Gazprom Agrees to Pay $100/tcm for Turkmen Gas.

Gazprom announced today that it had agreed to pay $100/tcm for Turkmen gas at the Turkmen-Uzbek border, up 54% from the current price of $65/tcm. It is understood that most of the gas will be resold by Gazprom’s affiliate RosUkrEnergo to Ukraine, which gets just over half its gas from Turkmenistan.  According to Gazprom, Turkmenistan agreed to fix the price until 2010. The agreement calls for Turkmenistan to supply 12 bcm this year (in addition to 30 bcm previously contracted at $65/tcm) and 50 bcm/year in 2007-2009, for a total of 162 bcm. Vladimir Nesterenko: The new price increase will certainly be passed on to Ukraine, although there is still a tiny probability that the increase in Ukraine’s import price could be delayed until 2007. The new price for imported gas at the Ukraine-Russia border is likely to be in the range of $120-$130/tcm for the fourth quarter, bringing the average price for 2H06 to about $110/tcm, matching our forecast. We expect Ukraine will negotiate the new price level by the end of September, when Turkmenistan is due to finish delivering the 30bcm contracted at the old price. Gazprom is likely to demand another smaller increase in January 2007, especially if the 4Q06 price is at the lower (~$120) range of our forecast. Ukraine’s gas imports from Gazprom’s affiliate RosUkrEnergo are de jure a mixture of Turkmen gas and Russian gas (~80%/20% in 7m06), with Russian gas supplied to RUE at a price that began at $230/tcm in January 2006 with quarterly adjustments based on the oil price (which has increased). RUE also buys gas from other Central Asian countries, currently at very low prices (less than $60/tcm), which are likely to increase in step with the Turkmen price. Assuming RUE’s price for Russian gas in 2007 will be $250/tcm, next year’s price for Ukraine could reach $140-145/tcm, implying a price for Ukrainian industrial consumers of $160-170/tcm. We do not expect Ukraine will succeed in contracting Turkmen gas directly, as the volumes contracted by Russia do not leave any room for additional sales to Ukraine.