Tuesday, June 18, 2013

Ukraine: Why buy when you can rent?

Ukraine and Russia may be on the verge of a compromise that grants Gazprom control over the Ukrainian pipeline system, while allowing President Viktor Yanukovych to keep his promise not to sell the asset to the Russians.  Ukraine may grant Gazprom use of the pipelines on a long-term lease.

In a live television program "Dialogue with the Nation," that was aired in February 2013, President Yanukovych floated the idea of renting out the pipeline system.  He continued to complain about the high price the country was paying Gazprom for natural gas under the "take or pay" contract negotiated by former Premier Yulia Tymoshenko, but rejected Gazprom's condition for lowering the price:  sale of the pipeline system.  Yanukovych was stuck between a rock and a hard place, however, in that he also rejected an International Monetary Fund (IMF) demand that Ukraine raise domestic gas prices before qualifying for a $15 billion loan.

Yanukovych traveled to Russia on March 4, and met Russian President Vladimir Putin for several hours.  At the conclusion, the news agency Unian reported the two sides were close to a deal in which the price of gas would be lowered from $430 per thousand cubic meters (tcm) to $260 per tcm, in return for which Gazprom and Naftogaz Ukrayiny would form a joint venture that would rent the pipeline system.

No formal announcement was made, however, because the two sides remain divided on including the European Union in the joint venture.  Ukraine supports a European presence, while the Russians would prefer a bilateral arrangement.  In May, Ukrainian Energy Minister Eduard Stavytsky and EU Energy Commissioner Guenther Oettinger discussed a potential trilateral arrangement.  ""Ukraine is really trying to consider its geopolitical situation and to establish a gas hub, so we will be able to do spot purchases in central Europe," Stavytsky told reporters.  He estimated it would take $550 million to modernize the Ukrainian infrastructure.  Oettinger said he believed EU firms were willing to buy the ageing system.

The two sides have been skirmishing over the pipeline for sometime.  Ukraine has unilaterally reduced the importation of Russian gas, and in November 2012 began to import gas from Hungary to take its place.  Russia retaliated by presenting Ukraine with a bill for $7 billion for gas Ukraine was obligated to purchase.  Russia has also threatened to build a second Yamal pipeline to divert gas deliveries from the Ukrainian route.

Alexei Miller, head of Gazprom, said he was not worried about Ukrainian attempts to purchase gas from Europe on the spot market, because the spot price was rising.  "The price for Russian gas, which is being supplied to Ukraine, is significantly lower than the spot price, which has settled in continental Europe," he told reporters.  "Ukraine will not be able to bear the spot prices."

In late April 2013, the Ukrainian government introduced a bill in parliament that would allow the sale or lease of Naftogaz.  Kommersant reported Ukrainian authorities were prepared to allow Gazprom to control the main gas pipeline, while the Ukrainian East European fuel and energy company (VETEK) would run local gas distribution.  Valery Yazev, Russian State Duma first deputy for natural resources, predicted a compromise might be found.  Faced with a new arrangement with lower fuel prices, or losing the Ukrainian contract entirely, Yazev predicted Russia would reduce the gas price to $260-$280 per tcm.

In anticipation of a deal being struck, accountants performed an appraisal of the gas network, and valued it at between $26 and $29 billion.  Ukraine is ready to go the the altar, but is still waiting for a bridegroom.