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 Conflict: Lack of Free Market in Russia


Giant leap to centralized economy and a blow to the reputation of Gazprom

On January 1, 2006, Gazprom started active warfare in the gas transit dispute with Ukraine. In our view, it demonstrates the lack of free market in Russia.

Under conditions of free market, Russian independent gas producers would have been knocking at the border of Ukraine now. Russian independents would prefer exporting gas to Ukraine at $100/mcm (mcm = 1000 m3), rather than selling it to consumers in Russia at state-regulated price of $30-$50/mcm. The most important condition of such sales - availability of spare capacity in gas pipelines - is also there.

However, things in Russia are moving the opposite direction. Gazprom has contracted more than all Turkmen gas for the next three months at $65/mcm at the border of Turkmenistan to resell it to Ukraine at $230. Note that in our view Turkmenistan is unlikely to accept the profits going one way to Gazprom.

We were unpleasantly surprised by the fussiness shown by the Russian side, when they wanted  to press a "free gift" on Ukraine in the last hours of 2005. Sudden change of terms and five-hour time limit for signing a new contract are typical at handing a lemon, but not at a multi-billion dollar deal.

Recent statements of Russia's and Gazprom officials disagree with previous statements of the same authorities.

Statement on Deliveries of Russian Gas to Ukraine, December 29, 2005, Novo-Ogaryovo. VLADIMIR PUTIN: In this case I am quite worried about the deliveries of gas to Ukraine. [] I understand that the final agreements have not yet been reached. This is very bad, especially bad because already in March of this year with the President of Ukraine, Viktor Andreevich Yushchenko, we agreed on the transition to a market-based regime for payments in energy including in the gas sphere.

Press Conference on the Results of Russian-Ukrainian Talks, March 19, 2005, Kiev. VLADIMIR PUTIN: Today, Viktor Andreevich [Yushchenko] and I really did give quite a lot of attention to this [natural gas] topic. The President formulated his approach, which is that we will not try to re-examine the agreements reached. We agree with this.

S.Kuprianov, press secretary of Gazprom, January 3, 2006: Gazprom prepaid Ukrainian transit services in cash back in 2004. There shouldn't be any questions to us about it.

Gazprom on Settlement of Ukraine's Debt for Natural Gas Deliveries between 1997 and 2000. August 11, 2004: Gazprom also made a single advance payment of USD 1.25 billion to Naftogaz of the Ukraine as payment for the transit of 19.2 bcm of gas via the Ukraine over 2005 to 2009. Said advance payment will make it possible to fix USD 1.09/1,000cm/100km as a gas transmission tariff between 2005 and 2009.

Apparently, Gazprom wants to forget the second half of the debt settlement agreement.

Previous statements of Gazprom about the mutually beneficial transit terms with Ukraine also are in contradiction with the current actions of the Russian gas monopoly. Gazprom statement of June 2005 also indicates that there was no agreement reached in March. It is absolutely impossible for deputy head of Gazprom A.Ryazanov to say in June that the $50/mcm price for Ukraine suited Gazprom just fine, if Mr. Putin have said the opposite in March of the same year.

According to our estimations, Gazprom will lose from the introduction of "European" gas price for Ukraine. Main financial losses will be caused by the following anticipated actions of Ukraine.

  • Cancellation of free use of Ukrainian gas storage facilities by Gazprom and introduction of "European" tariff for storage capacity reservation of up to $180 per one cubic meter per hour.

  • Raise of the Ukrainian transit tariff to the rate currently paid by Gazprom in Bulgaria or Austria.

  • We are surprised by the lack of distinct response of the Ukrainian side. NAK Nafogaz of Ukraine should either clearly indicate that Gazprom violates the existing contract or present new transit tariff and storage reservation fees.

The table below shows sample gas balance of Ukraine in winter and summer. Huge underground storage facilities of western Ukraine play vital role in providing export flows of Russian gas to Europe in winter time.

Table 1. Ukrainian Gas Balance, million cubic meters per day

 
 December 2004
 August 2005
 Gas input:
  
  
 Ukrainian production
 56
 55
 Central Asian gas
 86
 104
 Russian gas 435
399
 Ukrainian storage withdrawal
 137
 -  
 Total:
700
559
 Deliveries and transit:
   
 
 Ukrainian consumption 
303
117
 Ukrainian storage injection 
 -  
93
 Transit to South Russia 
1
63
 Transit to Moldova 
11
4
 Transit to Europe 
384
281
 Total:
700
559

Source: Energobiznes (http://www.e-b.com.ua/)

Total loss of Gazprom will exceed the revenues from gas sales at $230/mcm. Part of the loss can be compensated by resale of Turkmen gas, by the overall result will still be a loss (see table). Profits from future resale are not clear and the Turkmen-Gazprom deal itself does not look final yet.

Reputation of Gazprom as a reliable supplier of gas to Europe was damaged.

We believe, Gazprom accepts moral and financial losses as the price to get control over Ukrainian gas export pipelines. It looks like valuable assets are treated one after another, one at a time: Yukos, Sibneft, Ukrainian gas pipelines...

Mikhail Korchemkin

January 3, 2006

 

Previous publications on Russian-Ukrainian gas dispute:

Economics of Russian-Ukrainian Gas Conflict: Summary for Beginners

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


Last modified: 12/07/14                    East European Gas Analysis 2006-2014                                           Email: info@eegas.com
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