Lagniappe

 

Global Insight : Russia-Ukraine
Gas debt deal, will agreement hold?

Last-Minute Russia-Ukraine Gas Debt Deal is Victory for Transparency, But Will Agreement Hold?

The presidents of Ukraine and Russia have reached an 11th-hour agreement on Ukraine's gas debts that will also eliminate controversial gas-delivery intermediaries; although this resolves a row that threatened to disrupt Russian gas supplies, some important questions remain unanswered.
Global Insight Perspective

Significance

The agreement between Russian President Vladimir Putin and his Ukrainian counterpart Viktor Yushchenko on Ukraine's gas debts and the removal of controversial intermediaries RosUkrEnergo and UkrGazEnergo in its gas supply system has averted a potential halt in Russian gas exports to Ukraine.

Implications

Europe, which receives 80% of its Russian gas imports via Ukraine, can breathe a sigh of relief now that the debt dispute has been resolved, thereby avoiding a scenario in which Ukraine may have taken transit gas for its own needs in the event of a halt in Russian gas imports.

Outlook

Both Russia and Ukraine can claim victory with yesterday's agreement, but details to implement the accord must still be worked out, and the deal to give Gazprom a 50% stake in the distribution of gas in Ukraine could raise the ire of Ukrainian Prime Minister Yulia Tymoshenko and her government.

A Win-Win Agreement

In the run-up to yesterday's deadline (set at 6 p.m. Moscow time, 3 p.m. GMT) for Ukraine to pay its US$1.5-billion debt to Gazprom for gas supplies already received, the Russian gas giant said it appeared "doubtful" that Ukraine and Russia could bridge their differences and avert a halt in Russian gas supplies to Ukraine (see "Related Articles"). The gas showdown was set to overshadow a meeting between Ukrainian President Viktor Yushchenko and Russian President Vladimir Putin in the Russian capital, Moscow, but after some four hours of talks, the two leaders emerged, looking pale and haggard but nonetheless pleased, announcing that they had reached a deal in principle to avert a gas supply halt. Yushchenko said that Ukraine had agreed to begin paying its debt from Thursday (14 February), while Putin confirmed that, "We have agreed on the principles of cooperation", noting that "Gazprom is satisfied with the offers made by the Ukrainian side."

European leaders, who had been anxiously watching the situation unfold, wary of a repeat of the January 2006 "gas war" that led to a disruption in Russian gas supplies to Europe via Ukraine, breathed a collective sigh of relief. Although the conflict between Russia and Ukraine this time around was more nuanced and unlikely to have much, if any, impact on Russian gas to Europe, there was significant concern that any halt in Russian gas to Ukraine (which only accounts for 25% of that country's total) would prompt Ukraine to take Russian transit gas for its own consumption needs, interrupting Russian supplies to Europe. Thus yesterday's deal to keep the gas flowing to Ukraine should ensure stable supplies of Russian gas to Europe via Ukraine as well.

Details Could Be Problematic

Although many details of the agreement still must be hammered out by Ukrainian and Russian negotiators, the main points of the deal commit Ukraine to paying off its debts to Gazprom for supplies already received and an end to the use of the controversial intermediaries RosUkrEnergo and UkrGazEnergo in the supply and distribution of gas to and in Ukraine. The size of the actual debt appears to be still in question, as Ukrainian Prime Minister Yulia Tymoshenko acknowledged her country's debt for supplies earlier this week, but she put it at US$1.05 billion rather than the US$1.5 billion that Gazprom has stipulated. Yushchenko said that Ukraine will begin to repay the debt racked up in November-December last year, and will repay it at the gas price that was valid for 2007, meaning US$130 per 1,000 cm.

This appears to be a victory for Ukraine and Naftogaz, the cash-strapped Ukrainian state oil and gas firm, as Gazprom had been insisting on charging the 2008 price. The price it will have to pay for supplies received in January 2008 remains unclear. Gazprom's price for Russian-sourced gas is US$314.7 per 1,000 cm, while the price that Ukraine agreed to pay in December 2007 for all gas supplies in 2008 is US$179.5 per 1,000 cm; Yushchenko seemed to suggest the latter. Gazprom said that it supplemented a shortfall in gas from Central Asia, which makes up the bulk of Ukraine's gas imports, by supplying Ukraine with its own, more expensive gas in January, adding to confusion about the size of the debt and who was ultimately responsible for paying it. While Yushchenko and Putin agreed that the debt would be paid off, exactly how and when this deal will be implemented remains to be determined.

Furthermore, while Russia and Gazprom agreed to the Ukrainian government's demands to scrap the use of intermediaries as a condition of paying off the debt, the deal that Yushchenko cut with Putin may still face opposition from Tymoshenko. The fiery Ukrainian PM has argued to get rid of RosUkrEnergo, the joint venture (JV) between Gazprom and two Ukrainian business that holds a monopoly on the supply of Russian and Central Asian gas to Ukraine, and UkrGazEnergo, the JV between RosUkrEnergo and Naftogaz that dominates the distribution of this gas to Ukrainian industrial consumers, asserting that the supply chain was riddled with corruption. In place of the two existing JVs, both of which came to prominence in the deal resolving the January 2006 dispute, Gazprom and Naftogaz are set to establish two new companies with 50% participation each. One of these companies will control the import of gas to Ukraine, while the other will sell to consumers within Ukraine.

While Tymoshenko gets what she demanded in this deal, it appears that Gazprom will expand its presence in Ukraine as a result, a clear victory for the Russian gas giant. Whereas Gazprom currently has an indirect 25% stake in the distribution of gas to Ukrainian industrial consumers (via its stake in RosUkrEnergo), the new agreement gives the company direct access to the Ukrainian domestic market, with 50% as well. Ukrainian officials may well object to this arrangement, as Tymoshenko had sought to ditch UkrGazEnergo and return Naftogaz to its former dominant role in supplying gas to the country's industry, giving the state firm a renewed source of revenue to bolster its financial standing. Instead, Naftogaz is set to keep just 50% of the distribution market for industrial consumers, albeit with a new partner. Ukrainian Deputy Prime Minister Hrihoriy Nemyria, an adviser to Tymoshenko, reserved judgment on the agreement, saying that, "We just cannot say whether this deal is acceptable until we have seen the details."

Outlook and Implications

On the face of it, the deal between Yushchenko and Putin is a victory for both sides, averting a supply disruption and streamlining their gas trade. Furthermore, the return to a direct relationship between Naftogaz and Gazprom, ditching the controversial intermediaries, is a victory for transparency, and thus, for Tymoshenko. When exactly the new set-up will go into effect remains to be determined, but Naftogaz chief executive officer (CEO) Oleh Dubyna said that he hoped that supplies of Russian gas to Ukraine would be "straightened out" by March. RosUkrEnergo and UkrGazEnergo have the contract to supply Central Asian gas to Ukraine through the end of 2008, but a new all-encompassing deal could yet supersede the existing December 2007 agreement.

Now that Tymoshenko has been handed the victory that she sought, however, there remains the potential that she may give it back. Nothing in the deal yesterday covered gas transit prices via Ukraine, and Tymoshenko, who is due to visit Moscow later this month, has voiced her desire to sharply increase transit tariffs. Her potential frustration with the fact that Yushchenko has given Gazprom a direct role in the supply of gas to Ukrainian industrial consumers, leaving Naftogaz with just 50% (together with the loss-making residential consumption market), could prompt her to push for the transit increase. However, this will only renew tension with Russia, as well as trigger a corresponding increase in the price of gas for Ukraine, which yesterday's deal leaves at US$179.5 per 1,000 cm for this year. The fact that Naftogaz is now set to gain a direct role in the transit of Central Asian gas via Russia should give the Ukrainian firm a new source or revenue and—hopefully—convince Tymoshenko to back down from a potentially damaging push for increased transit revenues.

Andrew Neff is an Global Insight's energy analyst. (andrew.neff@globalinsight.com). Petroleumworld does not necessarily share these views.

Editor's note: For more information on Global Insigth, contact: Catarina Feria-Walsh Global Insight, catarina.walsh@globalinsight.com. / www.globalinsight.com.
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Petroleumworld News 02/14/08

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