Maidan

ANALYSIS: Dr. Edilberto Segura
Director & Chief Economist, SigmaBleyzer
President, Advisory Board, The Bleyzer Foundation
The Action Ukraine Report (AUR), Number 639, Article 7
Washington, D.C., Wednesday, January 11, 2006

It seems that there are inconsistencies between the signed gas agreement (which is given below) and statements made by officials. But this is not so.

This agreement and other information provided by government officials(the PM and heads of the gas companies), and my own calculations, lead to the following situation:

1. Rosukrenergo will get a total amount of gas of 49 billion m3 (of which 41 billion m3 will come from Central Asia (CA) and 8 billion m3 from Russia (only about half of the maximum amount stipulated). In addition Rosukrenergo will get 15 bn m3 for Moldova).

2. Rosukrenergo will sell to Ukraine a total of 34 bn m3 at a price of $95 th m3. Given the quoted prices ($230 th m3 for Russian and $55 th m3 for CA), about 26 bn m3 of this gas will come from CA and 8 bn m3 will come from Russia. Rosukrenergo will keep to itself the difference of 15 bn m3 (49 bn m3 supplied to it minus 34 bn m3 provided to Ukraine) as payment for transit fees.

3. In addition to the 34 bn m3 from the above deal, Ukraine would also buy from CA (through a separate contract) another 22 bn m3 at an average price of about price of $55 th m3 ($50 in 2006H1 and $60 in 2006H2).

4. The total supply to Ukraine would amount to 56 bn m3 (34 bn m3 from the Russian deal plus 22 bn m3 directly from CA). Together with 20 bn m3 produced internally, Ukraine will have 76 bn m3 of gas for its internal use, a figure similar to last year's. The utilization of this gas supply is expected to be as follows:

Households 18 bn m3
Municipal heating 15 bn m3
Power stations 5 bn m3
Industry 26 bn m3
Govt Institutions 1 bn m3
Transportation 7 bn m3
Storage 4 bn m3
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Total 76 bn m3

Ukraine will have to pay the following for its 56 billion m3 of gas imports plus the 15 billion given to Rosukrenergo for transit fees:

26 bn m3 from CA under the Russian
deal at $55/th m3 = $1.43 billion
8 bn m3 from Russia under the Russian
deal at $230/th m3 = $1.84 billion
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Subtotal $3.27 billion
Plus:
22 bn m3 from CA under separate
contract at $55/th m3 = $1.21 billion
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Subtotal $4.48 billion
Plus:
Payment to CA for 15 bn m3 of gas
given to Rosukrenergo at$55 /th m3 = $0.82 billion
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Total $5.30 billion

This expense of $5.3 billion for 56 billion m3 represents a gas price of $95 /thousand m3. Therefore, the statement that Ukraine will pay $95 /th m3 at the border is right.

The total gas expense for Rosukrenergo for its gas supply will amount to
the following:

41 bn m3 at a price of $55 /th m3 = $2.05 billion
8 bn m3 at a price of $230/ th m3 = $1.84 billion
---------------------
Total = $3.89 billion

To pay for these expenses, Rosukrenergo will receive payments from Ukraine of $3.27 billion (under the Russian deal) plus 15 billion m3 of gas. This 15 bn m3 of gas would represent revenues of $3.4 billion if sold in Europe (that is, 15 billion m3 x $230 billion). Therefore, the total revenue for Rosukrenergo may amount to $6.67 billion.

This will enable Rosukrenergo to pay $3.89 billion for the gas plus any required transit fees (which are unlikely to exceed $1.0 billion at a fee of $1.09 per 1000 m3 per 100 km for both the Ukrainian route and the
Russian route.

Rosukenergo could therefore retain about $1.8 billion for other operating expenses and profits.

Although we do not know the terms of the agreement between Russia and CA, the CA gas price is valid only for the year 2006. As per the agreement below, the price of gas at the Russian-Ukrainian border of $95 per th m3 is guaranteed only for the first six months of 2006.
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Agreement on Settling Relations in the Gas Sector.
Moscow. Wednesday, 4 Jan 2006.

[1] The open joint-stock company Gazprom (the Russian Federation), hereinafter called Gazprom, in the person of Board Chairman Aleksandr B. Miller, who acts on the basis of the statutes, on the one hand,
[2] the national joint-stock company Naftohaz Ukrayiny (Ukraine),
hereinafter called Naftohaz Ukrayiny, in the person of Board Chairman Oleksiy H. Ivchenko, who acts on the basis of the statutes, on the other hand,
[3] and also the Rosukrenergo company (Switzerland), hereinafter called Rosukrenergo, in the person of Executive Directors O.A. Palchykov and K.A. Chuychenko, who act on the basis of the articles of association, which are jointly called the Sides, have signed this agreement striving to settle relations in the gas sector on a mutually beneficial basis and agreed on the following:

1. To ensure transit of natural gas which belongs to Gazprom (Gazeksport Ltd) and Rosukrenergo through Ukraine and the Russian Federation, the Sides have agreed on the rate of payment for transit to the amount of 1.60 US dollars per 1,000 cu.m. per 100 km until 01.01.2011.
2. The Sides have agreed on the Rosukrenergo company as the supplier of natural gas to Ukraine. From 1 January 2006 Gazprom shall not deliver Russian natural gas to Ukraine, while Naftohaz Ukrayiny shall not export from Ukraine the natural gas that came from the Russian Federation.
3. To sell the natural gas that came from the Russian Federation on the Ukrainian domestic market, Naftohaz Ukrayiny and Rosukrenergo shall set up a joint venture, within the shortest possible time but no later than 1 February 2006, whose authorized capital shall be formed by paying money and bringing in other assets.
4. The Sides shall sign appropriate agreements and contracts (shall ensure the signing of appropriate agreements and contracts) with the aim of forming, starting from 1 January 2006, an annual gas balance of the Rosukrenergo company in the following volumes:
TO PURCHASE:
- 41bn cu.m. of Turkmen gas to be bought from Gazeksport Ltd and Naftohaz Ukrayiny to the amounts at their disposal;
- up to 7bn cu.m. of Uzbek gas to be bought from Gazeksport Ltd with the aim, in particular, of swapping with gas deliveries in the Transcaucasus;
- up to 8bn cu.m. of Kazakh gas to be bought from Gazeksport Ltd with the aim, in particular, of swapping with gas deliveries in the Transcaucasus;
- up to 17bn cu.m. of Russian gas to be bought from the open joint-stock company Gazprom at a price to be set by a formula, proceeding from the basic gas price (Po = 230 US dollars per 1,000 cu.m.).
TO SELL:
- in 2006 - 34bn cu.m. of gas to be sold at the price of 95 US dollars per 1,000 cu.m. of gas which is in force in the first six months of 2006, to the joint venture created according to Paragraph 3 of this agreement (to be sold to Naftohaz Ukrayiny until 1 February 2006 until the creation of the joint venture) for subsequent sale on the Ukrainian domestic market without the right to re-export;
- from 2007 - up to 58bn cu.m. of gas to be sold to the joint venture created according to Paragraph 3 of this agreement for subsequent sale on the Ukrainian domestic market without the right to re-export;
- 15bn cu.m. of gas for export under joint programmes with Gazeksport Ltd.
5. The rate of payment for transit and the price of natural gas which are set in this agreement can only be changed upon the mutual consent of the Sides.
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