Global Insight Perspective | |
Significance | The latest round of negotiations between Belarus and Gazprom on a gas price and supply deal for 2008 ended in failure, with reports suggesting that the Russian gas giant is seeking to charge Belarus at least US$160 per 1,000 cm for gas supplies, up from US$100 per 1,000 cm this year. |
Implications | Belarus has been seeking to limit a price increase to no more than US$119.5 per 1,000 cm: the country can ill afford to pay as much as Gazprom is asking, and thus is likely to continue to hold out, raising the risk of a potential disruption in Russian gas supplies to Europe via Belarus from the start of next year. |
Outlook | Neither side is keen to repeat the frantic scramble at the end of 2006 to sign a last-minute deal covering prices and supplies for 2007, and with Europe casting a wary eye on the progress of negotiations, Gazprom may yet lower its price demands in the interest of reaching a deal before the start of 2008. |
On to the Next Problem
In the past two weeks, Gazprom has begun to remove some of the uncertainty over the status of Russian gas supplies to Europe for 2008. After commencing price negotiations with key transit states Belarus and Ukraine in October, the Russian gas giant backtracked in late November to shore up its own gas balance, agreeing to a demand by Turkmenistan to raise the price of its gas exports to Russia next year from US$100 per 1,000 cm to US$130 per 1,000 cm in the first half of the year and US$150 per 1,000 cm in the second half of the year. Gazprom then returned to its most important transit partner, Ukraine, through whose territory more than 80% of Russia's gas exports to Europe are directed, and convinced it to accept a price of US$179.50 per 1,000 cm for its gas supplies next year (see "Related Articles" below).
Uzbekistan is also seeking to raise its gas prices for Gazprom to the same level as Turkmenistan, to which the gas giant appears likely to agree as well, considering Uzbekistan only exports a small amount of gas to Russia. A proposal to charge US$190 per 1,000 cm for Central Asian gas supplied on the Kazakhstan-Russia border is potentially more problematic, however, since it would mean Gazprom would have to swallow some of the increase in the Turkmen gas price instead of passing it on to Ukraine (unless, of course, the incoming Ukrainian government is keen to renegotiate its own freshly agreed deal at its peril). Gazprom, which together with Kazakhstan's Kazmunaigaz serves as operator of Central Asian gas transiting Kazakhstan, is more likely to push for a reduction in the price of gas supplied at the Kazakhstan-Russian border in order to ensure that it is not taking a loss on transiting Turkmen gas via Russia to Ukraine.
The impact of higher Central Asian gas imports for Gazprom has already had an inflationary effect on prices for Ukraine, but with that problem solved at least for the time being, the Russian gas giant can move on with what may well be its biggest headache this year; namely, hammering out a new price deal covering gas supplies to Belarus for 2008. Higher Central Asian gas prices, together with Gazprom's determination to yank Belarus out of its complacency in relying on Russian energy subsidies, appear to be the foundation of reports that Gazprom is seeking to charge Belarus at least US$160 per 1,000 cm for gas supplies next year. Reuters, citing a source close to Gazprom, said that the Russian gas giant wants to increase the price to Belarus—which is paying just US$100 per 1,000 cm this year for gas imports—in line with higher global energy prices.
Resistance, As Expected
The atmosphere for negotiations between Gazprom and Belarus on a gas price deal for 2008 was charged right from the start, given the clashes over Belarus's slow payments for supplies earlier this year and the residual animosity over negotiations last year. Indeed, Belarus's recalcitrant attitude in paying for gas in the first half of this year seemed to be its way of demonstrating the country's lingering unhappiness over the "New Year's Eve", 11th-hour gas deal signed covering gas supplies in 2007, with Belarus finally relenting to pay US$100 per 1,000 cm, up from just US$46.68 per 1,000 cm in 2006. In September, with negotiations for 2008 about to commence, Belarusian President Alexander Lukashenka set the stage for another potential fight, saying that Belarus would resist any attempt to increase prices and girding his country for a new dispute.
After a period of relative quiet over the past two months as Gazprom took care of other business, those comments are looking prophetic now, as the reports of Gazprom's price demands are sure to provoke a negative reaction from the Belarusian government. The Russian gas giant had said earlier this year that it only planned to "fine-tune" gas prices to ex-Soviet states in 2008, but plans for just a slight price increase appear to have gone out of the window as rising global energy prices and a decision by Turkmenistan to raise its gas export price (together with Gazprom's consent to pay that higher price) have prompted Gazprom to ask for a bigger price increase for Belarus next year.
Outlook and Implications
Belarusian officials had previously suggested that the two sides had reached a gas pricing mechanism covering supplies for 2008, setting the price for Belarus at 67% of European prices. The Belarusian side subsequently suggested a price of US$119.50 per 1,000 cm, but with Gazprom paying more for Central Asian gas and Russian gas prices for Europe expected to increase from an average of US$250 per 1,000 cm to perhaps US$350 per 1,000 cm due to higher crude oil prices, it comes as little surprise that Gazprom is seeking to charge Belarus more than what that country had anticipated paying. After all, 67% of European prices, discounting customs duties and transportation costs, is still above the US$119.50 price that Belarus had been seeking.
The Russian gas giant, which is seeking the transition of Belarus to "market prices" by 2011, may yet lower its price demands for Belarus in an effort to avoid a repeat of last year's game of chicken, in which Belarus finally blinked on the eve of the new year. Gazprom is certainly keen to avoid a new price dispute that would even raise the threat of a disruption in its gas supplies to Europe via Belarus and once again bring the issue of the Russian gas giant's reliability as a supplier to Europe into question. However, Gazprom is certainly not going to sit by and allow Belarus to coast on its leverage as a transit state, and the gas giant will surely seek to ensure that it supplies Belarus at a price no lower than what the company will pay for Turkmen gas imports next year. The clock is ticking on the two sides reaching a deal for 2008, so the issue will be whether or not they can reach a compromise in time on a price—say US$140 per 1,000 cm—in which neither side is completely happy, but which avoids a dispute that affects Russian gas supplies to Europe via Belarus at the start of 2008.
Related Articles
CIS: 5 December 2007: Russia, Ukraine Agree on Gas Price Deal for 2008, Averting Potential Supply Disruption
CIS: 28 November 2007: Gazprom Consents to Increased Turkmen Gas Prices; Ukraine to Face Higher Prices in Turn
Belarus: 18 October 2007: Belarus Could See Higher-than-Expected Gas Price Increases for 2008, Says Russian Ambassador
CIS: 15 October 2007: Belarus Claims Deal on Gas Price Mechanism with Russia for 2008
Belarus: 24 September 2007: Belarusian Leader Lashes Out at Gazprom, Prepares for New Gas Dispute with Russia
CIS: 31 August 2007: Gazprom Plans to "Fine-Tune" Gas Prices for Ex-Soviet States in 2008
Belarus: 9 August 2007: Belarus Clears Russia Gas Debt
Belarus: 24 July 2007: President Dismisses Heads of Belarusian Energy Firms Amid Financial Woes
Belarus: 21 May 2007: Gazprom Buys Initial Stake in Belarusian Gas Pipeline System
CIS: 2 January 2007: Gazprom, Belarus Strike Last-Minute Gas Deal to Avoid Cut-Off