Ukraine cuts gas purchases from Gazprom, pursues more Western imports

The Ukrainian government “practically didn’t buy any” natural gas from Gazprom in March 2013, Interfax reported on March 28, citing Ukraine’s Energy Minister Eduard Stavytskiy. The reason for the reduction is “pricing issues” that Ukraine is trying to solve at the moment, the minister said. The price of Russian gas for Ukraine is about USD 406/tcm in 1Q13, while the current price of gas imported from the EU is just USD 380/tcm, according to Stavytskiy.

Meanwhile, Ukraine is trying to increase export capacity from the West (Hungary and Poland), Stavytskiy said. The current gas import capacity from Hungary is about 3.5 mcm/day (over 1.0 bcm/year) and will increase to 15 mcm/day (over 5 bcm/year) in two months, the minister said. On top of that, Stavytskiy estimates Ukraine has a physical capacity to import up to 2 bcm of gas annually from Poland.

Alexander Paraschiy: It’s not clear from the minister’s statement whether it was Ukraine as a country, or the state gas holding Naftogaz of Ukraine, that nearly stopped importing Russian gas. Ukraine’s other main Russian importer is Ostchem Ukraine, controlled by Dmytro Firtash, which accounted for a quarter of Russian gas imports in 2012.

We support enthusiastically the Ukrainian government’s attempts to diversify gas imports, especially since it will reduce the average gas import price. So far, however, we don’t see adequate guarantees that European-bought gas will be significantly cheaper than the Russian-bought gas.

Naftogaz seems to be playing a risky game by cutting Russian gas imports in anticipation that Gazprom will provide a discount. If this trick is not successful, Naftogaz will have lost money, buying Russian gas at a higher price in the next quarter when it could have been buying it cheaper this quarter. The Energy Ministry estimates the Russian gas price will increase to USD 426/tcm in 2Q13 from USD 406/tcm in 1Q13.

Based on the available information, we estimate that Naftogaz purchased about 3 bcm of gas in 1Q13, which is 2.4x less yoy. The company’s plan for 2013 is to import 18-20 bcm of gas from Russia, or 15-17 bcm in 2Q-4Q13.

The smaller gas purchases suggest that either Naftogaz has indeed a strong bargaining position with Gazprom, or it has some unidentified troubles that make it unable to purchase Russian gas. Evidence in favor of the latter version is that Firtash announced ten days ago that he was approached by Naftogaz leadership with a request to help supply an extra 1.5-2.0 bcm of gas to industrial consumers in March 2013.