You're reading: Paper: Gazprom expected to pay for stake in Ukrainian gas system with shares

MOSCOW - Gazprom and Ukraine have still not signed a new contract because the Russian gas giant did not just want a stake in Ukraine's gas transport system (GTS), but also expected to pay for it with its own shares rather than cash, Vedomosti reported on Friday.

The paper obtained a copy of a draft agreement between Russia and Ukraine On the Expansion of Cooperation in the Gas Sector.

Under this agreement, Gazprom could pay for a stake in the joint ventures with Ukraine not only in cash, as desired by Ukraine, but also with assets, including its own shares, with the guarantee that they belong to Gazprom itself, the paper said.

Under the draft agreement, Russia and Ukraine were supposed to form two 50-50 joint ventures. The first would own Ukraine’s GTS. Then, "based on consensus," the owners of the venture, Ukraine’s Naftogaz and the Gazprom group, were supposed to "determine the conditions of participation" in a joint venture with a European gas company or companies, the paper said.

If agreement was reached, the third partner or partners would have received a stake of 33%, Gazprom would retain 33% and Ukraine would get 34%.

Gazprom chief executive Alexei Miller submitted the agreement to Prime Minister Vladimir Putin on December 1, indicating that the document was "prepared jointly with the Ukrainian side" and Gazprom was waiting for an order to sign it.

A Russian official familiar with the negotiations said this was supposed to happen in early December.

However, Gazprom and Naftogaz Ukrainy instead signed a temporary agreement giving Ukraine the right to pay for Russian gas 21 days later than planned earlier, and allowing settlements in rubles as well as dollars.

The main document, concerning Ukraine’s GTS and the discounts for it, never emerged. "It turned out that the draft agreement negotiated at the level of experts drew criticism from above – on the Ukrainian side," the paper reported the Russian official as saying.

"At the end of the year Miller said the Ukrainian’s appraised their GTS at $20 billion. Gazprom itself thinks that it is worth at least two times less," a source close to the company told the paper.

A 50% stake in the joint venture that was never formed could have been worth either 3.6% of Gazprom shares at their price on January 19, based on the Russian company’s maximum valuation of the Ukrainian pipeline, or 7.2% based on the Ukrainian appraisal, the paper said, adding that Gazprom subsidiaries now hold about 3.1% of the parent company’s shares.

The draft agreement also proposed a whole list of guarantees from Ukraine – that it would compensate all losses if third parties make any claims on the assets to be handed over, and that the country’s government agencies would not interfere in the setting of rates for gas transshipments through Ukraine.

The document also protected Gazprom from the possible introduction in Ukraine of the rules of the Third Energy Package that is in effect in the European Union. The joint ventures were supposed to retain the right to combine the businesses of production, transportation and distribution of gas.

However, the agreement did not provide any guarantees from Gazprom to transship certain amounts of gas through Ukraine. Neither were there clear obligations on investment in the GTS. It did not even specify the new price for Russian gas, but only cited a future additional agreement with this price, and it would no longer be valid if the agreement was cancelled.

A source close to Gazprom said work is underway on a milder version of the agreement, but he declined to provide details, the paper reported.

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