Ukraine will buy Russian gas. At what price?

Author : Olena Holubeva

Source :

The end of last year was marked by a sensational statement of the President Petro Poroshenko, who did not rule out the resumption of natural gas deliveries from Russia suspended from 2015. Naftogaz clarified that with the Russian gas monopoly for today "there is communication" on this issue.
20:45, 3 January 2018


112 Agency

The resumption of supplies became possible after the decision was made in the Stockholm Arbitration Court, which secured for the next two years favorable conditions for Ukraine to fulfill the contract with Gazprom. Taking advantage of them, the Ukrainian authorities will be able to keep the gas price for the population at the current level. And this is especially true on the eve of the upcoming elections.

Russia again?

The President of Ukraine Petro Poroshenko voiced the fact that Ukraine is ready to resume gas purchases from Russia during a working trip to Odesa region on December 28th. Poroshenko noted that this would be possible if Russian gas was cheap and the process was not corrupt. "What has happened over the past two years? We are energetically independent, they are knocking: can you take our gas? No, we are fine. But if it's cheap and no corruption on the way, then we will think about it," said Poroshenko.

Ukraine has stopped buying Russian gas since November 2015. Note that this happened not due to economic expediency but also because of the annexation of Crimea and Russian aggression in Donbas. Russia was officially recognized as an aggressor country. Cooperation with Russia was not stopped only in the gas sphere but in the cultural and commercial spheres. Ukrainian politicians have repeatedly trumpeted in recent years that the break-up of relations with Gazprom and the freedom from the "Russian gas needle" is one of the most significant achievements of Ukraine after the Maidan.

Why did the authorities change their point of view now? On December 22, the Stockholm Arbitration ruled in a dispute that lasted almost three years between Gazprom and Naftogaz about mutual claims for the supply of Russian gas to Ukraine. As you know, in the arbitration of the company challenged the provisions of the current contract, which was concluded while Yulia Tymoshenko was a Prime Minister. According to the contract, by 2014, the price of Russian gas has risen to $ 485 per 1,000 cubic meters (on reverse Ukraine now buys gas at a price of about $ 280 per 1,000 cubic meters). By decision of the arbitration, the price of gas for the second quarter of 2014 was reduced from $ 485 to $ 352 per thousand cubic meters, the claims of Gazprom on the "take or pay" for 2009-2017 demand (the amount equivalent to $ 56 billion) were completely canceled.

The annual volume of gas purchases instead of fixed 52 billion cubic meters/year (which was subject to the principle "take or pay") was reduced to 5 billion cubic meters per year. "This is the annual contract volume (5 billion cubic meters), the minimum contract volume is 80% of the annual contract volume," said Yury Vitrenko, chief commercial director of the Naftogaz group.

This means that within two years (2018-2019 before the expiration of the contract with Gazprom) Ukraine is obliged to buy 4 billion cubic meters of Russian gas per year. If our country refused to do this, Gazprom could apply to arbitration in connection with the violation of the confirmed contractual obligations (in Stockholm), said the general director of Naftogazbudinformatyka Leonid Unigovsky: "The consequences are easy to guess: it would be clearly negative valuation for Ukraine, so I think that we will buy these volumes."

Poroshenko's statement is a signal to the political forces consolidating around the president about changing the policy on the issue of Russian gas supplies. "Politicians have been talking about it for two years that we would not buy gas from Russia, now we need to buy it, so it's the beginning of preparing of public opinion," said ExPro Consulting Director Gennady Kobal.

This assumption was confirmed in Naftogaz, where the president's statement and the prospects of buying Russian gas were commented in a very restrained tone. "As far as I understand, Petro Poroshenko's words were based on the decision of the Stockholm Arbitration Court, which established a new contract volume under the existing Gazprom contract," Yuriy Vitrenko said. "At the same time, the question whether negotiations on the resumption of gas supplies to Ukraine undergo Vitrenko replied that "today there is communication with Gazprom." has not yet received any comments from the Russian Gazprom. The Russian gas monopoly's press service did not respond to the agency's information request.

According to Unigovsky, Gazprom cannot refuse to sell gas to Ukraine in volumes and on terms stipulated by the decision of Stockholm Arbitration. Ukraine can also apply for arbitration on this matter. Therefore, the question of whether Russian gas will be supplied to Ukraine in the coming years is closed. Another question is important: at what price will the delivery be done.

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Price of Russian gas for Ukraine

Yuri Vitrenko, the chief commercial director of the Naftogaz group, told that in the decision of the Stockholm Arbitration, it is written: the price would be tied to the price of the European hub. "What will be the price of the hub, the same will be the price of the contract. We do not disclose the exact price, "he said. Earlier it was reported that arbitration tied the pricing formula to the price on the German NCG hub.

Thanks to this circumstance, under the conditions that we came up with after the decision of the Stockholm Arbitration, it is profitable for Ukraine to purchase gas from Gazprom, Leonid Unigovsky said: "Russian gas will be cheaper than that which Ukraine buys on the reverse." According to the reverse, Ukraine buys gas on the terms of hub plus transportation costs and exit from the Slovak gas transmission system, which on average, at least, is plus 15-20 dollars per thousand cubic meters to the price of the hub.

Experts have calculated that on the terms of "European hub" the price of Russian gas in Ukraine can be, at least, 15-20 dollars per thousand cubic meters less than the one for which the gas is supplied to the population, heat and energy and religious organizations (IDP category) (now about $ 249). Note that this price is calculated on the basis of the formula of import parity taking into account the price on the NCG hub. "I think that the formula for import parity in Ukraine should be changed: if Naftogaz starts buying 4 billion cubic meters of Russian gas a year, then the question arises: why should the import parity not take into account the price of cheaper Russian gas? ", said Leonid Unigovsky.

The expert expressed his confidence that Naftogaz would sell gas bought from the Russian gas monopoly to the population, and not to the industry. It could replace gas which, for the needs of the category, is now imported from Europe at a higher price than the one that Gazprom has. It should be noted that 3.7 billion cubic meters of gas were imported to Ukraine for the needs of the population (for the heating season), which was comparable to the minimum volume that Ukraine should purchase from Gazprom (4 billion cubic meters). The remaining volume of needs for this category was covered by gas produced in Ukraine - 17.6 billion cubic meters.

This situation can help the authorities solve one of the most painful and provoking acute social tension problems - the retention of gas prices for the population. As you know, the battles over the price between Prime Minister Volodymyr Groysman and the head of Naftogaz Ukraine Andriy Kobolev have been conducted since the spring of 2017. Last summer Naftogaz filed a financial plan for consideration by the Cabinet of Ministers, which stated an increase in the price of gas for the population in the current heating season (since October 2017) by 18.84% - to UAH 5,873 per 1 thousand cubic meters without a value-added tax. Nevertheless, the government and the Ministry of Fuel and Energy were categorically against the increase. The Ministry has not yet published the price of gas for the heating season, although it should have been done in the summer. Now the gas is sold to the population at the price of the previous year, which is the subject of the discussion with the IMF, which insists on the abolition of manual regulation in the sphere of providing the population with gas. According to unofficial data, a return to market pricing for the population is one of the main requirements for the allocation of the IMF lagging tranche.

Of course, the opportunity to retain or even lower the gas price for the population is especially relevant for the authorities on the eve of the upcoming elections. However, we have to be on guard that there is a possibility that the NCG hub can play a cruel joke against Naftogaz, says Unigovsky. According to him, the price of the hub is connected to a market and many factors influence it: oil quotations, sharp cooling, accidents that happen on gas pipelines. Accordingly, this is the risk that at some point the price of Gazprom may not be so convenient. "At some point, it can jump even higher than the level that was in the old contract with the Russian monopolist, because of which they argued in arbitration," the expert said.

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Also, Unigovsky stressed that Ukraine should not repeat mistakes of the past by finding itself completely dependent on Gazprom. "Ukraine should legislatively fix the situation, which operates in Europe, where it is prohibited to supply more than 30% of gas from one source. And 5 billion cubic meters, which we must purchase in accordance with the obligations of arbitration, is about 30%. Or we can lose the reverse, and there will be problems with Gazprom again, or it could refuse to supply us gas, and we will be in a difficult situation again," said Unigovsky.

The general director of Naftogazbudinformatyka also reminded that the situation with favorable conditions will last no more than two years: "The decision of Stockholm court concerns only 2018-2019, it is unknown what will happen in the future. It is possible that Gazprom will refuse to supply gas to us after 2019".

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