Ukraine’s Prime Minister Yulia Tymoshenko succeeded in preventing a stiff price increase for natural gas imports this year and to eliminate intermediaries.
s imports this year, and convinced Moscow to eliminate controversial intermediaries from the multibillion dollar energy trade business between Ukraine, Russia and Central Asian producers.
In securing the crucial March 12 agreement with Russia’s gas monopoly Gazprom, political observers said Tymoshenko achieved a shortterm victory in her rivalry with President Viktor Yushchenko.
Yet Ukraine, heavily dependent on gas imports and the main transit country for Russian supplies to Europe, could be paying much more for blue fuel next year, market analysts said.
The pact was signed a week after a tense standoff in which Gazprom reduced supplies to Ukraine by some 50 percent in retaliation for a refusal by Tymoshenko’s government to accept a February handshake agreement made by Yushchenko and his Russian counterpart, Vladimir Putin.
Gazprom backed down, resuming gas supplies to Kyiv after Ukraine’s state energy company, Naftogaz of Ukraine, threatened to cut supplies to Europe.
The agreement reached by Yushchenko and Putin envisioned Gazprom and Naftogaz setting up two intermediaries: one to supply Ukraine with gas, another to sell gas to Ukrainian industry.
The new agreement removes one intermediary, UkrGazEnergo, from the Ukrainian market, but leaves it up to Gazprom to decide whether it wants to supply gas this year to Ukraine directly, or through Swissregistered RosUkrEnergo.
Despite earlier warnings from Gazprom that the price would significantly rise for Ukraine if it wanted to purchase gas without intermediaries, the accord preserved a price of $179.5 per 1,000 cubic meters for gas supplies this year.
Gazprom, which owned a stake in Ukraine’s domestic gas market last year through UkrGazEnergo, was offered direct access to Ukraine’s gas market.
In doing so, Tymoshenko cut out the role of private individuals as middlemen between Ukraine and Russia. The agreement envisions Gazprom will retain its access to Ukraine’s bestpaying customer, the industrial sector, selling a minimum of 7.5 billion cubic meters of gas.
Naftogaz agreed to pay RosUkrEnergo back for gas consumed recently without a contract, returning an equivalent amount in gas, some 1.4 billion cubic meters.
Despite claims by Tymoshenko last week that the new agreement completely removes intermediaries, the agreement will allow Gazprom to preserve RosUkrEnergo as supplier for this year, or to appoint a Gazpromsubsidiary for this role.
Final details are still being worked out, but “RosUkrEnergo should be Gazprom’s headache,” insisted Naftogaz Spokesman Valentyn Zemlianskyi.
By removing UkrGazEnergo as an intermediary to Ukraine’s domestic gas market, the agreement ensures a large amount of revenues will fill the pockets of debtridden Naftogaz, he added.
This alone will help to significantly improve Naftogaz’s solvency, which last year was at the brink of a technical default on $500 million in Eurobonds.
Naftogaz sunk deeper into financial woes as middlemen companies gradually took control of its traditional market, including its revenue and profit, in recent years, most analysts said.
Middlemen could preserve some role this year, but their time is running out fast, political analyst Vadym Karasyov said.
Some political analysts dubbed the agreement a tactical victory for Tymoshenko, who is trying to establish herself as the main powerbroker in Kyiv and gain support for her likely candidacy in the 2010 presidential election.
“Tymoshenko did not let what she viewed as new intermediaries into the system and concentrated the largest part of the domestic gas distribution market into the hands of Naftogaz,” Karasyov said.
In a statement issued by Gazprom ahead of Tymoshenko’s agreement, top energy executives from Kazakhstan, Turkmenistan and Uzbekistan warned their prices would rise sharply in 2009 to “European” levels, a suggestion that import prices might double for Ukraine.
“Strategically this agreement can end up as a loss for Tymoshenko if she remains premier in 2009,” Karasyov said. When next year’s prices reach “$315 to $320, the Central European price, she will be blamed for the shock,” he added.
Gas and electricity price hikes will likely appear this summer, though not by more than 25 percent, said Ildar Gazizullin, chief economist at the International Centre for Policy Studies.
The big increases will occur in 2009, he said.
Ukraine is still adjusting to three successive price hikes since 2006 and is struggling to tame spiraling inflation.
Russia’s Gazprom began raising Ukraine’s gas prices towards European levels after the Orange Revolution of 2004, when Kyiv shifted its geopolitical orientation westward.
“I see it as the price of independence and in principle, there is no reason any more why Ukraine should have prices lower than Central European countries,” said Peter Keller, an analyst at Millennium Capital.
Looking ahead to future negotiations between Moscow, Kyiv and Central Asian producers, market analysts said Ukraine held some of its best bargaining chips in reserve.
In the recent negotiations, Ukraine warned it could compensate for higher gas import prices by raising transit and storage fees for Europe.
But following Tymoshenko’s orders, the Ukrainian negotiating team and top management of Naftogaz held these fees low this year, leaving the option to use them in the tough talks ahead.
During the March 17 parliamentary hearings on Ukraine’s energy security, Minister of Fuel and Energy Yuriy Prodan stressed the need for Ukraine to discuss longterm prospects for raising rates for supply, transit and storage of natural gas.
Increasing these fees would raise more revenue for Ukraine, helping it compensate for higher import prices, but that would ultimately lead to higher prices in the European Union, giving it incentive to become involved in negotiations.
