Wednesday, January 04, 2006

Russia Ukraine gas deal

Russia and Ukraine Reach Deal in Gas Cost Dispute

Andrew E Kramer

New York Times 4 January 2006

KIEV, Ukraine Jan. 4 – Russia and Ukraine settled their price dispute over natural gas today when both countries' national energy companies surrendered control over all of the gas supply to Ukraine to an intermediary company, though one of uncertain ownership.
The solution allowed both nations to claim victory, though Russia emerged with its reputation on world energy markets bruised after disrupting natural gas supplies to Europe on Sunday in the middle of winter. Ukraine's gas utility bill will about double.
Under the deal, Russia will sell natural gas to the intermediary company at the price it had demanded from Ukraine, $230 per 1,000 cubic meters, while Ukraine will buy gas from that company as it comes into the country for $95.
Ukraine has been paying at a rate of $50 to Russia.
The company will balance out the price at $95 by selling Ukraine less of the expensive Russian natural gas and more lower-priced gas from Central Asia.
The gas from the Central Asian nations of Turkmenistan and Kazakhstan will sell for only $50 and $60 per 1,000 cubic meters.
At the center of the complex deal is an offshore energy-trading company that has for a decade, under various names, shipped natural gas to Ukraine from Turkmenistan, a business exploiting the price differentials in former Soviet markets.
Exactly who walked away from the negotiating table with what benefits was obscured behind the secrecy surrounding the intermediary, RosUkrEnergo, and vague promises by Ukrainian officials that this company would be reformed in the months ahead to fulfill its new role.
Ukraine's national security adviser, Anatoly K. Kinakh, said in an interview that the deal would increase the importance of Central Asian natural gas in Ukraine's fuel mix, moving away from Russian supplies.
That dovetailed with Ukraine's efforts to diversify its sources of fuel, he said - though Russia still controls the pipelines leading to Ukraine and, according to analysts, a majority interest in RosUkrEnergo through unidentified proxy owners.
"We have reached an agreement that is mutually beneficial and therefore mutually acceptable," Aleksei Ivchinko, the director of Ukraine's national gas company, Naftogaz, said in Moscow after signing the agreement.
The deal, Mr. Ivchinko said, will guarantee Ukraine's domestic supply as well as the transshipment of Russian gas to other European countries - something that had Europe and world energy markets jittery in the opening days of this year. Crude oil prices dipped slightly on the latest news.
The companies also reached agreement on the price that Ukraine will charge Russia for shipping gas across its territory to Europe.
Gazprom, Russia's natural gas monopoly, will pay $1.60 to ship 1,000 cubic meters for 100 kilometers (62 miles), up from the current price of $1.09, according to Mr. Ivchinko.
The higher price that Ukraine will pay for natural gas may prove a pyrrhic victory for Russia, as Western European countries that are Moscow's primary natural gas customers said today they would seek to diversify their sources of energy.
The disruption in the natural gas flow from fields in the Siberian Arctic and Central Asia was the first ever, according to Martin Bartenstein, the economy minister of Austria, which holds the rotating presidency of the European Union. The Soviet Union began exporting natural gas to Western Europe in 1968.
"Russian gas supplies will remain ... the backbone of European energy supplies but certainly we will have to learn the lesson of what has happened in the last few days," Mr. Bartenstein said, according to the Reuters news agency.
President Vladimir Putin of Russia, speaking at his dacha outside Moscow, called the settlement reached today a guarantee of energy supplies to Europe.
"I think undoubtedly this success will have a positive effect on the whole sphere of Russian-Ukrainian relations," Mr. Putin said. "We can work not just with each other but also together in the market of third countries."
Ukraine's prime minister, Yuriy Yekhanurov, said that the higher prices would impel Ukrainian industry to become more energy efficient, perhaps in the longer term forcing the pace of modernization at mammoth Soviet-era factories, but that the immediate consequences of higher prices could be bankruptcies at some chemical and metallurgical plants. These two energy-intensive sectors form the core of Ukraine's exports.
"I will not say who won or who lost," Mr. Yekhanurov said. "The people of Ukraine and Russia won. Europe won because it will calmly receive gas. Common sense won."
Behind the announcements lies a company with a troubling history in Ukraine, one that in the 1990's carved the most lucrative bits of Ukraine's gas market for itself and won exclusive, and profitable, rights to transship gas over Gazprom's domestic pipeline system.
The company first conducting this business was known as Itera, one of the many subsidiaries, daughter companies and joint ventures that tapped into the vast and then poorly audited revenue flows of Gazprom, according to analysts who follow Gazprom. When Mr. Putin brought new management to Gazprom, many such schemes dried up. But the Ukrainian middlemen stayed in business.
Former executives at Gazprom and Naftogaz had interests in the deal, according to Jerome Guillet, a Paris-based banker and authority on Gazprom's business practices. "The names change every year, but it's always been the same mechanism," he said in a telephone interview.
"The Ukrainians that were previously part of the deal are being kicked out" after the change of leadership in Ukraine after the Orange Revolution, he said. "The new leaders are trying to put their people in. You have a huge trade with hundreds of millions of dollars being captured by a small number of people."
Until officials specify how the company will operate in its new role, he said, the significance of today's settlement remain murky.
Some Ukrainian officials appeared almost giddy today after staring down Russia in the dispute, even though the country will now pay higher gas tariffs. "The price of freedom just went up a little bit," said one official, who said he did not to named because he did want to further aggravate relations with Russia by speaking publicly of victory.
Yet the elevated role of RosUkrEnergo troubled others in Ukraine's turbulent political class.
"The point was to eliminate a suspicious intermediary," Grigory Nemurya, an adviser to Yulia Tymoshchenko, a former prime minister and leader of the Orange Revolution who fell out with President Viktor Yushchenko last fall. "Now Ukraine depends on this company even more."
The deal settled economic and political turmoil in the dispute, but failed to address widespread corruption in the gas business in the former Soviet states, he said. "It's another time bomb that could explode later, further down the road."


Ukraine and Russia strike new deal for supply of gas

By Philippe Naughton and agencies

Times 4 January 2006

Russia and Ukraine have reached a messy compromise in their dispute over gas prices, allowing both sides to claim victory and calming fears of gas shortages in Europe this winter.

Under the deal, reached in Moscow in the early hours between the two countries' gas monopolies, Russia's Gazprom will be paid $230 per 1,000 cubic metres of gas exported to its ex-Soviet neighbour.
Ukraine will pay only $95 for the same unit, however, with the shortfall taken up by a joint venture trading company, RosUkrEnergo, that will become the country's sole provider of gas and will also take over responsibility for the transit pipelines taking Russian gas to the West.
"The talks ended successfully for Gazprom and Gazprom is completely satisfied," Alexei Miller, chief executive of the Russian company said as he and Oleksiy Ivchenko, head of Ukraine's Naftogas, announced the five-year contract.
"We reached an agreement - on mutually beneficial, mutually acceptable terms - that will make it possible to supply Ukraine with the full volume of gas it needs and provide for the transport of Russian gas to Europe," said his opposite number, Mr Ivchenko.
At first glance, the main loser in the deal should be RosUkrEnergo, which is owned by Gazprom and a Swiss subsidiary of Austria’s Raiffeisen Bank, although only as a nominee for unidentified Ukrainian interests.
A Gazprom spokesman, Sergei Kupriyanov, said that the intermediary company can pay and charge the different prices because it also buys cheap gas from the Central Asian nation of Turkmenistan that will be added to the mix.
President Viktor Yushchenko of the Ukraine has said that that the Turkmen gas, which forms the majority of Ukraine's gas imports, sells for about $50 per 1,000 cubic metres, slightly less than Ukraine had been paying for its Russian supplies.
The deal came only a few hours before European Union officials began a meeting in Brussels to co-ordinate their response to the gas crisis, which was brought to a head on New Year's Day when Russia cut off supplies to Ukraine. In response, Ukraine was said to have siphoned off gas being sent via its pipelines to Western Europe, causing a worrying drop-off in gas supplies to Europe.
Europe gets about a quarter of its gas from Russia, some 80 per cent of that arriving in pipelines that cross Ukraine. After a wave of criticism from Europe, Russia boosted the amount going into Ukrainian pipelines on Monday night and supplies appeared to have returned to normal today.
Both Ukraine and Russia claimed victory after the deal - Russia because it is now to receive a market price for its gas to replace Soviet-era barter arrangements, and Ukraine because it avoids having to pay that price in full.
But analysts saw it as more of a victory for Russia and questioned whether the $95 price level announced by the companies was what Ukrainian industry would really end up paying.
Christopher Granville, chief strategist at the Russian investment bank UFG, told Times Online that any losses incurred by RosUkrEnergo would probably have to be absorbed equally by its Russian and Ukrainian partners.
That would mean that the real price being paid by Ukraine could be as much as $160 per 1,000 cubic metres - the price originally demanded by Gazprom last year when it decided to force the issue.
Even at $95, he added, the price rise would wipe out a quarter of Ukraine's annual $4 billion current account surplus. It will also reduce the competitiveness of its industrial exporters - especially in relation to their Russian rivals.
"One of Russia's objectives in this that has not received the attention it deserves is that there are Russian jobs and Russian companies that were feeling the heat of Ukrainian competition because of the low price the Ukrainians were paying for their gas," Mr Granville said.

"Ukraine called Russia's bluff and it turned out not to be a bluff," he added. "Russia paid a price in terms of some bad publicity for a few days, but that was worth paying. My view is that they would not have got this deal if they had not brought things to a head."
Under today's deal, Gazprom has agreed to raise the transit fee it pays to Ukraine by almost 50 per cent. Ukraine will pay cash for gas deliveries and Russia will pay cash for transit, ending a long barter arrangement.
"Our relationship is shifting completely to a market basis," Mr Ivchenko said. Yuriy Yekhanurov, the Ukrainian Prime Minister, added: "Two nations won - Russia and Ukraine; Europe won; it is common sense that won."
EU officials expressed satisfaction that an agreement was reached, saying in a statement that they welcomed the "swift and positive response" to EU appeals for a settlement and the acknowledgment in Russia and Ukraine of "the importance placed by the Union on the maintenance of their role as secure long-term suppliers of natural gas to the EU".
Despite the resolution, the dispute forced many European countries to question their dependence on Russian energy supplies and Russia’s reliability as a political and economic partner as the country assumes the chairmanship of the Group of Eight, a position it wants to use to boost its international prestige.
"We should discuss what happened in those 24 hours when a number of European countries suffered from a reduced gas supply, which happened for the first time in over 40 years," Austrian Economy Minister Martin Bartenstein said Wednesday. Austria currently holds the EU’s presidency.
The main aspect of the deal where transparency may never be forthcoming is that exact terms of the deal between the joint-venture partners in RosUkrEnergo, which will become Ukraine's exclusive supplier of imported gas.
The trading company has come under scrutiny in Ukraine, where last summer the State Security agency was investigating Naftogaz, RosUkreEnergo and groups affiliated with Semyon Mogilevich, a Ukrainian-born Russian citizen and reputed organised crime figure who is wanted by the FBI.
The probe was aimed at establishing links between Russian and Ukrainian criminal groups, the two companies, and exports of Turkmen gas to Ukraine.

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