Has the New Year’s Celebration near Gazprom’s office been canceled?

If everything goes on like stated in the Agreement on principals of long-term cooperation in gas trade, then it will put an end to the vicious practice of signing gas agreements with Russian gas giant Gazprom on New Year’s Eve. According to point 3.3 of the aforementioned Agreement, “the parties are to sign a long term contract on gas transit through Ukraine before November 1, 2008. The transit tariff is defined by the parties at the level of 2008 and will be correlated by a reduction coefficient for the price of 6.4 cubic meters of natural gas necessary for normal functioning of the gas transport system of Naftogaz.”

This means that in 2009, so called technical gas necessary for pumping Russian gas through the territory of Ukraine will cost Naftogaz (to be more exact, Ukrtransgaz) less than in 2008. And the transit tariff will be not USD 1.7 as currently, but some other figure calculated in accordance with the reduction coefficient for the price of technical gas. This is definite progress.

The Agreement on principals of long term cooperation in gas trade was signed by chairman of the board of NJSC Naftogaz Ukrainy Oleh Dubina and chairman of the board of OJSC Gazprom Aleksey Miller as a continuation of the gas memorandum of October 2, 2008, entitled “Memorandum of Tymoshenko and Putin.” It is hard to assess how favorable this Agreement as well as memorandum will be for relations between Ukraine and Russia regarding gas trade. However, we should not forget about the remark made by the Russian prime minister after October 2: the Russians are ready to cooperate in gas trade under the discussed conditions only with the current Ukrainian government. And the position of this very government is not very stable today. Therefore, it is possible that if the new Cabinet of Ministers and prime minister are appointed, then the signed agreements between Ukraine and Russia in gas trade will be revised.

Nevertheless, let’s try to define the pros and cons of the aforementioned Agreement. One of the fundamental (and positive) points of this treaty is the point stating that from November, 2008 and in 2009, Ukraine will receive gas under direct contracts with Gazprom. Furthermore, from January, 2009, Naftogaz will be the only importer of Russian gas to Ukraine and will acquire the right to appropriate the entire amount of imported gas at the border between Ukraine and the Russian Federation.

Oleh Dubina confirmed in his interview to ZN that both gas companies intend to sign the contracts for 2009 by the beginning of November. Additionally, Oleh Viktorovych noted: despite the fact that the Agreement doesn’t specify the amount of gas that will be imported to Ukraine in 2009, it is actually defined as 55 billion cubic meters per year. Thus, considering Ukraine’s own production of gas, the gas balance of the country will be fulfilled and the price of gas will be economically reasonable. O. Dubina didn’t answer the question “What will be the origin of gas imported to Ukraine in 2009?” This is reminiscent of Gazprom’s notices about the influence of the price of Central Asian gas on price of gas imported to Ukraine.

According to the head of Naftogaz, the exact price of gas imported to Ukraine in 2009 and the procedure for the gradual increase in price of gas during the next three years are as of yet undefined.

The price of gas in the last two months of the current year will remain unchanged – USD 179.5 for 1000 cubic meters. The Agreement of January 4, 2006, which instituted an intermediary in the scheme of gas supplies to Ukraine (RosUkrEnergo), will be voided.

However, along with vivid positive features, the Agreement has a number of drawbacks. One of them is that RosUkrEnergo will be liquidated under the condition that the debt of Naftogaz to RosUkrEnergo for the supplied gas is transferred as debt of Naftogaz to Gazprom. The size of debt is not mentioned in the Agreement and, apparently, will be specified in the contract on gas supplies.

At the same time, Naftogaz is barred from unilateral re-exporting of gas supplied by Gazprom, whereas joint export of gas in defined amounts to the European markets is allowed. A quote of 7.5 billion cubic meters of gas supplied to Ukrainian industrial consumers is allotted to Gazprom Sbyt Ukraina Ltd., a 100% subsidiary of Gazprom. It is around 10% of the Ukrainian domestic market and, according to the head of Naftogaz, doesn’t have much influence.

The most unclear aspects of the document are the price parameters, which will most likely be defined in the contracts on gas supplies to Ukraine and on transit of Russian gas through Ukraine. As it is known, the financial crisis has considerably reduced the price of oil in the global markets. From this point of view, the desire of Gazprom to speed up signing of the contracts is quite explicable.

The Director of the Energy Programs of the Razumkov Center Volodymyr SAPRYKIN, to whom ZN turned for commentary, considers that this transition period and long term contract on gas supplies gives Ukraine a last chance to reform the gas sector of its economy.

In his opinion, the aforementioned Agreement may be analyzed the following way.

“First, it is an intermediate framework agreement as well as is the “Memorandum of Tymoshenko and Putin”. This document doesn’t define the main point (and it shouldn’t since it is not a contract) – the price of gas in 2009.

Second, the Agreement is not a copy of the memorandum as it contains new information and concrete figures.

What the Agreement lacks: the Agreement doesn’t say anything about Gazprom using the Ukrainian underground gas storage facilities and about gas stored there by Gazprom’s subsidiaries.

Therefore, Ukraine is gradually moving further in resolving its gas problems. However, this progress might be distorted by the high prices of gas defined in the contracts, which are pending signature.

New prices on gas shouldn’t considerably affect the economy under the condition that the government and the parliament work effectively. For example, Moldova, which doesn’t have any serious industries, is today able to pay almost USD 279 for 1000 cubic meters of gas.

In a word, Ukraine has received a last chance to reform its gas sector in three years. What steps should be undertaken in this regard: 1) reorganize Naftogaz by separating all of its subsidiaries from it; 2) reduce the number of citizens entitled to benefits, reform the benefit system – it should not determine low prices on utility services, but the targeted support of low-income citizens; in the first stage, there should be two prices of gas: a considerably low price of gas for the population and considerably high price of gas for other consumers of gas; 3) develop and adopt the Law of Ukraine on Principals of gas market functioning by adapting the Directives of the European Union to account for national peculiarities.

If we don’t carry out these tasks, we will lose our own gas production first, then, we will lose Naftogaz, and then – the entire industrial sector…I am sure that the price of gas coupled with the economic crisis in Ukraine will force the President, the government and the parliament to consolidate their efforts and conduct the necessary fundamental reforms in the gas sector.”

ZN supports the opinion of the expert in this context and anticipates the completion of the negotiations.