Cabinet introduces regulated gas price for current heating season

Ukraine’s cabinet decided at its weekly meeting on
Jan. 13 to introduce a regulated price for natural gas for households at the
level of UAH 6,990/tcm (USD 250/tcm), PM Denys Shmyhal reported the same day.
This is the lowest price on Ukraine’s recently launched energy exchange and
about 30% below the price offered by private suppliers to households, Shmyhal
said. The price will be introduced for the period of quarantine restrictions in
Ukraine, or through the end of heating season, which is when natural gas
consumption peaks. Meanwhile, he assured the public that the regulated price
“does not mean the government is stepping out of the liberalized gas market.”

Alexander Paraschiy: This is a
populist move in response to public protests in several key regions, including
Kharkiv, related to recent gas price hikes for households. To score political
points with them, the government is attributing its decision to concern for
tough economic conditions under the nationwide lockdown
imposed on Jan. 8 to cope with the coronavirus pandemic. 

The biggest threat from the announced regulation is that it does not comply with Ukraine’s commitments to the IMF “to apply a
market-based pricing scheme” for natural gas “without any ceiling.” Recall,
earlier the IMF insisted that natural gas prices in Ukraine should be based on
the import parity principle (EU hub price plus delivery costs to Ukraine).

In this case however, we believe the IMF might not
consider this regulation as a breach of Ukraine’s commitments. Firstly, it has
been declared to be temporary, with the government characterizing it as a
measure to support households during the lockdown period. Secondly, Ukraine’s
liberalized gas market could become recognized as inefficient since its
introduction in 2H20, owing to large possibilities for manipulations from
private traders. Such a regulation might temporarily limit the inefficiencies
before they are removed in other way.

Thirdly, the discussed earlier import parity principle
for gas pricing in Ukraine does not look necessary any more, as Ukraine has
accumulated enough natural gas in storage to avoid any imports for a couple of
years. For instance, the current annual consumption of gas in Ukraine is below
29 bcm, which can be covered by about 20 bcm of domestic production and use of
gas stockpiles (22.9 bcm of natural gas that is currently in Ukraine’s
underground storage).

The key question, however, is who will pay for this
cheap gas. The declared price, for instance, is below the price of UAH
7,326/tcm paid by Naftogaz to Ukrnafta in the recent debt settlement deal, and below the price of UAH 7,220/tcm at which
Naftogaz is selling gas to households in January. It looks like any additional
losses from the government’s initiative (if any) will be laid on Naftogaz
(NAFTO), which is the gas seller of last resort.