Ukrainian market is getting attractive
President Leonid Kuchma and Premier Viktor Yanukovych met in Moscow with President Vladimir Putin and Premier Mikhail Kasyanov, December 9. They discussed trade and economic cooperation, fuel-and-energy complex, and transport. A number of agreements were signed. The Ukrainian leadership attended the ceremony of completing the Year of Ukraine in Russia.
Premier Yanukovych said previously in Kyiv that Ukraine and Russia would decide in December on the Russian gas transportation procedures in 2003, adding that Ukrainian specialists were still holding talks with the Russian corporation Gazprom, Turkmenistan, and the international Itera energy company.
Meanwhile, setting up a Ukrainian-Russian gas transportation consortium (still a long way off) has of late looked almost the only event on the Ukrainian gas market. The latter has noticeably quieted down since the times of Ihor Bakai (currently practically forgotten), Pavlo Lazarenko still in US prison, and the ever-impassioned Yulya Tymoshenko. This tranquility, however, is deceptive. Inner passions are boiling. Kharkiv gets frozen, the cabinet suddenly decides to improve the situation with nonpayments by issuing Naftohaz Ukrainy stocks, and quite recently Itera started making waves, as Gazprom reduced gas transit quotas in Ukraine and several other countries (fortunately, Itera managed to settle the problem with its debts and resumed contractual supplies to Ukraine, just as it was hit by the Christmas cold wave).
However, judging by the premier’s diplomatic hints, something big is cooking on the Ukrainian gas market — or maybe it is been prepared. In short, the big news is that Itera will have to bid good-bye to Ukraine or at least tangibly reduce its presence there. This will have a strong effect on the Ukrainian gas market, especially in view of the fact that the company has for the past several years acted as the Turkmenian gas operator and the only seller of imported gas in Ukraine (besides Turkmenistan). Gazprom sold no gas but paid for its transit to Europe across the Ukrainian territory.
An informed source told The Day that Gazprom and Naftohaz Ukraiyny signed a package of four documents in Moscow the Thursday before last, setting the next year’s disposition. It includes a contract on transit of 110 billion cubic meters of Russian gas across Ukraine (in keeping with the well-known long-term agreement signed in Kharkiv, June 26). Payments will be made in kind (26 billion cubic meters) and in cash (almost twice this year’s amount). Another document stems from Russia’s proposal (to which the Ukrainian national company Naftohaz Ukraiyny agreed) to provide better conditions of Turkmenian gas transit to Ukraine, compared to those of Itera (41% of gas bought by Ukraine from Turkmenistan went to Itera as delivery payment). Now gas transit will be cheaper by 3%. The reason is clear: it is considerably simpler for Gazprom to lower the cost of transit, because the company controls the pipelines and is in a position to choose optimal routes.
One ought to remember that Itera received access to the Ukrainian gas market with Gazprom’s blessings; at the time the Ukrainian market was regarded as having low liquidity, insolvent, so Gazprom preferred to use a cat’s strategy to have its earnings and secure its risks in the best possible way. The situation has changed since then. In November, even the most troublesome municipal gas consumers had their debts reduced by UAH 97.9 million. Since the start of the year these enterprises have consumed over 7 billion cubic meters of gas while providing an unprecedented 80% of payments. And so the Ukrainian gas market has become more attractive to Gazprom. The Russian company wanted to supply Turkmenian gas to Ukraine and began to look for a compromise.
The package signed in Moscow also provides for an increased gas quota for Ukraine (up to 5 billion cubic meters). Ukraine is thus rid of gas proficit, but most importantly it will substantially add to the state budget.
The fourth component of the Moscow package is Russia’s obligation to open a gas export credit line for Naftohaz Ukrainy. Practically it means that Gazprom will make prepayments, as gas supplies to Ukraine will be made under its contracts. Ukraine would otherwise count only on participation in the European gas spot market where the costs are considerably lower than in long-term contracts between Gazprom and European countries.
NU people consider that the company, being market-oriented, had no alternative; Russia’s conditions are considerably more advantageous; Itera lost the competition for the Ukrainian gas market. At the same time, NU believes that Itera will not completely disappear from the Ukrainian market. Some of the gas extracted by that company, relying on its own resources, may be directed to Ukraine. In addition, the Ukrainian underground storage facilities contain some 1.5 billion cubic meters of Itera gas, so the company will be able to sell it in Ukraine under long-term contracts with consumers. Another possibility is that Itera will supply gas to Ukraine (10 billion cubic meters) which it purchased directly from Turkmenistan for deliveries to CIS countries.
The Day’s experts, however, note that Naftohaz Ukrainy is parting with Itera without regret, for it was its only rival on the Ukrainian market. When NU decided to adopt a direct gas sales pattern in September, after returning and strengthening its influence on the regional distribution companies, it required from Itera a closer cooperation, specifically in terms of pricing. Itera could not influence its Ukrainian agents and some of the latter continued with gas supply patterns very much like those practiced under Pavlo Lazarenko. Also, NU believes that Itera failed to comply with the requirement to start selling the bulk of gas via the company Itera-Ukraine. In early December, after Gazprom blocked its routes for Itera, the latter lowed supplies to Ukraine, forcing NU to delve into the storage facilities for some 600 million cubic meters — Itera’s and its own — ahead of schedule.
It is also true, however, that it would be difficult to banish Itera from the Ukrainian gas market without coordinating the matter with Ashgabat, considering that the latter entrusted it with transporting gas to Ukraine, the more so that there has been a degree of friction between Russia and Turkmenistan of late. NU believes, nevertheless, that getting rid of the intermediary would benefit Ukraine as well as Turkmenistan, since Central Asian gas would be more competitive in Ukraine. According to intergovernmental agreements, Turkmenian gas (36 billion cubic meters) will be sold in Ukraine next year at two dollars higher than this year (34 billion cubic meters at $42.00 per cubic meters). In actuality, however, NU experts predict that the cost of Turkmenian gas will not go up, owing to the 3% concession. Ashgabat, in turn, may well expect additional revenues due to an increment in supplies, higher level of prepayments, and upgrading the pattern of settlements.
It is also understandable that signing the gas package and the trilateral Kyiv-Moscow-Ashgabat relationships may somewhat expedite the establishment of the international gas transportation consortium. After solving the Itera problem (experts believe it will cost at least $600 million), Russia will face another problem: where to channel the money. If the consortium project works (something few dare offer any forecasts on, the more so that the Kinakh cabinet was adamant in keeping gas transit returns to the budget and Premier Yanukovych is likely to follow suit), Russia , while completing the gas route to Turkey and planning another one toward the Baltic Sea, will not step up the second Yamal- Europe branch pipeline project. This will allow to stabilize gas transit across Ukraine. But if the consortium business is drawn out, Russia may well resort to all gas bypass options... In fact, voices to this effect have been heard in Russia, even though its leaders do not like to call a spade a spade.
