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Ukraine to hold negotiations with IMF on natural gas price

Author : Olena Holubeva

21:48, 10 October 2017
Ukraine to hold negotiations with IMF on natural gas price

Author : Olena Holubeva

Ukraine will offer the International Monetary Fund a new formula for calculating gas prices for the population

21:48, 10 October 2017

Read the original text at 112.ua.

 

112 Agency

Last Friday, Reuters reported that next week Ukraine will offer the International Monetary Fund (IMF) a new formula for calculating gas prices for the population. In case the formula is approved by the fund, the price of natural gas for the population in Ukraine will remain unchanged until July 2018.

Ukraine’s Naftogaz insists on raising the price. This state company supplies gas for the population, the district heating providers, and religious organizations. In the financial plan for 2017, Naftogaz envisaged raising the price of gas from the current 186,5 USD for 1 thousand cubic meters  to 221,5 USD for 1 thousand cubic meters of gas since October 1 - by 19%. As you know, the government reported that the financial plan of the state company was generally approved, but the government declared a principled position - gas prices for the population should not rise.

Related: Ukraine to propose new gas price formula to IMF, - Reuters

The government's arguments are clear: Ministry of Energy predicts that the debt of the population for consumed gas from January 1, 2016 to January 1, 2017 will increase to 25.8 billion UAH, which is 337% more than last year. The Ministry maintains that this, like the high proportion of recipients of the subsidy (60%), indicates a low population solvency. The Ministry of Energy is convinced that the next round of gas price increase for the population, religious organizations and district heating providers will not automatically lead to an increase in expenditures in the state budget for the payment of subsidies. In particular, the Ministry predicts that if the gas price rises to the level offered by Naftogaz, number of households that will receive a subsidy in Ternopil region will increase from the current 89% to 96%. Such data were provided by Deputy Minister of Energy Ihor Prokopiv.

At the same time, Ministry of Energy cannot disagree on the price increase offered by Naftogaz. The price of gas for population, the district heating providers, and religious organizations, is calculated on the basis of Government Decree No. 187. According to the calculation formula laid down in the document, taking into account the change in the price of imported parity from October 1, 2017, the gas price for the population and other categories should indeed be increased by at least 17.6% - up to UAH 223,6 USD (without VAT).

Related: Ukraine fuel costs soar: When will gasoline and diesel prices fall?

Of course, the only way to keep the gas price at the current level is to change the pricing formula. One of the variants of price change was taking into account the factors of seasonal decline in the gas price on the world market. According to Resolution No. 187, if the gas price formula does not differ from import parity to within 10%, then there is no reason to revise it. Thus, the Ministry of Energy produced a draft resolution "On Amendments to the Resolution of the Cabinet of Ministers of March 22, 2017 No. 187," according to which the time period for calculating import parity was proposed to be changed from the current 12 months for the period from April 1 to October 1, 2016 and from 1 April to July 1, 2017.

Such changes were not supported by the Ministry of Finance and the IMF. In particular, they say that changes in the methodology for calculating tariffs would lead to a reduction of imported gas price for the population in the summer and its increase in the winter (for the industry). In addition, it was alleged that this would artificially reduce market segmentation tariffs, create obstacles for a competitive gas market, and provide opportunities for cashing in on the price difference. It will create problems of corporate governance and will be a threat to the financial position of Naftogaz.

For this reason, Ministry of Energy has developed another package of proposals, which will allow either to keep the gas price for population, district heating providers, religious organizations at the current level, or will increase it insignificantly. They will be considered at the meeting of Minister of Finance Danyliuk with representatives of the IMF, which is planned for next week.

Related: Naftogaz, Gazprom, don’t agree on gas prices, Stockholm to decide

In particular, the variant of changes to the gas pricing formula fixed by resolution No.187 will be proposed. The calculation can be carried out according to the HUB zero principle or HUB minus for the volumes of gas produced in Ukraine, that is, without taking into account the transportation price (or subtracting it). Now the pricing takes place on the principle of HUB plus, where the price of HUB is the average value of the price on the German gas hub (NCG), and plus means the price of transportation. Currently, tariffs for the transportation of natural gas are calculated depending on the volumes of transportation through exit points on the state border. At the same time, tariffs for all entry points (of imported gas) are set at the same level of $ 12.47 per 1,000 cubic meters of gas, and for outlets within the limits of $ 16.74 for 1 thousand cubic meters (the minimum tariff) to $ 32.8 for 1 thousand cubic meters (the maximum rate).

Proposals for the HUB zero formula or HUB minus are justified by the fact that the import gas in the volume of supplies to the population, district heating providers, and religious organizations is only 3.7 billion cubic meters. The rest - 13.9 billion cubic meters - are needed to close the annual requirements, and they are produced in Ukraine.

Related: IMF doesn’t oppose to keeping gas prices in Ukraine at their level

It is not known whether the IMF would support such changes. In case of such a change in the pricing, Naftogaz might face deteriorating of financial indicators and the need to cut investment programs. population, district heating providers, religious organizations are the largest cluster of consumers of natural gas, sold by the state-owned company. According to the company's financial plan for 2017, 18.7 billion cubic meters were sold out of 25.5 billion cubic meters to this category.

The situation is more than serious. On the one hand, we have the social tension and discontent of the population. And on the other hand, IMF representatives might react in a negative way; at the same time, they are unsatisfied with the slow reforms in the country.

Reuters stresses that for IMF, resolving of natural gas price issue along and adoption of the pension reform is an important condition for Ukraine to receive another long-term credit tranche from the IMF in the amount of $ 17.5 billion.

Related: Sanctions against Russia and the gas war

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