The completion of the summer political season was marked by another
flare-up in Russian-Ukrainian gas relations. Ukrainian Prime Minister
Mykola Azarov declared that the contract of January 19, 2009 requires
revision because it does not correspond with Ukraine's interests.
The reasons for such "friendly behavior" are clear. First, in summer
Ukraine had to increase domestic gas prices considerably. By decision of
the national energy commission, it raised the average gas price for the
population from $78 to $118 per thousand cubic meters and from $110 to
$165 for utility services. This is explained by the terms of the IMF
loan, which requires tougher financial discipline and higher gas prices.
Ukraine is soon going to have elections to the local bodies of
government. The voters need know who to blame for these higher gas
prices. By talking about a "fettering contract" Azarov is shifting the
blame to Russia. Since the contract of January 19 was signed by the then
Prime Minister Yulia Tymoshenko, this scenario suits the Party of the
Regions down to the ground.
Moreover, now many European gas consumers have asked Gazprom to
revise their long-term contracts and Ukraine simply decided to join the
line.
What do European wholesale buyers hope to achieve? They want to
revise the system of fines based on the "take-or-pay principle" and also
to partially link prices to the spot market. As for Ukraine, Russia did
not fine it for its failure to take the required amount of gas last
year, saving Ukraine eight billion dollars. Nor is Russia going to fine
Ukraine in the future. As for the gas price formula, Ukraine hasn't just
got it linked to the spot market - it has received a 30% discount
because the export duty was cancelled. This is something other customers
can only dream of.
But Ukraine is still not content. Its proposals to alter the old
formula state that it is not appropriate to tie the gas price to the oil
products basket. But this is how the price of gas is formed right
across Europe. Setting the gas price independently is no guarantee of
cheap gas, but that requires a separate discussion. What is important is
that linking the gas price to oil products is not unique to the
European market. Nevertheless, Ukraine proposes a radical revision of
the price formulation principle. Since it is impossible to set the gas
price based on the market (as Kiev has no gas exchange), Kiev suggests
tying it to the price for Germany on the net back principle. In other
words, let's take the gas price for Germany and minus transportation
expenses. However, in Germany the price of gas is linked with that of
oil products.
Even rough estimates show that Ukraine will not stand to gain from
any change in contract terms. It's a simple calculation. The price of
gas for Ukraine was $305 in the first quarter of this year. Let's apply
the Kharkov coefficient to it, which is about $90. So, it works out at
$215 for a thousand cubic meters. Now let's calculate the net back
principle. In the first quarter of this year, the average price of
Russian gas for Europe was $290. The price for Germany doesn't differ
much from this figure. Let's minus the costs of transporting the gas
through Poland. The road is about 700 km, and the transit rate is $2.1
per 100 km, so the total is about $15. As a result, Ukraine still loses
$60.
In the third quarter Naftogaz purchases gas from Gazprom for $248 per
thousand cubic meters. The price for Germany is approaching $300.
Gazprom's average for the German market is $308 per thousand cubic
meters. It appears that the transition to the new price formula will
still increase the gas price, although not substantially.
It seems Ukraine wanted to exploit this net back principle and to
keep its 30% discount. Then the gas price really could drop beneath $200
per thousand cubic meters. But why should Russia forego the 30% duty?
Remember that the Kharkov agreements were based on the immutability of
the pricing formula. If it changes, then these agreements are called
into doubt. Hence, the 30% duty is back.
Ukraine's leaders understand this. In this context we should take
into account the third reason behind Azarov's statements - the talks
about Ukraine's gas transportation network (GTN). It is no accident that
Ukrainian Energy Minister Yuriy Boyko has paid two visits to Moscow
(last Friday and this Friday) for talks about the GTN. Azarov's speech
may be considered an attempt to improve Ukraine's negotiating position
ahead of another round of pipeline problem discussions.
If Russia starts construction on South Stream, Ukraine will soon lose
its role of being a transit country. Needless to say, South Stream is a
very expensive project and transporting gas via Ukraine is cheaper. But
this requires ownership over the pipeline, because otherwise it is
impossible to guarantee gas transit stability. But even this new
Ukrainian government cannot hand over its GTN to Russia because it is
considered a national asset even though without Russian gas it
immediately becomes a worthless heap of scrap. Kiev is eager to get help
from Europe, asking it to convince Russia to unconditionally guarantee
gas transit. However, the European Union has distanced itself from any
such mission.
Instead of trying to find a compromise, Ukraine has decided to
attack. This does not involve only the gas contract of January 19, 2009.
There is much speculation that it "can live without Russian gas." On
the eve of his visit to Moscow, Boyko staged a news conference where he
said that if Ukraine had a terminal for Liquefied Natural Gas (LNG),
then the price for LNG would be $190 per thousand cubic meters. Such
figures stoke the imaginations of those who have only a feeble grasp of
the subject. Even though they're pure fiction because Ukraine has no
such gas terminal.
Take Poland, Ukraine's neighbor: Poland is building a terminal, but
it will take it at least four years before construction is complete and
even then its initial capacity will be a mere 2.5 billion cubic meters.
If Ukraine were to acquire a similar terminal within four years, it
would profit little from it. Moreover, those four years may see serious
changes on the gas market. Those countries that have LNG do not want to
sell it at knock-down prices. Boyko is referring to agreements with
Egypt but Egypt currently exports less than 13 billion cubic meters of
LNG and has no surplus. Before the crisis Ukraine required about 45
billion cubic meters of imported gas. This is not to mention the
navigability of the Turkish straits and other such trifles.
Ukraine has other "reliable sources," for instance, Poland's shale
gas. Indeed, in the last four years 30 companies have received licenses
for gas exploration in Poland but no one has yet started drilling. So,
any talk of Polish shale gas is not serious. Poland understands this
too. That is why it is in negotiations with Russia about expanding gas
imports.
Belarus is, on paper at least, also playing an active part in gas
supply diversification. President Alexander Lukashenko says that he has
no great need for Russian oil and gas and that he will find an
alternative to them. He has promised to buy LNG in Lithuania although it
does not have any terminal for it, either.
In his address to parliament and the nation this spring, Lukashenko
instructed the government and the National Academy of Sciences to
intensify the exploration of promising, in-demand mineral deposits for
industrial use. He referred to shale gas, among other things. Indeed,
why buy it from Poland if it may be found at home? However, researchers
have not yet acted on the president's instructions. So, such
"diversification" may prove costly for Belarus.
In fact, Belarus has already suffered a bad experience with oil.
Lukashenko boasted that Belarus will now buy oil from Venezuela. Several
oil tankers even arrived in the country. However, according to its
statistical bureau, in the first half of the year Belarus has reduced
its oil imports from Russia by 49.8% (in annual terms). Exports of oil
products have decreased by 40% and the production volumes in the
Belarusian oil processing industry have fallen 30%. Such are the bitter
fruits of this "diversification."
There is every possibility that Ukraine will go down a similar road,
and be left without any fuel and also without the transit role. However,
Kiev still has time to clean up its act, at least until the South
Stream project gets underway.
Konstantin Simonov, general director of the National Energy Security Fund, for RIA Novosti
