Gazprom Agrees Not to Penalize Naftohaz, Gas Price to Grow in 2010

Gazprom and Naftohaz Ukrainy on November 24 signed addenda to their earlier contracts according to which Naftohaz will not pay fines for buying less gas in 2009 than stipulated by the contracts. Gazprom also allowed Naftohaz to buy less gas in 2010, 33.75 billion cubic meters (bcm) rather than 52 bcm. Naftohaz in 2009 will import far less than the 33 bcm of gas stipulated by the January 2009 contracts, and consequently fines could amount to as much as $8 billion if the “take-or-pay” clause in the contracts had been enforced by Gazprom. This would have sunk Naftohaz. Ukrainian President Viktor Yushchenko suspects that Prime Minister Yulia Tymoshenko reached secret agreements with the Kremlin in exchange for the concessions.

If the original January 2009 contracts had been enforced on Naftohaz, the state-owned oil and gas company simply would have nowhere to send so much gas. Ukraine will consume relatively little gas this year as its GDP is expected to plunge by 14-15 percent due to the global financial crisis. Gas consumption by industrial enterprises in Ukraine should shrink from 30 to 17.6 bcm in 2009 and there is already more than enough gas in Ukraine’s underground storage facilities for the country to live through the winter. In exchange for the concessions on the volume of gas secured from Gazprom, Naftohaz withdrew its request to apply the take-or-pay principle to Gazprom’s gas transit to Europe via Ukraine in 2010 (Kommersant-Ukraine, November 25). Ukrainian President Viktor Yushchenko insisted on introducing the clause in relation to transit in his November 18 letter to Russian President Dmitry Medvedev (EDM, December 1).

Gazprom spokesman Sergey Kupriyanov explained that Gazprom “forgave” Naftohaz simply because it understands that the debt-ridden Naftohaz has no money to pay (Ekho Moskvy, November 25). It is true that Naftohaz has no money as it defaulted on its $500 million Eurobond payment on September 30, paid Gazprom for gas deliveries early in 2009 with funds borrowed from Ukrainian state-controlled banks, and is going to pay in December with money borrowed by Ukraine from the International Monetary Fund (IMF), just like it did in November.

However, Yushchenko believes that Naftohaz did not go far enough in the talks with Gazprom, and he suspects that Moscow received some promises of both a political and economic nature from his arch-rival Tymoshenko in exchange for concessions. Yushchenko’s energy aide Bohdan Sokolovsky warned that the main risks for Naftohaz had not been removed by the November 24 accords. Among the remaining risks he listed, “the unjustified high price of gas for Ukraine, a transit rate twice as low as it should be, and the asymmetric penalties” for breach of contract (www.president.gov.ua, November 25).

Yushchenko claimed that Ukraine would pay a political price for Russia’s waiving the fines for Naftohaz. He specified that Tymoshenko, if she is elected president in 2010, could allow the Russian Black Sea fleet to stay in the Crimea beyond 2017. He also suggested that Ukraine under Tymoshenko would make concessions to Russia on NATO membership plans and the ownership of Ukraine’s gas transit network. Asked how he knew about it if the agreements had been secret, Yushchenko said, “I read the presidential post” (Inter TV, November 27).

Naftohaz CEO Oleg Dubyna spoke about the actual agreements reached with Gazprom in detail at a press conference in Kyiv on November 27. He specified that Naftohaz would not be fined by Gazprom if it bought 27 bcm of gas in 2009. This is more than the 26 bcm predicted earlier by Ukrainian Economy Minister Bohdan Danylyshyn. Naftohaz plans to buy 3.6 bcm of gas in November and some 4 bcm in December in order to comply with the requirement, Dubyna said (Ukrainski Novyny, November 27). This is much more than average monthly deliveries from Gazprom earlier in 2009. The government earlier admitted that the deliveries in December would be paid with funds received from the IMF.

Dubyna said that Gazprom’s price for Naftohaz during the first quarter of 2010 would be known in December. However, earlier Gazprom spokesman Kupriyanov said that the average price for Ukraine in 2010 would amount to some $280 per 1,000 square meters (Ekho Moskvy, November 25). This is despite Ukrainian Prime Minister Yulia Tymoshenko’s earlier pledge that the 2010 price would not be much higher than in 2009, when Ukraine paid $228.

On November 30, the UNIAN news agency reported that Naftohaz expects Russian gas to cost as much as $295 to $337 per 1,000 cubic meters on average in 2010. UNIAN cited Naftohaz’s own estimates submitted to the government. Kommersant-Ukraine suggested that Naftohaz deliberately overestimated the price of gas in order to secure more compensation from the state budget for the difference between the price paid to Gazprom and the prices for which Naftohaz sells imported gas to domestic consumers. Industry experts said that if Russian gas costs as much as Naftohaz forecasts, domestic fertilizer plants would stop and about 60 percent of metallurgy would be loss making (Kommersant-Ukraine, December 1).