Ukraine To Cut Gazprom's Umbilical Cord?

LONDON, England -- Kiev has been assiduously looking for ways to break out of its dependency on Russian energy imports, and now it looks as if this may in fact be coming true.

Sometimes it's not easy being Russia's neighbor -- just ask Ukraine.

Ever since the 1991 implosion of the USSR, Ukraine's relations with Russia have appeared between coldly formal and outright hostility, with a major irritant being the increasingly high prices Gazprom charges for natural gas.

Gazprom, in turn, needs access to Ukraine's pipeline network in order to reach its profitable European customers.

Faced with this symbiotic relationship, Kiev has been assiduously looking for ways to break out of its dependency on Russian energy imports, and now it looks as if this may in fact be coming true.

The head of Ukraine's state geology and subsurface resource service Gosgeonedr Eduard Stavitsky said, "Today, the state fund of subsurface resources is about 1.1 trillion cubic meters of gas and about 130-150 million tons of oil with gas condensate. In from seven to 10 years, Ukraine will be able to fully supply itself with gas and oil, excluding the purchase of imported energy resources."

Teekay Tankers is ready to invest $2 billion in the development of shale gas in Ukraine by 2020.

Shell has already prepared a project for extraction at the Yuzovsky gas field and is ready in the next three years to pump several billions of dollars into opening it, hoping within 10 years to be extracting around 8-10 billion cubic meters of gas per year there.

In Western Ukraine, investors, particularly Chevron, are showing interest in the Olessky field, straddling the Lviv, Ivano-Frankivsk, and Ternopol regions, covering around 2,700 square miles.

According to Ukrainian Deputy Fuel and Energy Minister Serhiy Chekh, Ukraine's state-run Naftogaz energy company is drafting an agreement with global oil and gas group Shell to develop the Black Sea shelf.

Chekh said Ukraine could boost oil and gas production in the Black Sea and the Sea of Azov but it would require significant investment, but nevertheless Ukraine plans to raise oil output on the Black Sea shelf to 2.9 million tons a year by 2015, including gas condensate.

If Ukraine is in fact able to achieve energy independence, it will rob Moscow of one of its major bargaining holds over Kiev.

Quite aside from the fractious issues involved in the transiting of Gazprom natural gas through Ukraine, another issue that has roiled Russian-Ukrainian relations for the past two decades still remains unresolved, Russia's continuing use of the Crimean port of Sevastopol for its Black Sea Fleet.

In the past Moscow has played hardball over continued use of the port, most notably by using its "natural gas weapon."

Given energy's centrality to the country's prosperity, this has proven a major obstacle for many of Ukraine's previous political leaders, including Viktor Yushchenko.

More than any other former Soviet state, Moscow desires a "friendly" Ukraine.

Among other things this means for Ukraine, no NATO membership, a high priority of President Yushchenko.

Should Kiev step out of line, Moscow still has a number of cards to play, including the country's ethnic Russian population, roughly 17 percent of the country's citizenry.

For the European Union, however, Ukrainian self-sufficiency in energy production could prove to be a significant lessening, as it could put an end annual brinkmanship laid by Russia and Ukraine over natural gas exports, which has disrupted winter supplies over the past several years.

Gazprom’s double in Slovakia is to be investigated

Slovak financial police and tax authorities are going to check the legality of the creation of Slovakian company Gazprom SRO, registered a week ago at an address of a shopping centre in the centre of Bratislava with the capital of €500 million.

Slovak Interior Minister Daniel Lipsic told local press that “Charges have already been made, but I cannot say who pressed them yet,” . The minister also refused to clarify what the charges were.

At the same time Slovakian tax authorities are checking the company because of it excessive capital, considering that only €5,000 are required to register a company. Slovakian government also stressed that the company does not hold a license for the sale of gas.

Russian Gazprom has repeatedly denied any connection to Gazprom SRO and is not issuing any further comments.

Kiev To Take Up Gas Slack From Belarus?

KIEV, Ukraine, June 22 -- Ukraine can transport more Russian natural gas bound for European costumers if a gas row with Belarus causes supply disruptions, the state energy company said.
Moscow said Belarus owes Russian gas company Gazprom millions in gas payments for supplies from the first four months of the year. Minsk says Gazprom owes a similar amount for gas transit fees.

A Russian gas pipeline through Belarus supplies Germany, Poland and Lithuania. Redirecting gas from Belarus through Ukraine could ally supply concerns, the Platts news service reports.

Moscow, Platts said, asked Kiev last week to stand by for possible additional gas supplies if the gas dispute with Belarus drags on.

Ukraine's state-owned energy company Naftogaz said it was ready for emergency shipments but has so far not seen any additional gas from Russia.

Around 80 percent of all Russian gas bound for European markets travels through Soviet-era pipelines in Ukraine. The remaining 20 percent runs through Belarus.

Gazprom said it would gradually cut gas supplies to Belarus by as much as 85 percent if the dispute lingers.

The Russian energy company cut gas supplies to Ukraine most recently in 2009 over a similar issue.

European glut hits Gazprom plans

The fortunes of Gazprom, long on the rise due to its grip of the European gas market, now hang in the balance as a gas glut could see its ambitious plans put on the back burner.
The gas giant said this week that exports had ticked up in the first four months of the year, as parts of Europe’s economy show signs of a modest turnaround.
“Naturally, we are expecting positive dynamics compared with 2009,” said Mikhail Malgin, head of Gazprom Export’s department for northwestern markets. “The economy has begun to recover after the crisis but we do not expect a sharp increase in exports.”

Gazprom has played down fears of oversupply harming the market and insisted the recovery will continue, particularly in Central and Eastern Europe.
“They expect this extra supply of gas to be liquidated in the next three to four years,” said Vadim Mitroshin, senior oil and gas analyst at Otkritie.

The biggest challenge on the horizon, however, comes from shale gas production in the United States, which has been described as a “game changer” by BP chief executive Tony Hayward in supplying energy-hungry China and other Asian countries that have resisted the crisis.

Shale gas output could increase from its pre-crisis 2007 level by 71 per cent by 2030, according to the Paris-based International Energy Agency, but some analysts doubt these upbeat figures.

“It is still an open-ended discussion, because even in the US where the industry is a couple of years ahead there are no clear answers to problems such as ecology,” said Artyom Konchin, oil and gas analyst at Unicredit

Gazprom is focusing on developing its liquified natural gas (LNG) projects, with a view to supplying 10 per cent of the US market and developing the Yamal peninsula.
Qatar, however, has already seen its hopes of supplying Europe and the US stumped by the current gas glut, so the battle for new markets could switch to Asia.
The battle for dominance between shale gas and LNG will come down to price, but Mitroshin, of Otkritie, said that shale gas would not develop as quickly as people recently thought.
“The price is too low and it doesn’t deliver proper returns for producers,” he said.

Meanwhile, Gazprom and Ukraine’s Naftogaz are mulling over a joint venture, a step well short of a merger. The two state-controlled companies are discussing which assets each side will contribute and Ukraine is reportedly holding out for a 50-50 split on any deal.

Gazprom, Naftogaz Ukrainy May Seek Joint Venture

MOSCOW, Russia -- Gazprom and its second-largest foreign customer, state-run energy company Naftogaz Ukrainy, agreed Friday that they could move toward a complete merger after they create a joint venture, Gazprom said in a statement.
A merger of the companies, proposed by Prime Minister Vladimir Putin last month, has raised questions because Naftogaz was just 6 percent the size of Gazprom in terms of sales last year.

Ukrainian President Viktor Yanukovych later said a merger would have to be on parity terms.

After talks Friday, Gazprom chief Alexei Miller and Ukraine's fuel and energy minister, Yuri Boiko, suggested that a 50-50 venture could be a “first step” in the eventual unification of the companies, the Gazprom statement said.

“The parties agreed that the process could be gradual,” Gazprom said.

At this point, the companies need to determine what assets they want to contribute to the joint venture, Miller said in the statement.

Separately on Friday, Energy Minister Sergei Shmatko told reporters that Russia hoped the companies would do their best to complete the talks on possible scenarios for the merger “as soon as possible.”

Naftogaz obviously could offer its sprawling pipelines, or a portion of them, said Alexander Nazarov, a gas industry analyst at investment company Metropol.

Gazprom could give the joint venture partial ownership of the gas fields that it is developing, Nazarov said, adding that a full unification was out of the question.

“Most likely, a joint venture is all that the proponents of a merger can count on,” he said in a note to investors.

Gazprom has a market capitalization of more than $120 billion, and with sales of $98.5 billion in 2009, it is also the world's largest gas producer.

Naftogaz, which is not publicly traded, reported sales of $5.75 billion for last year.

The proposal to merge the companies appeared after Putin said Russia cooled off to the idea of leasing Ukraine's pipelines in a consortium with Naftogaz and European Union energy companies to run and maintain the network.

Yanukovych resurrected the plan, which his predecessor, Viktor Yushchenko, ditched in the early 2000s.

Gazprom initially wanted a say in running the Ukrainian pipelines to ensure the immunity of its Europe-bound transit to politically tinged pricing disputes.

It said it would pay to upgrade the worsening lines.

The Russian gas export monopoly is interested in the merger now more for the sales on Ukraine's giant market than because of transit, energy industry expert Bohdan Sokolovsky, who advised Yushchenko, said earlier this month.

Gazprom sold 27 billion cubic meters of gas to Ukraine last year, an amount second only to the deliveries to Germany, which — according to Gazprom data released last month — were 33.5 bcm.

The European Union is prepared to consider a consortium to run the Ukrainian pipelines, Fernando Valenzuela, head of the bloc's office in Russia, said Friday.

If the issue makes it to the negotiating table, “the European Union will study all the proposals and state its position,” he said, Interfax reported.

European Energy Commissioner Guenther Oettinger said earlier this month that a decision "has to be made between Kiev and Moscow, and not in Brussels."

Nord Stream gas pipeline raises bank funds

The consortium behind the planned Nord Stream gas pipeline from Russia to Europe has sealed a 3.9bn euro ($5.4bn; £3.5bn) funding deal from 26 banks.

The deal marks a milestone in development of the 1,220km (756-mile) pipeline, due for completion in 2012.

Russia's gas giant Gazprom has the biggest stake in the controversial venture, which environmentalists say will increase pollution in the Baltic.

Supporters say the project will secure energy supplies from gas-rich Russia.

The finance raised from the bank syndicate and consortium partners paves the way for completion of the first phase of the pipeline, which is expected to cost of 7.4bn euros.

Gazprom owns 51% of Nord Stream. Germany's BASF-Wintershall and E.On Ruhrgas each hold 20%, and Gasunie of the Netherlands has 9%.

The plan is to pump 55bn cubic metres of gas annually to Germany and other EU countries through the pipeline.

Alexei Miller, chief executive of Gazprom, said: "The completion of Phase I financing is a landmark event in the development of Nord Stream and helps take the project from concept to reality.

"Nord Stream solidifies the long-standing energy relationship between Russia and Europe, a relationship that has lasted nearly 40 years," he added.

The Baltic is said to be one of world's most polluted seas. Concerns have been raised that the project could stir up toxins lying on the sea bed, especially those inside a vast number of World War II munitions.

Finland has only permitted the project on the grounds that ships laying the pipeline do not lay anchor in Finland's economic zone, to prevent the disturbance of sediment.

However, last month, Russian Prime Minister Vladimir Putin told Baltic leaders in the Finnish capital Helsinki that extensive research had been carried out into any environmental impact and that the pipeline would be "safe".

European Union countries are also involved in two other major projects - the Nabucco and South Stream pipelines - to deliver gas to Europe from Russia and Central Asia.

Ammonia Producer Shuts Plants After Gas Price Hike

Russia's largest producer of ammonia, TogliattiAzot, said Tuesday that it had shut down six of its 11 production facilities after Mezhregiongaz, a Gazprom subsidiary that provides the company with natural gas, raised gas prices this year.
The Federal Tariff Service raised gas prices from Jan. 1, and Mezhregiongaz followed suit by increasing the prices that it charges to TogliattiAzot to the maximum allowed level, company spokesman Igor Bashunov said.
The Federal Tariff Service sets the price for gas suppliers contracted to provide limited supplies, and suppliers who offer unlimited supplies are allowed to sell gas from that price and higher.
Mezhregiongaz provides limited gas supplies to TogliattiAzot, while its subsidiary Samararegiongaz makes up the rest of the company's needs with a contract for unlimited supplies.
Bashunov complained that Mezhregiongaz was overcharging for unlimited supplies.
"Mezhregiongaz has a price range for unlimited gas that is higher than the price set by the Federal Tariff Service. Prices for unlimited gas supplies set by Mezhregiongaz for us are reaching the upper limit of this range, although they could have set a lower price," Bashunov told The Moscow Times.
The price that TogliattiAzot pays per 1,000 cubic meters of limited gas supplies has been raised from 2,037 rubles to 2,835 rubles ($69 to $96), he said. The price for unlimited supplies has grown from 2,843 rubles to 3,403 rubles ($96 to $114).
"It wasn't a one-time increase. The prices have been raised gradually since early 2009," Bashunov said. "Our company will be unprofitable if we buy gas at these prices."
The company posted a net profit of 8.58 billion rubles on revenue of 29.97 billion rubles in 2008.
TogliattiAzot consumes 360 million cubic meters of natural gas, which is the main raw material for the ammonia, carbamide and methanol that the company produces, per month. Of the total consumption, 220 cubic meters is limited gas and 140 cubic meters is unlimited gas.
TogliattiAzot signed an agreement on gas supplies with Mezhregiongaz in October 2007.
Mezhregiongaz said Tuesday that it and its subsidiary had fulfilled their obligation on gas supplies to the company in full and accused TogliattiAzot of delays in gas payments in 2009 and illegal gas extraction.
"Starting from the second quarter of 2009, TogliattiAzot stopped fulfilling its contract obligations, allowing it to go into debt for months," Mezhregiongaz said in an e-mailed statement.
"In addition TogliattiAzot systematically violated the gas consumption agreement and allowed unsanctioned gas extraction," it said.
TogliattiAzot is currently in talks with Gazprom about the issue, Bashunov said.
"We're holding talks with Gazprom on a price that would be acceptable for both us and them," he said.
In case the sides don't come to an agreement, TogliattiAzot will have to cut expenses and consider possible cutbacks, he said, declining to specify how many workers might be fired.
The company may cut as much as half of its 4,500-member workforce, Bloomberg reported.
Bashunov declined to comment on these figures. "We're trying to keep our labor force," he said.

Russian energy group with the power to plunge Europe into darkness

Gazprom has so much natural gas under the tundra of Siberia that its energy resources are equivalent to all the oil and gas fields owned by western energy companies put together
The next cold war may well take place in a room that looks oddly like a scene from the last one. Along one wall of a spartan control centre in Moscow, a large map of Europe is projected on computer screens. Visitors have to pass through five rings of security to reach this spot, but the few outsiders who make it through are proudly shown a display of raw power. From underground facilities deep inside Siberia, a series of trajectories are plotted on the computer screens – aiming west toward Europe's largest conurbations. An engineer explains how easy it would be to turn out the lights in a foreign city with the click of a button on his desk.
Fortunately, this is not missile command but the control room of Gazprom, the world's largest gas producer and a flagship of Russian capitalism. The plotted lines show the route of major pipelines – coloured green because they are full of natural gas flowing at more than 30km an hour. Yet the threat of plunging neighbouring states into nuclear winter remains a real one. This time last year, actions taken in this room threw much of Europe into panic.A dispute between Gazprom and Ukraine over unpaid gas bills culminated in a decision to turn off transit pipelines that also feed much of central and eastern Europe – shutting down heating and electricity generation for millions during one of the worst cold snaps for years.
Now, with the continent again in the deep freeze and running low on gas, the power of Russian energy companies is once more in the spotlight. Russia has already sparred with Belarus over oil supplies this winter in a dispute that also threatened to disrupt energy exports to Europe. Gazprom and the Ukrainian government are hoping to avoid a repeat of their 2009 pipeline brinkmanship for now, but critics claim Moscow is never far away from using its energy might to exert political influence over its neighbours.
Even Britain received a taste of how fragile Europe's gas supply infrastructure can be last week when a drop in pipeline pressure from Norway forced authorities to suspend supply to certain designated industrial users to protect homes and offices. Our reliance on imported gas is set to rise rapidly as UK reserves near depletion in less than eight years at current extraction rates.
Increasingly, one company dominates not just existing European supply but, more importantly, its future sources. Gazprom has so much natural gas under the tundra of Siberia that its energy resources are equivalent to all the oil and gas fields owned by western energy companies put together. At 33.1tn cubic metres, its gas reserves are 55 times greater than Britain's North Sea alone. In fact, only the Saudis, with their huge desert oilfields, can match Gazprom's total energy reserves. Even then, oil exports from Russia recently overtook those of Saudi Arabia .
The geopolitics of energy are well rehearsed but relatively little is known about key corporate players such as Gazprom, which rarely grants access to foreign media. Today's Guardian interview is the first in a five-part series published this week, which looks at some of the key international companies likely to shape world affairs over the coming decade. Some, like Gazprom or the mining giant BHP Billiton, control the dwindling raw materials most likely to prove strategic flashpoints.
Tomorrow we turn to China Mobile, straddling the two most powerful global trends: the rise of China and digital communications, while General Electric and Wal-Mart are examples of how powerful multinational corporations have survived the financial crisis to retain their global influence.
Not all are in good shape. 2009 was a torrid time for businesses everywhere. Gazprom has had a particularly bad year as its reputation for reliability plummeted after the Ukrainian shutdown and the recession caused Europeans to consume far less gas.
But as energy prices bounce back fast (oil, which acts as a benchmark for gas, has jumped swiftly to $80 a barrel again) Moscow is recovering the swagger of a city swimming in easy money.
A few miles south of its glitzy ­boutiques, the headquarters of Russia's largest company is more forbidding: a chilly blue neo-Stalinist skyscraper known as "The Candle" houses a bureaucracy that serves as a constant reminder of Gazprom's Soviet past. Still 50.1% owned by the Russian state, its managers are nonetheless at pains to stress its independence from government foreign policy. "We don't do politics," insists Vladimir Mikheev, an executive from the export arm who complains of the west's "Gazpromophobia".
But his boss, Gazprom's official public representative, Sergei Kupriyanov, is blunt about why the state keeps such an iron grip: "Most of the territory of the Russian Federation lies in rather uncomfortable climatic conditions – much of the year it is freezing, which means any rupture of the gas supplies will immediately lead to catastrophe."
Russia knows about energy's strategic importance better than most. Its citizens rely on heavily subsidised gas from Gazprom's monopoly and months of sub-zero temperatures make energy security a matter of life and death.
As last year's clash with Ukraine showed, it also makes for an unusually powerful form of economic weapon. Opinion remains divided over who was really to blame for shutdown, but the show of strength appears to have worked: five years after Ukraine's so-called Orange revolution, both candidates standing for election in next weekend's presidential election are now broadly pro-Moscow.
Gazprom is more than just strategically useful, contributing 20% of ­Russia's total state budget in taxes, and Kupriyanov stresses its benefits to other shareholders too: "We also have private investors who are expecting returns and that means we have to be transparent".
Unfortunately, market rules do not always apply as evenly to foreign investors in Russia, who remain scarred by a series of assets confiscations and forced disposals. Only the vast riches at stake keep overseas money flowing to invest in vital new projects such as the Yamal development scheme in Siberia or Nord Stream pipeline to Germany. Chief executives from two western energy firms who agreed to speak off the record about Gazprom conceded that they faced little choice but to continue dealing with Russia despite misgivings about the reliability of its contract law.
Gazprom's emphasis on "shareholder transparency" does little to clear up questions about its ownership either. Rumours persist that senior government figures have sizeable indirect holdings. "We haven't seen any traces," says Kupriyanov when asked whether Vladimir Putin has a personal economic interest in the company.
To Gazprom's foreign shareholders, close links with the Kremlin are a mixed blessing: protecting their asset but holding back true reform. "The government is only interested in two things: political power and cheap domestic gas," says one Moscow-based fund manager. "There is no incentive to make the business more efficient and profitable so they just take more for themselves."
For the economy as a whole, energy may be too much of a good thing. Roland Nash, head of research at Moscow investment bank Renaissance Capital, warns that over-reliance on booming energy prices may hold back Russia's otherwise strong prospects.: "The economic crisis was just the wrong length of time: long enough to undermine small companies and the emerging middle class but too short to force government into reform. Russia needs to diversify away from oil and gas."
For now though, Gazprom is in the vanguard of Russia's new energy imperialism. British consumers too may see more of "the big G". Gazprom Marketing and Trading, its overseas arm, sells gas to commercial clients such as Chelsea football club and has a target of expanding its UK market share from 2% to 10%. Kupriyanov also reveals ambitions to sell to residential customers one day. "Yes, definitely," he says. "The British market offers ample opportunities of developing downstream operations – we appreciate the fact that it's a liberalised market and all of the infrastructure is in place."
Last time Gazprom made moves on the residential market – by exploring a takeover of Centrica – it prompted intense political suspicion and even the threat of a UK government veto. Now it hopes its softly-softly approach with commercial customers will ease fears. "You all thought there would be bear scratches on the gas pipes but the headlines cried wolf," says Kupriyanov. "Our entry to the UK market was exemplary."
A bigger factor in containing Europe's "Gazpromophobia" is likely to be whether the company cuts off any more pipelines. Will there be another crisis this winter? "We have good reason to believe crisis can be averted but it is never easy to give a 100% guarantee," concludes the man from Gazprom.

Gazprom Gives Ukraine More Time To Pay

KIEV, Ukraine -- Russia’s Gazprom announced on Tuesday that it would grant Naftogaz, the cash-strapped Ukrainian state energy company, a few extra days in January to pay its December natural gas import bill due to the New Year and Christmas holidays.
“Taking into account the holidays, an agreement was reached to postpone the payment date for December supplies from January 7 to January 11 2010,” Gazprom said in a statement. January 7 is the day most Christians in both countries celebrate Christmas.The European Union, which saw Russian gas supplies cut off for weeks during the Russia-Ukraine energy spat in January 2009, has urged both sides to avoid repeat disruption. In recent months, Russian and Ukrainian officials have moved to reassure Brussels that a repeat stand-off was unlikely.But with the political temperature in Ukraine high ahead of a presidential election, some experts fear political rivalries in Kiev could help spark a repeat dispute. Moreover, the cost of Russian imports for a financially stretched Ukrainian government is to increase sharply during the first quarter of 2010 from a 2009 average of $208 per 1,000 cubic meters to about $305.As Ukraine is hit by a 15 per cent drop in gross domestic product, Naftogaz has struggled amid falling gas consumption and payment by consumers.Kiev has stayed financially afloat and made monthly payments to Gazprom this year largely thanks to $11bn in aid provided by the International Monetary Fund.But a lack of political consensus and reforms in the run up to a January 17 presidential election caused the IMF to freeze additional assistance, raising fears that Kiev could find it particularly difficult to pay gas import bills in coming months.Ukrainian officials have in recent weeks held talks with the IMF on resuming assistance in the form of an emergency $2bn loan. They say the assistance is needed to ensure timely gas, pension and wage payments ahead of the election – expected to wrap up after a February second round run-off.

Gazprom Profit Falls but is Set to Rebound

Gazprom saw net profit fall in the first quarter, when it paid more for Central Asian gas and incurred foreign exchange losses, but was tipped to bounce back in the rest of 2009. Net profit at Gazprom fell to 110.18 billion rubles ($3.49 billion) in the first three months of 2009, down 61 percent from last year but well ahead of an average forecast of 84.75 billion from a Reuters poll. Operating expenses jumped almost a fifth to 648.8 billion rubles. Its profits should rebound in the second and third quarters, analysts said, after a pipeline explosion halted Russian imports of expensive gas from Turkmenistan in April. A recovery in sales volumes, down nearly 24 percent in the first quarter as a pricing dispute with Ukraine weighed, should also help offset lower gas prices in the second half of 2009. "The third quarter should be better thanks to rising gas tariffs [at home] and exports volumes," UniCredit analyst Pavel Sorokin said. The row with Kiev over gas payments in January cut supplies to Europe, which receives about 20 percent of its gas from Russia via Ukraine. But quarterly revenues rose 2.2 percent to 931.4 billion rubles as higher prices offset the decline in volumes. Gazprom said first-quarter profit was hit by the high cost of purchased gas, primarily from Central Asia, which contributed to costs rising 121 percent to 303.5 billion rubles. Total natural gas sales fell to 140 billion cubic meters. The company incurred a foreign exchange loss of 140 billion rubles due to a significant appreciation of the dollar against the ruble. Ruble weakness also hit net debt, which rose 17 percent to 1.191 trillion rubles as of March 31. Denis Borisov, an analyst with Solid brokerage, said the company was likely to incur smaller foreign exchange losses due to the stabilization of the ruble-dollar exchange rate. "I would also expect a recovery in exports, though the price will be somewhat lower," he said. Gas prices follow those of oil with a six to nine-month lag, meaning prices are only now beginning to catch up with the lows plumbed by crude in January.

EU reaches gas deal with Ukraine

The EU and international lending institutions have agreed a deal with Ukraine to help it provide stable supplies of Russian gas to Europe.
Loans worth $1.7bn (£1bn) were agreed in return for reforms to Ukraine's gas sector, the European Commission said.
The deal is meant to include money to help Ukrainian national gas company Naftogaz pay off large debts to Russia.
In January, many countries were left without gas because of a payment dispute between Moscow and Kiev.
The new deal will allow Ukraine to replenish its reserves of Russian gas before the winter.
Commission President Jose Manuel Barroso said Ukraine had made commitments which would ensure increased transparency and the long-term viability of the industry, though he did not give details.
"The agreement should provide the stability needed to significantly reduce the risk of a further gas crisis between Ukraine and Russia and therefore provide the security of supply that member states and our consumers expect," he said.
The institutions that will provide funding include the International Monetary Fund, the World Bank, and the European Bank for Reconstruction and Development.
Lenders have called for Naftogaz to end subsidies of gas supplies within Ukraine as a condition for making loans, correspondents say.
Russia provides about a quarter of the gas consumed in the EU and 80% of that is piped through Ukraine.

Gazprom’s ‘Nigaz’ project raises eyebrows

Gazprom's new joint venture in Africa has raised more than a few eyebrows with a choice of name that sounds uncomfortably like a racial slur, just days ahead of US President Barack Obama's first visit to Moscow.
Nigaz, formed following a $2.5 billion deal between the Russian gas behemoth and Nigeria's National Petroleum Company, has already prompted a rash of jokes on the Internet.
The spelling is even similar to that of US hip hop group Niggaz With Attitude, who are largely credited with starting the gangsta rap music genre.
No one from Gazprom was immediately available for comment on the joint venture.
For US firms, dealing with this company could be an extra burden due to the particular resonance of the word's historical connection with slavery. However, in Russian it has a similar pronunciation but very few of the negative connotations associated with it in other countries.
President Dmitry Medvedev, who is due to meet with Obama in Moscow during the US president's visit to Moscow on July 6-8, oversaw the creation of the Nigaz joint venture in Nigeria earlier this week.
Despite the apparent lack of PR savvy from one of the world's largest companies and a country with a long history of slavery, it is not the first major company to make a naming howler. Powergen's Italian branch named their website powergenitalia.com, while visitors to stationery retailer penisland.net might have got less than they bargained for.

Russia Has Paid Ukraine Total Gas Transit Fees For 2009 - Putin

MOSCOW, Russia -- Russia has already paid Ukraine in full for its 2009 gas transit fees, a payment that effectively amounts to a huge loan to the crisis-battered country, Prime Minister Vladimir Putin said Wednesday.
"We pre-paid our Ukrainian partners for the transit of our gas to Europe to the start of next year, 2010, inclusive. Essentially this is a credit of $2.2 billion," he said, quoted by Interfax news agency."These are very significant resources which our Ukraine partners have effectively received from Russia," Putin said at a meeting with Alexei Miller, chief executive of Russian state-controlled gas giant OAO Gazprom (GAZP.RS)."I hope very much that discipline within the framework of existing contracts will be maintained by both sides and in the future," he added.Russia has warned repeatedly that Ukraine - which has been hit hard by the global economic crisis - will have trouble paying its natural gas bills and that any failure to pay could trigger a repeat of the January gas crisis.Ukraine says it has the money to pay its bills, and it avoided a looming crisis earlier this month when it paid its May gas bill. However, there is widespread doubt about whether Kiev can pay its next gas bill for June.In the January gas crisis, a bitter price dispute between Moscow and Kiev caused Gazprom to cut gas supplies to Ukraine, leaving more than a dozen European countries without Russian gas in the middle of winter.Some 80% of Russian gas exports to the European Union pass through Ukraine.

Gazprom Neft Buys Italy Assets

Gazprom Neft extended a Russian push into European refining and marketing on Wednesday by buying Italian oil operations from U.S. oil major Chevron. Gazprom Neft will buy a plant in Bari, in southern Italy, which produces 30,000 tons of oil and 6,000 tons of lubricants a year for cars, trucks and other industrial uses, and fuel marketing and sales operations in Rome, the companies said. The plant produces 150 types of oils used in cars and commercial transport as well as industry including drilling, according to the statement. Gazprom Neft will also get the right to use the Texaco brand in the Italian market until 2010. Chevron, the second-largest U.S. oil company, and Gazprom Neft, Russia's fifth-largest oil producer, did not reveal the price of the deal. Gazprom Neft said in a statement that it expected production and marketing synergies between the Chevron assets and the Serbian oil refiner NIS, which it took control of earlier this year. Chevron said last month that it would push ahead with streamlining its lubricants product line and would exit retail markets. Russian oil companies' push into downstream activities in Europe reflects Gazprom's own effort to acquire gas distribution and power-generation assets across the continent and consolidate control of the country's domestic assets. Rival LUKoil bought a 49 percent stake in ERG's Isab di Priolo refinery on Sicily last year and held talks to buy a large stake in Spanish oil company Repsol, which has a large refining portfolio. Last month, Russian oil producer Surgutneftegaz agreed to buy 21 percent of Hungarian oil refiner MOL. Earlier this month, Gazprom spent $4 billion to buy back a 20 percent stake in Gazprom Neft from Italy's Eni, which had picked up the stake at a 2007 auction of the assets of bankrupt oil firm Yukos.

Gazprom To Fine Ukraine $530 Mln For Gas Import Cut - Newspaper

MOSCOW, Russia -- Russia's Gazprom has demanded that Ukraine pay a fine of around $530 million for its failure to import the contracted volume of natural gas, business daily Kommersant Ukraina reported on Monday.
The paper cited an unnamed source in the Russian gas monopoly as saying the company sent official notification of the fine to the Ukrainian state oil and gas company Naftogaz last week.The demand comes despite pledges from both Gazprom and Prime Minister Vladimir Putin in March that Moscow would not seek reparations from Ukraine for the low import level.The source said the fine would apply to supplies in March, when Ukraine was obliged to buy 2 billion cubic meters of gas, but bought only 0.9 billion cu m. Under the contract, the supplier has the right to demand reparations totaling 150% of the value of the import shortfall during the October-March period, and 300% during the rest of the year.For the first quarter as a whole, Ukraine imported roughly half the level stipulated in the supply contract.The dispute has had a knock-on effect on Russia's gas dealings with Turkmenistan, the paper said. Most of the gas sold by Gazprom to Ukraine is bought from the Central Asian country and piped through the Russian grid.Supplies from Turkmenistan to Russia were halted after an explosion on the Central Asia-Center-4 pipeline in the early hours of April 9. Turkmenistan blamed the explosion on Gazprom, saying the company had reduced the volume of gas taken at the Russian end by 90% without informing the Turkmen side. The surplus gas reportedly caused an increase in pressure, which burst the pipeline.Speaking on March 12, Putin gave assurances that Russia would not fine Ukraine."Ukraine is currently not buying the volume of gas from us that it was contracted to do, and should pay a fine for this. We are waiving this fine, based on realities - they can't pay. They are now on the verge of bankruptcy, and you perfectly understand that you cannot finish off your partners," the prime minister said.However, less than two weeks later Putin issued an angry statement over a deal between Ukraine and the European Union, under which the EU agreed to provide up to $5 billion to modernize Ukraine's gas pipeline system.Russia froze intergovernmental talks with Ukraine and threatened to review ties with the EU, saying Moscow's interests had been ignored in the deal.Ukraine has been hard hit by the global economic crisis, with unemployment doubling, the economy shrinking by at least 25% in the first two months of 2009 alone, and demand collapsing for the country's main exports, steel and chemicals. The national currency, the hryvnia, has lost around 40% of its value.

Ukraine's Naftogaz Seeking Changes To Russia Gas Deal

KIEV, Ukraine -- Ukraine's debt-burdened company Naftogaz wants changes in a hard-won natural gas deal with Russia that ended Europe's gas cutoff, officials said Thursday, amid concerns of a renewed dispute between the two neighbours.
Naftogaz has asked Russia's gas giant Gazprom to allow Ukraine to buy less natural gas this year than previously agreed, according to Gazprom and President Viktor Yushchenko's office.The contract signed in January locks Naftogaz into buying 40 billion cubic metres of gas this year, but the company is asking to buy only 33 billion.Naftogaz representatives were not immediately available for comment.The move raises fears of a repeat gas war between Moscow and Kiev as Gazprom is unlikely to yield to Kiev's request. The January dispute left over a dozen European countries cut off in winter after Gazprom halted gas supplies through Ukraine, accusing its neighbour of stealing the fuel.A spokesman for Gazprom confirmed receiving Naftogaz's request, but declined any further comment.Naftogaz said last week it may run into arrears with Gazprom because of deep financial problems.Fresh arrears by Naftogaz could lead to a new conflict with Russia. The deal that ended January's rift stipulates that Naftogaz will have to make advance payments for gas shipments if it runs up arrears — a commitment the debt-laden company may be unable to fulfill.Naftogaz has long been plagued by financial problems. It is struggling to stay afloat with more than $4-billion (U.S.) in debt. It has twice narrowly averted technical default on its Eurobond obligations.

Putin Undermines Gazprom As Ukraine Pact Freezes Out Yushchenko

MOSCOW, Russia -- As Russia and Ukraine reached a mid- January accord in their long-running natural-gas dispute, Russian Prime Minister Vladimir Putin had at least one thing to cheer him up.
He had frozen his pro-Western nemesis, Ukrainian President Viktor Yushchenko, out of the negotiations, reaching an agreement instead with Ukrainian Prime Minister Yulia Timoshenko, who had shuttled back and forth to Moscow during the crisis.At home, this left Yushchenko looking ineffectual: One opinion poll put his approval rating at 3.4 percent even before the settlement. Yushchenko is a Russia basher; Timoshenko isn’t. Her poll numbers are rising, and she has voiced a desire to run for Yushchenko’s job in the next elections, which could take place at year’s end.During Putin’s eight year presidency, which ended in May 2008, he made it his goal to strengthen Russia’s position as the dominant European gas supplier while becoming a global energy power with sway over energy supplies and policies far and wide.To that end, the Ukraine gambit is part of Putin’s ongoing strategy to divide Europe and thwart the U.S., which is concerned that Russia intends to exploit its energy dominance to influence European politics.Rough Test Ahead Marginalizing Yushchenko was one tactical Putin victory; that the West could do little more than issue statements and grumble at Russian temerity was another. The European Union’s helplessness was reminiscent of its inaction during Russia’s invasion of Georgia in August.Putin’s gamesmanship is in for a rougher test as oil prices drop and the Russian and global economies slump. He also must deal with a blow to the credibility of OAO Gazprom, Russia’s gas monopoly, which he employed as his proxy in the Ukraine fight.Still, Putin plows onward. He has used the Ukraine crisis as an opportunity to flog two new pipelines, known as Nord Stream and South Stream, as a way to break what he has characterized as Ukraine’s monopoly on European gas deliveries.The new pipelines would also increase Russia’s export capacity to Europe by 50 percent from current volumes; Russia now supplies about 25 percent of Europe’s gas.“You’ve got to give Putin credit, he’s outplayed the West,” says Chuck Wald, former deputy commander of U.S. armed forces in Europe. “It’s not as easy now without $100 oil, but he’s driving the issues.”Huge Losses Two developments could yet derail or at least stall Russia’s energy ambitions. One is the 70 percent drop in oil prices, which peaked at $147 a barrel in July 2008 before falling to a low of under $34 a barrel on Dec. 19. The other is that Europe, jarred by the Russian gas cutoff, is now seriously thinking it needs to diversify its energy supplies.“We must not allow ourselves to be placed in this position in the future,” said European Commission President Jose Barroso as gas started flowing again through Ukraine’s Soviet-era pipelines on Jan. 20.Putin’s actions also caused Gazprom to bleed. By the company’s own estimates, the Ukrainian dispute cost it more than $2 billion in lost revenue.“Was this agreement worth such efforts, such costs?” Putin said in a Jan. 25 interview with Bloomberg Television. “I think yes, because at some point you need to move to normal civilized market relations.”‘Political Tool’ Those losses were piling up at a time when Gazprom was saddled with 1.1 trillion ($31.4 billion) in debt; that and sharply declining revenue could weaken the company’s ability to raise outside capital as global credit markets dry up.“De facto, Gazprom is being used as a political tool,” says James Beadle, chief investment strategist at Pilgrim Asset Management, an investment fund in Moscow. “It’s not functioning as a corporate enterprise, putting business and reputation first.”Other casualties could include the Nord Stream project, estimated to cost 7.4 billion euros ($9.6 billion) and scheduled to go online in 2011, and South Stream, projected to cost about $20 billion and slated for completion in 2013. “The question is, where is Gazprom going to get all the financing?” says Keith Smith, an energy analyst at the Center for Strategic and International Studies in Washington.He contends that the projects are primarily political, as it’s prohibitively expensive to find and develop the Arctic fields that hold the gas with which Russia plans to fill the pipelines.Gazprom’s position as a natural-gas provider isn’t going to shield it from falling oil prices -- European gas prices are pegged to the oil market, lagging crude prices by six to nine months.Optimistic Projection Not everyone is that pessimistic. Nord Stream, a 1,200- kilometer (750 mile) route under the Baltic Sea, would cut out transit countries by linking Russia directly to Germany. “They’re going under the assumption that expanded sales will pay for Nord Stream,” says Ronald Smith, chief strategist at Moscow based Alfa Bank. “It will justify itself, even at $40 oil.”South Stream, on the other hand, a 900-kilometer pipeline under the Black Sea that would link Russia to Bulgaria, is less realistic, he says -- and not just because of its price tag.Should Europe get serious about importing more liquefied natural-gas and relying more on nuclear energy, demand for piped gas could stagnate, he says. Russia may find it difficult to keep on track many of the long-planned projects necessary to replace declining production, much less undertake ambitious new ones.Domestic crude output fell for the first time in a decade last year, declining to 488 million tons from 491 million in 2007.Many of the fields brought online by the last wave of Soviet investment three decades ago are drying up, forcing producers to explore in ever more remote regions in Russia’s Arctic and eastern Siberia.Cold Comfort One example is Gazprom’s Shtokman field -- an Arctic offshore project with enough reserves to meet world gas demand for more than a year. The field is financially feasible at a per barrel oil price of $50-$60, according to project chief Yury Komarov.Delays to the development, projected to provide 11 percent of Gazprom’s gas output by 2020, could also affect exports to Europe, since part of Shtokman’s gas is expected to fill the proposed Nord Stream pipeline.Merrill Lynch & Co., which had originally forecast 2009 average prices at $90 a barrel, cut that to $50 a barrel in November. Finam Investment Co. of Moscow estimates that 2009 oil prices will average $52 a barrel, while its “pessimistic” scenario projects $37 a barrel oil.Extraction taxes and export duties on oil and gas provide almost half of Russia’s revenue. Russia’s Finance Ministry, in one scenario projecting Russia’s Urals export blend to average $32 a barrel this year, is forecasting a 2009 deficit of 4 trillion rubles, or about $111 billion -- Russia’s first shortfall in a decade.Staying the CourseGazprom insists that despite a looming recession, dropping oil prices and the global credit squeeze, its energy plans are going forward. “All of our projects in production, distribution and transportation will be realized regardless of any difficulties,” Alexander Medvedev, Gazprom’s deputy chief executive officer, said at a January press conference.Western energy companies, desperate to get in on Russia’s still considerable untapped oil and gas reserves, may bail Russia out as they have in the past. “Russia is the biggest prize left on the planet for international energy majors,” says Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow. “If they have to secure their position by shouldering a disproportionate share of the financing, history shows they will do it.”For example, France’s Total SA and Norway’s StatoilHydro ASA are already partners in Shtokman, while Royal Dutch Shell Plc and ConocoPhillips may be roped into developing the isolated Arctic Yamal peninsula.Gazprom plans to build Nord Stream in partnership with German energy companies E.ON AG and BASF AG; South Stream is proposed as a joint venture with Italy’s Eni SpA.Putin’s IrritationOn the surface, the latest Ukrainian dispute, which erupted on Jan. 1, was about Gazprom’s attempt to discontinue selling gas to Ukraine at a discount and start charging market prices. The political subtext was Putin’s irritation that Yushchenko is seeking membership in the European Union and the North Atlantic Treaty Organization.The U.S., at least vicariously, got dragged into the Ukrainian fray. At the height of the dispute, Gazprom’s Medvedev suggested that Washington was behind Ukrainian obstinacy. “It looks like they are dancing to music which is being orchestrated not in Kiev but outside the country,” he said, referring to a U.S. Ukraine strategic partnership charter signed in Washington on Dec. 19.The agreement, similar to one Washington reached later with Georgia, contained a clause saying the U.S. would help Ukraine refurbish its gas pipeline network.U.S. Skepticism The American response to Russian criticism was a mid-January statement from the U.S. Embassy in Moscow that said, “We hope Russia will do its part to end this dispute, resume and maintain gas supplies and avoid similar crises in the future.”That the U.S. is wary of a Russian stranglehold on European gas supplies is no secret. In May 2006, four months after Russia cut off gas to Ukraine the first time, then U.S. Vice President Dick Cheney, on a visit to Lithuania, scolded Russia by declaring “no legitimate interest is served when oil and gas become tools of intimidation or blackmail.”Cheney toured former Soviet republics voicing U.S. support for a proposed “southern energy corridor” that would bring Caspian Sea energy to Europe, bypassing Russia.The key to the corridor is a European project that was backed by the administration of former U.S. President George W. Bush. Nabucco, named by its Vienna-based consortium for the opera by Giuseppe Verdi, is a $10 billion, 3,000-kilometer pipeline stretching from eastern Turkey to Austria that’s designed to bring gas from Central Asia, Egypt or the Middle East.Russia Strikes Back “What happened in recent years in Ukraine is the result, to a significant extent, of the activities of the previous U.S. administration and the European Union, which supported it,” says Putin.Annoyed with perceived U.S. meddling in Russia’s backyard, Putin journeyed to Central Asia in May 2007. He coaxed Kazakhstan and Turkmenistan -- two logical suppliers to Nabucco -- to increase gas exports to Russia instead of throwing in their lot with the Europeans.A month later, Gazprom announced its South Stream plans, and Putin courted leaders in Hungary and Bulgaria, both partners in Nabucco, to join South Stream instead.“South Stream is a Trojan horse to stop Nabucco,” says Keith Smith, the Washington based energy analyst.‘One Goal’The Russians bristle at accusations that the pipelines are political tools. “Our relations with our partners have only one goal: to develop business from oil and gas extraction to refining and power generation,” Gazprom’s Medvedev says.U.S. policy may change little with the Obama administration. In June 2008, Joe Biden, just before he became Barack Obama’s running mate, spoke at Senate hearings on Russia’s energy intentions.“No wonder the president and prime minister of Russia spend more time running Gazprom than they do running the country,” Biden said. “They have shown that they are willing to use their dominance of both ends of most existing pipelines to extract not just economic deals but, increasingly, political influence.” Gazprom has been the engine in driving Putin’s energy goals and creating Russia’s new wealth.In 2007, Medvedev first laid out Gazprom’s vision to become the world’s largest company, with an eventual market value of $1 trillion. And as oil prices climbed to unprecedented heights in June, CEO Alexei Miller predicted that a barrel of crude would soon hit $250.Radical Adjustments The energy landscape has changed radically since then. Gazprom, amid crashing revenues, has to come up with $10.6 billion in debt payments by the end of June. Its share price by mid January had tumbled more than 60 percent since July, knocking the company from its perch as the world’s third largest, with a market cap of $366 billion on May 16, to 51st on Feb. 3, according to data compiled by Bloomberg.All of this is happening when other segments of the Russian economy are faring no better than the country’s energy industry. The Micex Stock Exchange has also cratered, declining almost 60 percent since its peak in May, when oil was riding above $130 a barrel.The ruble -- once touted by Putin as a reserve currency of the future -- has gone wobbly. It sank to record lows against the dollar, falling to 36 rubles per dollar and losing more than a third in value from August. That has forced the government to burn through more than $200 billion of reserves since August in an effort to buttress the currency.Beleaguered Oligarchs Russia’s claim to be the world’s hottest billionaire factory has also taken a battering. According to Bloomberg data, a clutch of oligarchs, including Roman Abramovich, who is an owner of steelmaker Evraz Group SA, and Oleg Deripaska, who runs Basic Element, an investment concern with holdings in energy, financial services and manufacturing, watched their asset values shrivel by $230 billion in the five months from May to October 2008.Some wonder if Putin has overplayed his hand. “Putin’s energy doctrine is in danger,” says Mikhail Korchemkin, director of East European Gas Analysis, a consulting firm in Malvern, Pennsylvania. “It doesn’t work in bad times.”Putin, a former KGB agent, is acutely aware of the correlation between cheap oil and economic decline. Sub-$19-a- barrel oil undermined Mikhail Gorbachev’s efforts to remake socialism and Boris Yeltsin’s early economic reforms.A Gas OPEC? Putin is counting on increased political clout and diversification to spare the new Russia. The country already belongs to a once ineffectual organization called the Gas Exporting Countries Forum, which includes the likes of Iran and Venezuela.Putin has said he wants to energize the group to coordinate investment and output -- similar, critics worry, to the Organization of Petroleum Exporting Countries.And he is already looking far beyond sales to European gas markets. Later this year, Russia will deliver its first shipments of liquefied natural-gas -- exportable anywhere by tankers -- to Japan and Korea.

Russia President: Urges Quick Work Making Pipelines To Bypass Ukraine

Russian President Dmitry Medvedev called for the speedy completion of two new gas pipelines that bypass Ukraine, in an interview with Bulgarian nati"The new energy routes such as the South Stream and the Nord Stream pipelines have to be speeded up," Medvedev said during an interview from his Meiendorf Castle official residence."If we can diversify supplies, Europe will depend less on the whims of the political regime in one country or another," he said according to the BNT channel.Medvedev reiterated Russia's position that it wasn't responsible for the two- week halt in deliveries of natural gas to Europe in January amid a pricing row with Ukraine."Judicial responsibility has to be brought against the party that is really to blame for not respecting its contract," he said, adding that he wanted to see the creation of an "international legal control mechanism."On Wednesday, Russian Prime Minister Vladimir Putin urged the World Economic Forum in Davos to set up an international legal framework for energy security, saying it could prove as important as the 1951 European Coal and Steel Community accord, which led to the European Union.Medvedev also said Friday Russia didn't need to sign its delivery gas contracts via intermediary companies."We do not need any intermediaries if they...hike up the price of gas. We want transparent and direct contracts," he added.Medvedev is expected to discuss energy issues with his Bulgarian counterpart Georgy Parvanov during the latter's visit to Moscow on Wednesday.The two men will discuss progress on the South Stream pipeline project to channel Russian gas to Europe under the Black Sea and the Burgas-Alexandrupolis oil pipeline project to bring Russian oil from the Black Sea to the Greek port of Alexandrupolis on the Aegean.Nord Stream is a gas pipeline to link Russia and the European Union via the Baltic Sea.onal television Friday.

Will The Real Gazprom CEO Please Stand Up

The great Russian-Ukrainian gas war is over, and it is time to assess the outcome. On the surface, the result looks promising. Finally, Russia and Ukraine have concluded a normal long-term gas agreement.
Both gas prices and transit tariffs are market-related and based on clear principles without shady intermediaries or arbitrariness. The gas prices will probably average $230 per 1,000 cubic meters in 2009, while investment bankers had expected $250.Prime Minister Vladimir Putin claimed that Ukraine had an obligation to guarantee transit of Russia's gas since Kiev ratified the Energy Charter Treaty (which Moscow has not ratified).Putin lamented that the "European Union is placing Russia and Ukraine in the same category," but the supplier in this transaction is also obligated to deliver. Vedomosti perhaps put it best: "Gazprom's reliability as a supplier is inseparable from Ukraine's as a transit state."Corruption and Ukrainian domestic politics were major factors in a conflict in which the prime antagonists were Prime Minister Yulia Tymoshenko and Dmitry Firtash, partial owner of the shady intermediary RosUkrEnergo.Both Tymoshenko and Putin claim that RosUkrEnergo through Ukrainian President Viktor Yushchenko's administration disrupted the gas negotiations on Dec. 31.Tymoshenko walked away from this conflict with an outstanding victory. RosUkrEnergo has been excluded from the Russian-Ukrainian gas trade, losing profits of at least $1 billion a year.At his news conference on Jan. 8, Putin implausibly denied that he knew Firtash, although both were co-founders of RosUkrEnergo in July 2004. Subsequently, Gazprom sold RosUkrEnergo's debt of $1.7 billion to Naftogaz, allowing Naftogaz to squeeze Firtash out."Finally, we eliminated a big political slush fund, which fed several political forces," Tymoshenko said. Firtash has spent lavishly on Ukrainian politics, mainly on former Prime Minister Viktor Yanukovych's Party of the Regions but also on Yushchenko's administration.The elimination of RosUkrEnergo will cleanse Ukrainian politics of gas money. Although Yanukovych has sensibly kept a low profile, his campaign financing will most likely dwindle in the end.Gazprom's cost in the gas war was very high. Its direct financial loss was about $2 billion, but its reputation has suffered even more since the gas monopoly has proven itself an unreliable supplier.Its customers will try to reduce their dependence on the state-run gas monopoly, but when Gazprom is the problem new pipelines are of little help.Before the conflict broke out, Gazprom opened a web site that criticized Ukraine. This suggests that Moscow was gearing up for a fight. Gazprom and Putin pulled no punches in going after Kiev. "The current situation shows a high degree of criminalization of power in Ukraine," Putin said.During the January 2006 Russia-Ukraine gas conflict, Gazprom's stock price skyrocketed because investors were impressed when the company pushed for higher export prices at a time of rising energy prices.During the latest gas war, however, Gazprom's stocks plummeted as investors objected when the company treating its customers recklessly by demanding unrealistically high prices at a time of sharply falling energy prices.Meanwhile, European gas consumers suffered considerably, and the European Union looked terribly weak, having failed to learn anything from previous gas wars.But one European politician stands out as a true leader -- German Chancellor Angela Merkel. During Putin's news conference with Merkel on Jan. 16 in Berlin, Merkel lectured him like a teacher to a schoolboy, placing the responsibility on Moscow, and Putin ate his teacher's humble pie.Austria, France, Hungary, Germany and Italy have quietly built up gas reserves that could last for three months; they have learned the lesson from 2006.Now, other European countries are likely to build up large reserves and further diversify their energy supplies, although this is very expensive.Putin has the most complex motivation in all of this. By directly commanding Gazprom and taking over the negotiations, Putin confirmed the old assumption that he is the real CEO of Gazprom.Although Ukraine had paid its gas bills by Dec. 30, Putin ordered the disruption in the gas supply, making him the main culprit.Gazprom's damaged reputation will likely impair its stock price and debt rating. The conflict was also a disaster for Russia's foreign policy. President Dmitry Medvedev's hastily arranged "gas summit" attracted no heads of state and was the largest snub to Russian diplomacy in recent memory.Putin has been identified as one of RosUkr-Energo's main beneficiaries, but now he has accepted the fact that this middleman will have to be eliminated from gas transactions. Moreover, he looked panicky when he lost himself in technical details, accusing Ukraine of "theft" of tiny gas volumes, far smaller than customary losses.In the end, the gas war had to be settled by Russian and Ukrainian prime ministers. The press photos showed a strident Ukrainian prime minister, while Putin looked increasingly frustrated.So why did Putin instigate the gas war in the first place? My suspicion is that his main purpose was to whip up Russian patriotism against Ukraine and enhance support for the government in a time of economic decline. This was perhaps his only success.According to the state-run pollster VTsIOM, 63 percent of Russians believed that Ukraine was solely responsible for the conflict.Another suspicion is that Putin hoped to destabilize Ukraine by exploiting its domestic divisions and its severe financial crisis. If this were his goal, he failed. Tymoshenko had little choice except to liquidate RosUkrEnergo since it was an issue of her political survival.After Putin and Tymoshenko signed the gas peace treaty, Ukraine has eliminated a major source of corruption. Now it should reform its distorted energy sector to improve efficiency and save energy.Ukraine must stop subsidizing its imports of gas, and it should also raise the government's purchasing price for domestically produced gas to stimulate domestic production.And the EU should get more serious about its own energy security. Whatever Putin's motive was, he is likely to offer more shocks as the situation grows worse for both Russia and Putin in a deepening economic crisis. The EU must realize that it needs a Russia policy no less than it requires an energy policy.Only two winners are apparent -- Tymoshenko and Merkel.There are many losers: Firtash, European gas consumers, Gazprom, its shareholders, Yushchenko and, last but not least, Putin.

Gas Deal Gives Opportunites To Make Tough Decisions

KIEV, Ukraine -- Ukraine, by signing a normal, long-term contract with Russia for Central Asian gas, took a major step forward, bringing it in line with European economic realities.
How will the new price arrangement impact on the Ukrainian economy in 2009 and beyond? Will the country be able to pay the new gas prices? Will it finally begin to revamp its energy intensive economy and live within its means?For the past 10 years, Ukraine has been buying Turkmen gas, the price of which was not linked to the price of oil or to the laws of supply and demand. The formula for determining the final price was based on the arbitrarily negotiated price reached by Ukraine (later by Gazprom) with the unstable and highly corrupt former president of Turkmenistan, Saparmurat Niazov, plus the cost of transit from Turkmenistan to the Ukrainian border –roughly $40 for 1,000 cubic meters.It is therefore incorrect to say, as Vladimir Putin often does, that Russia has been subsidizing the price of gas to Ukraine. RosUkrEnergo’s Dmytro Firtash also has spread this lie in his recent television appearances by claiming that he and RUE subsidized Ukraine to the tune of over $2 billion. The truth is that Turkmenistan sold gas at a lower price than Russia, and Ukraine took advantage of this. The only subsidy was the abnormally low transit tariff Ukraine charged Gazprom and RosUkrEnergo.The large price difference between Turkmen gas and Russian gas – which was pegged to the price of oil – left a large margin of profit for intermediary companies such as RosUkrEnergo. It bought Turkmen gas as part of the Russian-Ukrainian gas contract and then resold part of the volume to European customers at close to European prices, making a huge profit on this.According to experts, the average European price for gas in 2009, barring any major jump in the price of oil, will be in the range of $210-$240 for 1,000 cubic meters.This will create mild hardships for the already ailing Ukrainian chemical and metallurgical industries, which will have to pay slightly higher prices for their energy-intensive production needs. These prices, however, will be lower than what European chemical and steel producers are paying, but higher than those paid by Russian producers, Ukraine’s main competitors.Yet grave problems are bound to arise for Ukraine in the future. These need to be examined in order for future Ukrainian governments to prepare for the gathering storm.The newly signed Ukrainian-Russian gas contract will expire in 2019. A major provision in the contract obliges Ukraine to pay the full European price for gas (without the 20 percent discount Ukraine will get in 2009) beginning in January 2010. Russia at that time will begin paying Ukraine the European transit tariff for gas going to Europe. Presently this tariff is $1.70 per 1,000 cubic meters for 100 kilometers; in 2010 it is scheduled to rise to about $4. According to press reports, the $4 transit fee will remain fixed until 2019, even if European transit fees increase – or decrease.In the first quarter of 2009, when the new price of gas will be relatively high, Ukraine should be able to cushion the pain by continuing to rely on its own gas stored underground and not buy large quantities from Gazprom. By the second and third quarters of the year, the price should continue dropping in line with the price of oil 9 months earlier (thus in September 2009, the gas price will be calculated based on the price of oil in January 2009 - $50-$35).If the world-wide recession ends by late 2009, oil prices are likely to rise. If the recovery continues into 2010 and beyond, it is almost certain that oil prices will rebound to $80-$90 or more per barrel and the European price for gas will reflect these price increases by mid-2011. Ukraine should be prepared to pay about $300-$325 for 1,000 cubic meters of gas at that time. If such a trend continues, it is altogether feasible that Ukraine will pay $350-$450 for 1,000 cubic meters of gas by 2015.The price for Ukraine in 2015 will also be affected by the North Stream and South Stream pipelines (if they are operational by then) which would most likely lead to a decrease in the volume of Russian gas shipped via Ukraine –thus lowering income from the transit fee.Ukraine has six years in which to complete a number of critical projects in the energy sphere:It is essential for Ukraine to drastically reduce its consumption of gas.The government of Ukraine must encourage new drilling for gas, including coal bed methane and remove the artificial barriers it has created which discourage foreign investors from entering the Ukrainian energy market.Ukraine should proceed to build an LNG regasification terminal on the Black Sea in order to diversify suppliers. By placing all its bets on Central Asian or Russian gas producers, Ukrainian governments could well find themselves without gas in the future.The price of gas sold to Ukrainian consumers, both industrial and household users, should be raised in increments to reflect the real price of gas and not maintain a foolish, politically motivated, subsidized price.Those responsible for energy policy must once and forever come to terms with reality. There is no going back to the old, corrupt schemes with crooked Central Asian leaders or using fly-by-night intermediaries. If Ukraine is to survive as a country its leaders must make hard and painful decisions.