Sunday, January 18, 2009

Double-cross. New gas agreement with Russia will cost Ukraine from 3 to 4 billion dollars.

Today (at night actually) the Prime Minister of Ukraine Yulia Tymoshenko reached a preliminary agreement with the Prime Minister of Russia Vladimir Putin on gas supply to Ukraine in 2009-2010: Ukraine will switch to “European price” with the 20% discount, and the gas transit fee will stay at the previous level.

In my previous post I gave the main figures of Russia-Ukraine gas trade. I mentioned that if Ukraine had agreed for Russian December proposal of gas price of $250 per tcm and unchanged transit fee of $1.7 per 1 tcm for 100 km, Kiev would pay to Russians around $3.85 billion more in 2009. But in new reality the losses of Ukrainian economy will be much more significant.

If the “average European price” is $400 per 1 tcm (Russian authorities have previously declared that it may be up to $460), Ukrainian price for this year would be around $320 per tcm. Ukraine consumes 55 bcm of gas every year, this amount costs $17.6 billion. So, this year Ukraine will overpay the price-2008 on $7.727 billion.

Direct loss of a non-signing of gas supply contract on conditions, proposed by Russia in December, is $3.877 billion (if the price-2009 is $320 per tcm). Even if the price will be different – higher or lower – Ukraine will lose from 3 to 4 billion dollars of budget money. The extra losses of January gas conflict: the cut of budget revenues due to the stoppage of work of more than 20 biggest plants and factories, further gas price raise on the internal market, and a dramatic damage of image of Ukraine as a business partner and predictable democratic country. And how can we call this if not the betrayal of the State interests?

It will be possible to smooth over the budget damage if Ukraine have the permission to perform re-export of gas to Europe (at European prices): financial crisis decreased the gas consumption, Ukraine also has significant amounts of gas in storages, and it can just sell the excesses. But there is no information, if Gazprom will give to Naftogaz Ukraine the re-export permission.

The agreement on gas supply to Ukraine in 2009-2010 is supposed to be signed on 19 December.


Tammy Lynch said...

Tetyana, excellent post, as usual. I would say, though, that the price of $400 given by Gazprom hasn't been supported with documentation. Germany will pay $280 /mcm while the Czechs will pay $250.

At the most, "european price" currently is $350, but as little as $300. Ukraine likely will pay $240-$280 in the first quarter, but much less in the next three quarters. They could pay as little as $180 in quarters 3 and 4 of 2009. Of course, if Ukraine negotiated badly, they'll pay much more. We'll have to wait and see.

Anonymous said...

Generally I would second what Tammy is saying -- your argument is incorrect because the "European price" (whatever that is, and it will be interesting to see exactly how that is defined) is not going to be $400 in 2009. Tammy's numbers are almost certainly low for 1Q 2009 -- my guess is Ukraine would have to be buying at $350/mcm -- but they can just use the gas they have in storage for the next couple of months. The price will then come down over the course of the year due to the lagged oil price linkage that defines European prices.