Will gas price for population decrease after decision of Ukraine's Cabinet?

Author : Olena Holubeva

Source : 112 Ukraine

Ukraine's Naftogaz could lower prices if market conditions allow this, but the increase is still not allowed: the Cabinet has left the right to set the upper price limit
21:36, 8 April 2019

gas supplies
Open source

This is a "judgment of Solomon," based on parliamentary elections, experts say: if market prices fall, this will be a good political asset for Petro Poroshenko’s bloc in the fall. And if the market situation encourages prices to rise, they will not jump above the regulated ceiling. But here it is important to note that, according to preliminary data, the effect of this reduction is suitable only for political speculation, rather than for a real reduction in tariffs for the population.

The government announced the adoption of a decision, according to which it has "provided Naftogaz with an opportunity to reduce gas prices for the population since April 2019." "Today we approved a decision that gives Naftogaz the right to set prices from April 1 lower than 8.55 UAH (30 cents) per cubic meter (actual price), but in no way higher,” the Prime Minister explained.

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An important detail: apparently, this decision was made either in the mode of harsh secrecy or impromptu - on the eve nothing was known about it. In addition, the document was not announced on the agenda of the upcoming government meeting. Naftogaz reported that it did not participate in the development of the document and did not even know its content. Three sources said that the final text of the decision was not available yet: they said, the government approved the general meaning of the document, but it’s not ready yet, the text is being worked on. Shortly thereafter, a document appeared on the Ukrainian News media outlet.

It should be noted that the document published in the media does not give a complete picture of the mechanism by which Naftogaz can vary the price downwards. It follows that this mechanism should act like this: "if the gas market situation shows a decrease in the price of gas for industry, Naftogaz should sell gas to the population at a price that is defined as the arithmetic average price of gas at which the state-owned company offers gas to industrial consumers on a prepaid basis. If the price for industry rises, Naftogaz should sell gas to the population at a price set by the Ukrainian government."

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Note that according to Decree No. 867, which was in force earlier, from November 1, 2018 to December 31, 2019, the price of gas was calculated according to the formula P = (Pbasic x Dc), where Pbasic is the arithmetic average price of natural gas for industrial consumers, subject to advance payment before the gas supply period, and Dc is the coefficient of discount.

Thus, despite the changes in market conditions, Naftogaz could not sell gas to the population at a lower price than determined by the current decree. This is confirmed by the company itself. "Recall that, as of now, we are obliged to sell gas to supplier companies at a price set according to Resolution No. 867. We cannot sell gas to them at a price that is more expensive or cheaper," the company said on Facebook.

So the Cabinet of Ministers cancels the fixed price for gas for the population and the reduction factor and introduces a certain average price, formed by the market, which at the same time cannot exceed ... And what value cannot exceed - it is not known at all. Therefore, in the end, serious surprises may await us, especially in the fall, when gas prices in the market will start to grow.

So what does the decision of the Cabinet mean at the moment? How would the gas price reduce?

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Back in early March, Andriy Kobolev, the chairman of the Naftogaz board, has sent a letter to the Cabinet of Ministers in which he announced that it was possible not to raise the price of gas for the population (taking into account the multiplying factor). Naftogaz reported that it was able to buy gas at a point in Slovakia at a price equivalent to 5,981 UAH (213 USD) per thousand cubic meters. Taking into account VAT and the cost of transportation and delivery, this corresponds to a retail price of approximately 8,380 UAH (302 USD) per thousand cubic meters, instead of 8,550 UAH (308 USD), which was the basis of the calculation of tariffs for the heat of the enterprises. If these figures are relevant at the moment, the savings are measured at 170 UAH (6 USD) per thousand cubic meters. This is 2%.

Then Naftogaz called on the Cabinet of Ministers to completely liberalize gas supplies to all categories of consumers from April of this year. That is, it was a question of removing both the lower and upper price limits. As we see, today the government has agreed only to a “half-hearted” liberalization.

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Now gas prices have fallen even more compared to March. In general, over the past six months, they have already collapsed twice. If there was no such formula (laid down in the decree number 867), the price of gas for the population now could be 7,500 UAH (270 USD) for 1 thousand cubic meters, which would lead to a reduction in heat tariffs, said Hennadiy Kobal, ExPro Consulting Director.

At the same time now, at the end of the heating season (in Kyiv it ended on April 6), there’s no reason in it. In the non-heating season, in comparison with the winter, gas consumption decreases by 5-10 times. "Thus, the current government decision will not have a practical effect, but most likely, the effect will be purely psychological and will allow the government to promote itself on one of the most popular themes among the electorate - reducing gas prices," said Kobal.

The practical effect would be more noticeable if the government hurried and made a decision earlier, for example, in February, when it was already clear that the trend for falling gas prices on the world market had strengthened and would remain. In this case, the population would not have to pay tariffs, which were calculated in accordance with the price of 8,550 UAH (308 USD). Not a large reduction, but it is better than nothing. And now there will be practically no effect for people at all.

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Most likely, the government is aware of this, but the looming second round of presidential elections forces the Cabinet to take any steps. But it will be useful at the parliamentary elections that will be held in the fall. If gas prices in the world market remain low, the political force of the current president will be able to use the gas topic to their advantage, arguing that the government has managed to really lower gas prices for the population (and it does not matter that this decrease is 2-5%).

According to the forecasts of the Ministry of Energy and Coal Industry, the tendency for gas prices to decline will be observed in Ukraine until December 2019, according to a statement on the official website of the government. However, it is difficult to say how the situation will actually develop, experts say. According to Kobal, the fact that gas prices on the world market will not grow can remain up to mid-summer: "In the future, much will depend on how the situation with the negotiation process with Gazprom develops around the transit of Russian gas in the Ukrainian GTS. If the negotiations are successful, the price will remain stable. If problems arise in the negotiations and it becomes clear that the transit stops from January, all EU countries, including Ukraine, will begin to increase reserves, which can shake the market price for gas again." Gas pricing will be affected not only by this but by many other factors, in particular, the price of LNG in Asian markets: "If it remains low, as it is now, supplies to Europe will continue to grow, which will also balance the price of gas."

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