More Competition, Less Expensive Russian Gas in Ukraine’s Market (Part Two)

For Part One Click Here 

On April 2, Russian Gazprom and Naftohaz Ukrainy signed an agreement on natural gas sales-and-purchases to cover the next three months. Russian President Vladimir Putin authorized his government, which in turn instructed Gazprom, to sign this agreement, with a substantial price discount for the “Ukrainian partners” (Kremlin.ru, March 31). Valid until June 30, as part of a putative “summer package,” this agreement represents the continuation of the “winter package” gas supply agreement, which was signed last October for the period November 1, 2014, through March 31, 2015 (see Part One in EDM, April 3).

Under the agreement just signed, Naftohaz’s purchase price for Russian gas drops to $248 per one thousand cubic meters, valid until the end of the second quarter of 2015. Gazprom has arrived at this price by applying a discount of $100 per thousand cubic meters on the “contractual price,” which is set at $348 for this year’s second quarter (Interfax, April 2).

The “contractual price” refers to the 2009 Russian-Ukrainian inter-governmental agreement on gas supplies, negotiated by then–prime ministers Vladimir Putin and Yuliya Tymoshenko, and deemed valid until 2019. The $100 discount stems, in turn, from the 2010 inter-state agreement negotiated by Putin with then-president Viktor Yanukovych, whereby Russia received long-term naval basing rights in Ukraine’s Crimea in return for the gas price discount. Russia tore up the 2010 agreement by annexing Crimea in March 2014. But it reinstated the gas price discount in the Gazprom-Naftohaz agreements of October 2014 and April 2, 2015.

Gazprom is dramatically losing market share to European energy companies in Ukraine. During the first quarter of 2015, for the first time ever, gas supplies to Ukraine from Europe exceeded those from Russia. The volumes delivered were 3.6 billion cubic meters (bcm) versus 2.2 bcm during January 1 through March 31. European energy companies re-sell gas mostly of Russian provenance to Ukraine. Their sale prices averaged from $270 to $280 per one thousand cubic meters during this period (Ukrinform, UNIAN, April 2).

Gazprom’s discounted price at $248 seems designed to outbid European competitors in Ukraine. Rebuilding its market share would also mean rebuilding Russian leverage and influence in the country. Conversely, a defeated and shrunken Gazprom in Ukraine would severely embarrass the Kremlin, and Putin personally.

Russia’s state budget, not Gazprom, will bear the costs of Gazprom’s price cut. The $100 difference between the contractual price and the discounted price (per one thousand cubic meters) results from the waiving of Russia’s gas export tax on the volumes to be delivered to Ukraine.

Under the April 2 agreement, delivery volumes will be determined on a daily basis, depending on Naftohaz’s requests. The volumes can range from 0 (zero) up to 114 million cubic meters (mcm) per day, by prior request and based on Ukrainian pre-payment in each case. The agreement signed in October 2014 (see above) introduced the pre-payment requirement, and the prolongation agreement just signed maintains it. For a quantitative comparison, Ukraine currently imports some 55 mcm per day from all external suppliers, via Naftohaz (Interfax-Ukraine, April 1).

The April 2 agreement brings back the issue of “take-or-pay” into the argument. This is related to the Gazprom versus Naftohaz litigation, ongoing in the Stockholm Arbitration Institute and due for a resolution in 2016. Gazprom claims some $20 billion in penalties from Naftohaz and/or Ukraine, for what Gazprom describes as non-compliance with the take-or-pay clauses of the 2009 agreement. The follow-up agreement of October 2014 did not include take-or-pay clauses (Interfax, April 1). The unpublished April 2 agreement (itself a continuation of the October document) apparently includes some reference to the 2009 take-or-pay clauses.

Russian officials’ public statements show some discrepancies on this issue. Gazprom CEO Aleksei Miller disclaims intentions to enforce take-or-pay under the April 2 agreement. Miller, however, claims that Gazprom needs this reference in the new document for consistency with its take-or-pay case in the Stockholm arbitration (see above). For his part, Russian Energy Minister Aleksandr Novak insists that the take-or-pay clauses from 2009 remain in force, along with that whole agreement; but Gazprom would, “as a goodwill gesture,” delay a decision on the possible imposition of penalties (Vedomosti, Interfax, April 2; RIA Novosti, April 4).

Ukraine maintains that take-or-pay does not apply to current Gazprom-Naftohaz relations; and attempting to apply it retroactively would amount to discrimination against Ukraine, since Gazprom has renounced those clauses or at least their application in a number of cases in recent years (UNIAN, April 2). The April 2 agreement is based strictly on Ukrainian pre-payment, which should render take-or-pay moot.

Apart from claims and counterclaims in the Stockholm arbitration, Naftohaz has fully repaid its debts for Russian gas consumed in 2013–2014. The October 2014 agreement (see above) “on gas supply resumption and debt repayment” had linked the two issues. Naftohaz repaid $1.45 billion in November 2014 and another $1.65 billion in December 2014, extinguishing its arrears to Gazprom (UNIAN, April 2). Gazprom, in turn, resumed gas deliveries to Ukraine, though strictly on a pre-payment basis.