JKX in 2005

Interesting for Russian viewpoint of this mess:



Dec. 30, 2005
Russia Rattles the Pipeline
Gazprom shuts off Ukraine

Friendship of the Nations

Russian President Vladimir Putin yesterday refused to preserve the existing natural gas delivery plan and Ukrainian President Viktor Yushchenko's proposal to “work for the collaboration of two economies, peoples and states,” thus refusing to consider Ukraine “a friend and neighbor.” Ukraine has two days to agree to the price of $230 per 1000 cu. m. of gas. It was already clear last night that Gazprom would not reach any agreement and the gas supply would be shut off on January 1.

After evening negotiations between Ukrainian Energy Minister Ivan Plachkov and Russian Industry and Energy Minister Viktor Khristenko on December 28, Ukraine had hoped that Russia would look for a compromise on prices and a transitional period from the current subsidized supply plan for the country to a commercial plan. Yesterday, experts from the Ukrainian Energy Ministry and Naftogaz Ukrainy began negotiations at Gazprom and the Ukrainian Energy Ministry on a contract for 2006 and protocols to the interstate gas agreement between the Russian Federation and Ukraine and the agreement itself. It quickly became clear that only one man in Russia could approve or reject Plachkov's proposals. That man was Vladimir Putin, and he was waiting for it.

The Russian President brought a decisive clarity to the situation that had been missing. He unambiguously rejected Ukraine's proposals to preserve even a modified version of the plan under which the industry of Ukraine belongs to a circle of objects provided gas by Gazprom, just as Russian enterprises, with cross-subsidization. “I think you can understand us as well,” said Putin. “It's one thing to subsidize our friends and neighbors who, like us, are emerging from the complicated situation of a planned economy, and another thing, for example, to subsidize Indian business in Ukraine. We should understand the conditions that we live in.”

Although Putin explained that he did not want to consider what was unfolding an interstate conflict, but rather the unfinished business of Naftogaz Ukrainy and Gazprom, everything else he said cut to the bone. On the efforts of Plachkov even to raise the topic of the principles of Russian gas pricing, Putin said, “The formula is simple. 0.5 multiplied by two prices – for diesel fuel and for heating oil. That's all the price there is.”

Based on the “presidential formula,” with the price for IFO380 heating oil being $247.50 per ton in Rotterdam and MDO diesel fuel $454 per ton, natural gas should run Ukraine a minimum of $350 per 1000 cu. m. It follows from the president's statements that Ukraine should pay for its gas at the spot market price, which is the most expensive.

The answer has thus been given to the Ukrainian question, and it was to the point. At Mittal Steel, the company belonging to Briton of Indian descent Lakshmi Mittal that bought the Ukrainian Krivorozhstal in a televised privatization auction, Kommersant was told yesterday that they would receive gas produced in Ukraine in 2006. They already had a contract. It was obvious that “Indian business” was Putin's indication that the whole heritage of the Orange Revolution – from the loss of Russian-supported candidate Viktor Yanukovich in the presidential elections to the defeat of pro-Russian oligarch Rinat Akhmetov in the battle over Krivorozhstal, has made Kiev an unacceptable political partner for the Kremlin.

Putin is correct in essence. The Ukrainian authorities cannot remain economic partners with the Russian authorities when they are their direct political opponents. Even a proffered guarantee not to hinder Russia's entrance into the World Trade Organization couldn't change things. An hour after Plachkov's visit to the Kremlin, the “presidential formula” was interpreted at Gazprom to mean that, as of January 1, natural gas will cost Ukraine $230 per 1000 cu. m., or it would cost nothing, because there wouldn't be any. Putin did offer Ukraine $3.6 billion in state credit for the transition to market prices. But the pricing principle would be commercial on January 1, and that was the last word. Yushchenko refused the money, stating that “the objective price for gas for Ukraine, based on the current economic situation, is $75-80 per 1000 cu. m.”

After that, Naftogaz Ukrainy negotiations at Gazprom were short. That evening, a reception was held at Gazprom for all the company's subsidiaries. The guests were greeted by former head of the Russian division of Dresdner Bank Mattias Warnig, who will manage the North European Gas Pipeline project. No one was thinking about Ukraine.

Negotiations will, of course, continue today, but there is little sense in it any more. All Ukrainian proposals boil down to maintaining control over the gas transport system and a gradual transition for Ukrainian consumers from subsidized prices from Gazprom to subsidized prices from the Ukrainian government. Deputy Prime Minister of Ukraine Anatoly Kinakh stated earlier that the Ukrainian metals and chemical industries would close down if natural gas reached $105. Ukraine can implement a subsidization plan only at a maximum price of $95 per 1000 cu. m. For Gazprom, which only Turkmenistan can compete with on the Ukrainian market, the minimal base price is $135 per 1000 cu. m., the price of Turkmen gas plus transit through Russia and Central Asia at the averaged European price of $2.20-2.60 per 1000 cu. m. The price of $160 per 1000 cu. m., which Gazprom offered Ukraine in August, was the Turkmen price + 15-percent operational cost.

Gazprom practically neutralized its competitor this week by agreeing to buy 30 billion cu. m. of Turkmen gas at $65 per 1000 cu. m. In the first quarter of 2006, 15 billion cu. m. will be delivered to Russia, that is, everything that Turkmenistan will have at that time. Ukraine offered to buy 39 billion cu. m. of Turkmen gas in 2005, and Plachkov flew to Ashghabad last week to reach an agreement on an alternative contract.

They should have prepared for this situation long ago. Kommersant has information that Gazprom stopped storing gas in Ukrainian underground reservoirs this summer and redirected it to the EU. Ukraine approached the winter with reserves of 16-17 billion cu. m. instead of the usual 30 billion. By conservative estimate, without Turkmen gas, Ukraine will feel the lack of fuel three weeks after it is cut off. The radical estimate is that it will feel the shortage two days after the gas pressure is reduced in the Union pipeline by 15 percent.

by Dmitry Butrin, Natalia Grib

All the Article in Russian as of Dec. 30, 2005