Gazprom, Naftogaz Reach Deal on 2008 Gas Deliveries, Prices

Moving Closer to a Final Resolution…Perhaps

Negotiators from Naftogaz Ukrainy and Gazprom yesterday resumed talks, geared to resolve an ongoing dispute over the former's gas debts, after a brief "cooling-off" period following a short-lived reduction in gas supplies to Ukraine last week. Although Gazprom reduced these gas supplies in two stages in an effort to force Ukraine to own up to its debts and make payment, the threat by Naftogaz to take gas from its transit system and thereby disrupt Russian gas exports to Europe prompted Gazprom to back down and resume supplies in full. However, the two sides remained at odds over the size of Ukraine's debt for gas supplied thus far this year, with Gazprom seeking to charge Ukraine US$314.7 per 1,000 cm for gas supplied that it asserts was of Russian origin, while Naftogaz and Ukrainian officials argued that they would not pay more than US$179.5 per 1,000 cm, the price agreed for 2008 gas supplies (albeit from Central Asia) under a December 2007 contract. Gazprom said that it supplied some of its own Russian gas to Ukraine in the first two months of the year to make up for a shortfall in Central Asian gas.

In a move that put additional pressure on Ukraine in the lingering dispute over the size of its debt—not to mention the prospect of substantially higher gas prices from next year—Gazprom earlier this week consented to pay "European" prices for its own Central Asian gas imports from 2009 (see "Related Articles"). Not surprisingly, today Gazprom said it had reached an agreement with Naftogaz covering gas prices for the remainder of 2008, as well as prices for supplies already received this year. In a press release, the Russian gas giant said that it has agreed to keep gas prices for Central Asian gas supplied to Ukraine at US$179.5 per 1,000 cm. It is unclear what becomes of RosUkrEnergo, the joint venture (JV) that controls the supply of Central Asian gas to Ukraine (and in which Gazprom has a 50% stake), but presumably, considering the deal to keep prices stable for the rest of 2008, the contract will remain in force (or Gazprom alone will operate the transit of Central Asian gas via the Russian pipeline system).

While Naftogaz keeps gas prices stable for the remainder of the year, Gazprom can claim victory in convincing Naftogaz to pay the US$315 per 1,000 cm for the gas supplied to Ukraine in January and February that Gazprom says was of Russian origin. Instead of paying cash for these volumes, however, Ukrainian officials agreed to pay for the supplies by returning volumes from Naftogaz's underground storage. Furthermore, Gazprom said that the deal announced today will give it the ability directly to supply no less than 7.5 bcm of gas per year to Ukraine's industrial consumers. This is less than the 50% stake in the industrial gas market as envisioned in the mid-February agreement between Ukrainian President Viktor Yushchenko and his Russian counterpart Vladimir Putin, to which Ukrainian Prime Minister Yulia Tymoshenko strongly objected. Nevertheless, getting Naftogaz to agree to Gazprom gaining a foothold in the Ukrainian domestic gas market is a "win" for Gazprom in the current dispute.

Outlook and Implications

As with all of the recent agreements between Gazprom and Naftogaz, and Yushchenko and Putin, the latest deal between Russia and Ukraine will be subject to further scrutiny. Unless Tymoshenko abides by it and consents to implement it as agreed, this deal will be nothing more than another failed attempt to "resolve" the dispute. In fact, considering the ambiguity in the new deal with regard to the role of intermediaries, together with the lack of a deal on gas prices for next year, it is clear that the latest agreement is but a stopgap measure that will not put an end to the disagreements between the two countries in the gas sphere.

With the Central Asian countries now set to charge "European" prices for their gas exports next year, Gazprom is poised to pass on these higher costs to Naftogaz—regardless of whether or not RosUkrEnergo is in the picture. Tymoshenko's singular determination to get rid of all intermediaries in the supply and distribution of gas to and in Ukraine has proven an obstacle to resolving the dispute once and for all. She has even objected to the proposed Gazprom-Naftogaz JV that would replace UkrGazEnergo in the distribution of gas to industrial consumers in Ukraine. While today's deal limits Gazprom's role in the Ukrainian industrial market, her goal of securing a direct supply deal for Naftogaz with Central Asian suppliers is clearly unrealistic, given Gazprom's own long-term deal to import gas from the region.

Even if Ukraine were to somehow bypass Russia and Gazprom to import Central Asian gas, Naftogaz would no longer have access to cheap supplies, given the determination of Turkmenistan, Kazakhstan, and Uzbekistan to charge market prices from next year. Thus, with an agreement now in place—assuming it holds, which is a big "if"—between Naftogaz and Gazprom on gas import prices for the remainder of 2008 and the former's debts for supplies received thus far this year, the next big hurdle for the two companies to overcome will be hammering out a price and supply deal for 2009. Ukraine is now certain to pay even higher prices, although Naftogaz and the Ukrainian government may be able to limit the increase by offering some incentives to Gazprom—such as an expanded role in the distribution of gas in Ukraine. Negotiations will continue on the terms for gas supplies to Ukraine in 2009, and given the difficulties that lie ahead, it should come as a relief to European consumers that the two sides have more than nine months to reach a mutually acceptable deal.

Related Articles

CIS: 12 March 2008: Gazprom Agrees to Pay European Prices for Central Asian Gas from 2009

Ukraine: 10 March 2008: President Blasts Ukrainian PM's Stance in Gas Stand-Off with Russia

Ukraine: 7 March 2008: Ukrainian PM Again Rejects Part of Russia Gas Deal, Rebuking Ukrainian President

Russia: 6 March 2008: Gazprom Resumes Full Deliveries as Russia and Ukraine Resolve Gas Dispute

Ukraine: 5 March 2008: Gazprom Cuts Gas Supplies to Ukraine Further as Internal Ukrainian Split Remains

Ukraine: 3 March 2008: Gazprom Chairman Elected President as Russia Makes Good on Threat to Reduce Gas to Ukraine by 30 mmcm/d

Ukraine: 25 February 2008: Deputy Ukrainian PM Rejects Part of Russia Gas Deal; Gazprom and Naftogaz to Continue Talks

Ukraine: 22 February 2008: Details Remain Obstacles as Ukrainian PM Fails to Finalise Gas Deal with Gazprom

Russia: 21 February 2008: Ukrainian, Russian Prime Ministers Ease Lingering Tension, Reaffirming Gas Deal

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