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Russia offers Ukraine gas price discount on control condition

24 Aug 2011 20:12:50 | esgm

Russia has told Ukraine it would consider offering its neighbour a natural-gas price discount if it hands control of its gas network to Gazprom.

Russian president Dmitri Medvedev told journalists on Wednesday that Ukraine could get a review of its gas price if it followed last week's Belarusian deal. Under that deal, Russia agreed to cut its gas price to Belarus in return for Gazprom acquiring 100% control of Belarusian gas supply and transit company Beltransgaz (see ESGM 16 August 2011).

Ukraine has for many months been seeking a review of its market-related Russian gas-price formula, which was set in a January 2009 contract.

The contract was amended in April 2010 to allow for a 30% discount on the value of the gas or $100/Km³ (€69.30/Km³), whichever was the smaller.

Medvedev said Ukraine would have to present proposals and conditions to interest Russia in future cooperation. "What conditions would these be? Roughly the same conditions as applied with Belarus," he said.

"Although our [Ukrainian] colleagues in the first instance refused such conditions, ... my view is that this matter should not be hurried. You see, we also had our problems with Belarus - very serious ones which included problems over cooperation in the gas sector - but we ended up with a normal level of mutual understanding...

"We agreed that Russia should acquire practically 100% of Beltransgaz... It seems to me that is the route our Ukrainian friends should take."

When the Belarusian deal was announced, Ukraine said it would not consent to relinquishing control of its own transit lines to Gazprom in return for a lower gas price.

However, Ukrainian oil and gas company Naftogaz Ukrainy is having problems raising finance from European banks for the modernisation of its gas transport system. Gazprom could help finance such a modernisation but would only be willing to do so if it had total control of the system.

If Ukraine sought to raise funds from European institutions to upgrade its network itself, it would need to demonstrate it is introducing various economic reforms, including improvements to the gas sector.

Earlier this month, the Ukrainian cabinet of ministers issued its Directive No 733, which required the Ukrainian ministry of energy, the coal industry, Naftogaz and the National Electricity Regulator Commission to work on a plan to reform the nation's gas market to bring it in line with EU requirements.

The directive, published on the government website, is couched in the vaguest of terms and contains no details. But EU requirements are clear that there must be legal and financial unbundling of gas transport, gas sales and gas production, non-discriminatory third party access to pipelines and storage and liberalisation of gas prices.

The question now is whether or not Ukraine and Naftogaz will be forced to introduce real reform in order to obtain finance from European institutions.

The liberalisation of gas prices is particularly important - at the moment, Naftogaz is making huge losses because heat and power companies are paying Ukrainian hryvnia (UAH)1310/Km³, equivalent to $161.8/Km³.

For comparison, the price of Russian gas imports to Ukraine in Q3 was pegged at $354/Km3. However, the government has said it would not raise gas prices again this year, no doubt because of forthcoming parliamentary elections. ES

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