Global Insight Perspective | |
Significance | Earlier this month, Gazprom had threatened to reduce gas supplies to Ukraine by the start of November unless a US$1.3-billion debt for supplies already received was paid off. |
Implications | Ukrainian Fuel and Energy Minister Yuriy Boiko said that Ukraine paid off the debt by transferring gas in its underground storage to Gazprom's control, along with giving Gazprom back the money that it has paid as an advance for gas transit services in 2008. |
Outlook | In paying off the debt by essentially giving Gazprom free gas transit in 2008, Ukraine has solved the immediate debt problem while simultaneously limiting the government's room for negotiating a potential increase in transit fees for Gazprom as part of a new gas price and supply deal for next year. |
Solving One Problem…
Ukrainian Fuel and Energy Minister Yuriy Boiko said yesterday that the country has agreed a final settlement with Gazprom on Ukraine's debt for gas supplies, which the Russian gas giant said earlier this month amounted to US$1.3 billion (see "Related Articles" below). Boiko told reporters that the deal involves Gazprom making an advance payment to Ukraine for gas transit services in 2008, which is then being returned to Gazprom to pay off the remainder of the debt. Together with the transfer earlier this month of some 8 Bcm of gas in Ukraine's underground storage to Gazprom's control, Boiko said that Ukraine had completed "all this chain of settlements under the schedule"; meaning, before Gazprom's 1 November threat to reduce gas supplies to Ukraine.
Gazprom has not yet confirmed that it has received payment, but given the conciliatory rhetoric in both Russia and Ukraine over the past few weeks after the company's ultimatum, it would be a moderate surprise if it actually did cut back on gas supplies to Ukraine from tomorrow. Not only has Ukraine shown a good-faith effort to resolve the debt issue—even as the debt was clarified as commercial debt owed by the various intermediaries in the Russia-Ukraine gas trading relationship, rather than sovereign government debt—but Gazprom would further sully its reputation in Europe as a reliable supplier were it to halt or even merely reduce gas to Ukraine at this stage. With winter heating season approaching, and Europe already wary of Gazprom's intentions and the company's ability to meet peak demand among its export partners, such a move by Gazprom would only further exacerbate existing concerns.
…But Creating Another?
The problem with the resolution of this debt is in the method and implementation. Although details are a bit hazy—perhaps fitting, given that the opaque nature of Ukraine's gas trading relationship with Russia is precisely what caused the accumulation of the debt in the first place—it appears that state-owned Naftogaz Ukrainy will be indirectly paying off the commercial debt racked up by RosUkrEnergo and UkrGazEnergo in the form of free gas transit for Gazprom next year. RosUkrEnergo, the key intermediary (or shady middleman, depending on your perspective) in the supply of Russian and Central Asian gas to Ukraine, had transferred the 8 Bcm of gas in Ukraine's underground storage to Gazprom earlier this month as partial payment. RosUkrEnergo had racked up debt as UkrGazEnergo, its joint venture with Naftogaz that distributes imported gas to heat suppliers and state organisations in Ukraine, had run up substantial arrears to RosUkrEnergo. UkrGazEnergo, in turn, said its largest debtor was actually Naftogaz, which, indirectly, meant Ukraine's "commercial" gas debt was tantamount to sovereign debt.
Thus, Naftogaz is effectively paying UkrGazEnergo's and RosUkrEnergo's debts to Gazprom by giving Gazprom back its advance payment for gas transit services in 2008. Although this resolves the immediate debt problem and supply cut-off threat, the deal appears to hamstring the incoming Ukrainian government's negotiations with Gazprom over gas prices and supplies next year. With officials from both countries making noises about a return to a direct gas supply deal, eliminating the use of RosUkrEnergo as a "buffer" between Naftogaz and Gazprom, Ukraine is certain to face a gas price hike next year. The only real question is: how much? Ukraine is hoping to limit the increase by buying cheaper Central Asian gas for all of its needs, therefore reducing Gazprom itself to strictly a transit role and (at least in theory) limiting the amount that it can charge Ukraine to merely a transit fee. The country knows that it will have to pay more for gas imports next year, but had originally been hoping to use a potential hike in the transit fee for Russian gas exports via Ukrainian territory as leverage in negotiations with Gazprom to keep a lid on the price increase that Naftogaz itself would have to pay.
Outlook and Implications
However, with the outgoing government having negotiated a deal to pay Gazprom back using an advance payment for gas transit services (presumably at the current rate of US$1.60 per 100 km per 1,000 cm), the incoming government—with Yulia Tymoshenko as prime minister—will have less room for manoeuvre in negotiating a ceiling for gas import prices next year. With a potential increase in Ukraine's gas transit fees taken out of the equation, the country will be virtually at the mercy of Gazprom in accepting the Russian gas giant's price demands. Ukrainian President Viktor Yushchenko recently suggested that the "optimal" price for Ukraine to pay for gas imports next year would be between US$150 and US$160 per 1,000 cm, up from the US$130 per 1,000 cm that Ukraine pays at the moment, but also higher than the US$145 per 1,000 cm that Ukrainian officials have said that they are expecting to pay.
Yushchenko's comments reflect the realisation that Ukraine will have to pay more if it is to ditch the intermediary gas deal with Gazprom, but he also appears to be hoping to convince the Russian gas giant not to seek an even higher price. Gazprom has said it plans to "fine-tune" gas prices for ex-Soviet states in 2008, but it has yet to publicly announce its target gas price for Ukraine. A 23% gas price increase, at the high end of Yushchenko's stated range, would still be palatable for Ukraine, although it remains to be seen whether Tymoshenko will be so accepting, particularly as Ukraine will have less revenues coming in for transit as a result of the debt deal that Boiko has negotiated. Tymoshenko's acceptance of the debt deal and a price as high as US$160 appears necessary for the two countries to avoid a repeat of the January 2006 gas war, while a price demand by Gazprom higher than US$160 will surely face resistance in Ukraine, as well as put the Russian gas giant in the position of being seen in Europe as a bully that is threatening Europe's energy security. With Ukraine's gas debt to Russia now apparently resolved, the time has come for both sides to do the hard work that is needed to hammer out a final gas price and supply deal for 2008.
Related Articles
Ukraine: 29 October 2007: Ukrainian President Notes Optimal Gas Price for Russian Gas Imports
Ukraine: 19 October 2007: End Appears Closer for RosUkrEnergo as Russian President Suggests Direct Gas Sales to Ukraine
Russia: 17 October 2007: Gazprom Chairman Hints End to Intermediary Role in Russian Gas Sales to Ukraine
Ukraine: 5 October 2007: Gazprom Clarifies Ukrainian Gas Debt is Not Sovereign; UkrGazEnergo Confirms Payment Arrears
Ukraine: 4 October 2007: Russia Says Deal Reached on Ukraine Gas Debt, but Questions Remain
Ukraine: 3 October 2007: Gazprom Threatens to Cut Gas Supplies to Ukraine Unless US$1.3-bil. Debt Paid
Ukraine: 1 October 2007: Ukrainian Election Results Point to New Gas Price Clash with Russia
CIS: 31 August 2007: Gazprom Plans to "Fine-Tune" Gas Prices for Ex-Soviet States in 2008
Ukraine: 7 August 2007: Ukraine Considers Increasing Russian Gas Transit Fees
CIS: 25 October 2006: Ukraine, Russia Agree to Gas Price and Supply Deal for 2007