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Gas strategy of Russia towards the former Soviet Republics changes

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  • Gas strategy of Russia towards the former Soviet Republics changes

    Agency WPS
    The Russian Oil and Gas Report (Russia)
    July 11, 2005, Monday

    GAS STRATEGY OF RUSSIA TOWARDS THE FORMER SOVIET REPUBLICS CHANGES

    The formerly pursued policy of gradual transition to marketing
    relations and prices remains in the past. When Moscow understood that
    subsidizing of neighbors through gas supplies at low prices (in
    comparison to the European level) does not bring the expected
    political dividends, Gazprom received a cart blanche in its pricing
    policy. Management of the company has started speaking in the open
    about the intention to bring the selling price of gas to the European
    level very soon not only for Baltic republics but also for the CIS
    countries including Ukraine being the main transit territory in the
    path of Gazprom's gas to Europe.

    Speaking at the shareholders' meeting of Gazprom on June 24, CEO of
    the company Alexei Miller announced: first of all, the company
    planned to transit to "purely marketing mechanisms in mutual payments
    excluding non-transparent bartering and offsetting schemes" and,
    second, was going to "ensure a higher level of prices" in gas
    supplies to the CIS and Baltic countries. The argument is simple and
    understandable: "gas supplies to the former Soviet republics ensure
    presence on the market for us now but with minimum profitability."

    After breakup of the USSR gas market in the newly established
    countries neighboring Russia collapsed too. At a certain moment
    Gazprom yielded this market to ITERA affiliated with the company's
    management. In circumstances of total bartering ITERA felt very
    comfortable and made work on the markets of CIS and Baltic countries
    a very profitable business. Changing of the management of Gazprom
    changed the situation and the gas monopoly started regaining this
    sales market gradually. In 2005, Gazprom is the sole supplier of gas
    to the former Soviet republics.

    It is planned that from Gazprom Ukraine will receive 23 billion cubic
    meters of gas, Belarus will receive 19.1 billion cubic meters,
    Moldova will receive 1.25 billion cubic meters, Kazakhstan will
    receive 0.9 billion cubic meters, Latvia will receive 1.3 billion
    cubic meters, Lithuania will receive 3.56 billion cubic meters and
    Estonia will receive 0.73 billion cubic meters. Transcaucasia is
    fully supplied with the Central Asian gas purchased by Gazexport. To
    Azerbaijan Gazexport will supply 4.5 billion cubic meters of gas (5.5
    billion cubic meters if there is the technical possibility for this),
    to Armenia 1.7 billion cubic meters and to Georgia 1.2 billion cubic
    meters. Gazexport will also sell 1.1 billion cubic meters of gas to
    Moldova. Revenue of Gazprom on these markets will amount to about
    $2.7 billion (including $1.15 billion in the framework of the barter
    payment for export transit via Ukraine). Sales of Gazexport will
    bring about $580-600 million more to Gazprom.

    Meanwhile, export of the same quantity of gas to non-CIS countries
    would earn at least $9 billion for Gazprom. Along with this,
    additional transportation costs of delivery of this gas, leaving
    apart Transcaucasia, look very modestly ($5-7 per 1,000 cubic
    meters).

    Gazprom has always been discontent with the serious difference in
    prices. However, the gas corporation has begun a really aggressive
    policy in this area only now. Formerly Gazprom was restrained only by
    political orientation of the Kremlin at integration of the former
    Soviet republics. Now Gazprom is hindered only by limited paying
    power of the buyers. In any case, this factor has a very limited
    influence because there is simply no alternative to Gazprom's
    supplies on this market. This means that the gas monopoly always has
    opportunities to raise prices.

    Now CIS and Baltic countries pay for gas at different rates although
    the basic rate for this territory is set by Gazprom at the uniform
    level of $80 per 1,000 cubic meters. The price is the cheapest for
    Belarus ($46.68), Ukraine pays a little more ($50) and prices are the
    highest for the Baltic countries (from $85 to $95). Georgia, Armenia
    and Azerbaijan buy Central Asian gas from Gazexport at $60-65 and
    only Moldova pays in accordance with the basic rate.

    In each case, there are special reasons for deviation from the basic
    price to this or that side. With regard to the Baltic republics,
    Gazprom has been moving towards European prices for a long time.
    According to Deputy CEO of Gazprom Alexander Ryazanov, "There is a
    three-year program of prices rising to the average European level."
    Thus, annual indexing of prices for the buyers in Estonia, Latvia and
    Lithuania will amount to 10-15%. Most likely, wholesale prices for
    the Lithuanian company Lietuvos dujos where Gazprom has 37% will be
    slightly lower than prices for the other two neighboring countries.

    Belarus and Ukraine are transit countries for Gazprom's export, which
    determines the lowest prices. The rates set by the government for
    Russian buyers have been used in Belarus until 2004. This was a kind
    of support of the partner of the union state and an advance payment
    for follow-up establishment of a joint venture on the basis of the
    gas transportation infrastructure of Belarus. When establishment of
    the union state stalled and Minsk set conditions for establishment of
    the joint venture unacceptable for Gazprom, the company immediately
    announced transition to commercial relations. These relations are
    still the most privileged but there is no bartering the payments. So
    far, the management of Gazprom has not released any statements about
    revision of prices for Belarus. In any case, it is possible that in
    the course of signing of the new contract for 2006, there will be a
    10-15% indexing.

    Building of new gas relations with Ukraine is only beginning but has
    already acquired a scandalous nature. Despite that now the most
    profitable business of Gazprom in the form of gas sales in Europe
    depends on Ukraine by 80%, management of the Russian gas monopoly
    launched a large-scale campaign for revision of the existing system
    of gas supplies. At present Gazprom sells practically no gas to
    Ukraine but pays with gas for the transit services provided by the
    state-run Ukrainian company Naftogaz Ukrainy (26-29 billion cubic
    meters annually in the last few years) at the offsetting price of $50
    per 1,000 cubic meters. This scheme is confirmed by the ten-year
    intergovernmental agreement of 2002. However, certain parameters (the
    volumes of barter, as well as offsetting prices of gas and
    transportation prices) are set annually.

    In mid-March, after the first meeting of Alexei Miller and new CEO of
    Naftogaz Ukrainy Alexei Ivchenko, representatives of Gazprom reported
    that Ukrainian colleagues proposed transition to the monetary form of
    transit payment. This novelty opened a prospect for Gazprom to sell
    the volumes of gas released from the barter scheme at marketing
    prices. Moscow proposed a price of $160 per 1,000 cubic meters (the
    price is calculated according to the method "forecast of the price on
    the border of Ukraine and Slovakia minus transportation via Ukrainian
    pipelines"), which shocked Kyiv. Ivchenko started rejecting the idea
    of transition to monetary payments but Gazprom that acquired
    initiative at negotiations kept insisting on giving up bartering.
    Most likely, the most radical scenario will not be implemented but
    Gazprom can raise prices to $70-80 per 1,000 cubic meters without a
    significant growth in the transit rate. It is obvious that increase
    of the gas price for Ukraine will provoke the growth of the prices
    for Belarus and Moldova.

    Gas prices for the Transcaucasian republics will grow at least 20%
    too, due to increase of prices of Central Asian gas for Gazexport.
    Now Gazexport supplies mostly Kazakh gas to Georgia, Armenia and
    Azerbaijan. Its prices will grow inevitably after increase of real
    prices of Turkmen gas. Although the formal price of $44 per 1,000
    cubic meters remained in the contracts with Turkmenneftegaz, giving
    up of bartering increased real expenditures of Gazprom on purchase of
    Turkmen gas by $10-12 per 1,000 cubic meters.

    Of course, it is impossible to expect that already in 2006, Gazprom
    will manage to bring profitability of its business in the former
    Soviet republics to the European level. Nonetheless, $1.5-2 billion
    of additional revenue in this segment is a quite realistic goal in
    this segment. Even despite the obvious political mistakes of Moscow
    in the foreign Soviet republics, Gazprom remains the most powerful
    tool of foreign policy towards these countries. This means that many
    issues will be settled on a broader field for bargaining than the
    coefficient of exchange of cubic meters of gas for dollars.

    Source: Vremya Novostey, July 05, 2005
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