale
of Turkmen gas: |
|
|
|
Volume of gas
|
bcm
|
-
|
34
|
Cost at the Russian border
|
$/mcm
|
64
|
90
|
Import duty - 5%
|
$/mcm
|
-
|
5
|
Total Gazprom expense at the Russian border
|
$ billion
|
-
|
(3.2)
|
Gross revenue from resale to Ukraine
|
$ billion
|
-
|
7.8
|
Turkmenistan share in profits - 25%
|
$ billion
|
-
|
(1.2)
|
Export duty - 30%
|
$ billion
|
-
|
(2.3)
|
|
|
$ billion
|
-
|
1.1
|
Total net result of Gazprom:
|
$
billion
|
(0.2)
|
(1.1)
|
In best case, Gazprom is likely to supply 60
bcm and spend the major share of revenue on transit service and reservation of
storage capacity in Ukraine. The transit expense will go up and profits
from exports to Europe will decrease. Note that additional export duties
(30% of $230/mcm) will exceed $3.6 billion a year. In the most favorable
case, Gazprom loses over billion dollars a year.
NAK "Naftogaz Ukraine" gets 60 bcm of gas at
net cost of $7.4 billion. This transfers into the average Ukrainian internal
price of $124/mcm. The most favorable case for Gazprom means the worst case
for Ukraine, so the average Ukrainian price may be lower than $124/mcm.
We must note that
Ukraine has more other options for an adequate response to price raise.
However, packaging of gas transit issues with other political matters is
inappropriate from our point of view.
At the first glance, the Russian state looks
like a sure winner in this game. Indeed, the tax collection increases,
though the increase is cut by the lower profit tax of Gazprom.
However, the state is likely to lose as the
main shareholder of Gazprom. In the context of growing gas price in
Europe, the capitalization of Gazprom could have been higher under different
terms of Ukrainian transit.
We have made preliminary comparison of net
present value of additional tax income of the state and NPV of lost cash
flow of Gazprom. The state loses if the price is below $220/mcm and gains if
the price is higher. The break-even price is substantially higher if
additional measures of Ukraine and effects of probable increase of price of
gas from Uzbekistan and Kazakhstan are taken into account. The calculations
were done before the announcement of new deal with Turkmenistan. The
agreement with Turkmenistan increases the gain of the Russian state
because of the huge increase of export duties' collection from Gazprom.
Unlike the Russian state, minority
shareholders of Gazprom will just lose. The loss may not be noticed while
the European gas price is growing. However, the shareholders are likely to
understand that the main goal of Gazprom is not the profit maximization, but
rather tax maximization and fulfillment of political goals of the current
presidential administration.
Mikhail Korchemkin
December 29, 2005 (updated on December 30, 2005)
Previous publications on
Russian-Ukrainian gas dispute:
Russian-Ukrainian Gas Conflict: Financial
Effects of the Russian Side
- 2
Russian-Ukrainian Gas Conflict: Financial Effects of the
Russian Side
Brief
history of Soviet and Russian gas pipeline policy
Clarifying
the math of Ukrainian transit tariff
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