JKX in 2005

Gazprom. Finalizes Ukrainian gas price offer as talks continue

While President Vladimir Putin signed legislation to remove the ring fence on Friday, Gazprom announced it had set its Ukrainian gas price at $230 per thousand cubic meters and had officially extended that offer to Naftogaz Ukraine, Interfax reported. Gazprom had initially said it wanted to raise rates to $160 per 1,000 cubic meters from $50 at present, but later upped its demand to match European rates.

The struggle to reach agreement on pricing continued last week, with Gazprom offering to accept shares in Ukrainian enterprises - in particular the country's gas transportation system - in lieu of payments for natural gas. Gazprom appears keen to acquire control over remaining parts of the Europe-bound gas transportation network, even accepting a price of $46.68 per 1,000 cubic meters from Belarus last week after Minsk agreed to surrender 50% of gas transport company Beltransgaz

Ukraine last week offered to gradually raise prices towards market values. It appears that the country hopes that the delay will eventually force Gazprom to give in amid concerns about defaulting on European gas supplies, while threatening to take Gazprom to Stockholm's arbitration court in order to achieve the resolution of the issue.

We expect the situation to be resolved in Gazprom's favor, although we point out the risk that additional revenues from higher prices could be offset to some extent by reciprocal increases in transportation expenses. Still, we expect the coming increase in the gas price to Ukraine - which we estimate is likely to be $110-$150 for 2006 - as a net positive for Gazprom.

Our recommendations on Gazprom remain Hold for common, sell for ADSs.