Gazprom hints at 17% yoy cut in gas price for Ukraine in 2013

Gazprom (GAZP RX) might agree to reduce the natural gas price for Ukraine to USD 352/tcm in 2013, Interfax reported on Dec. 18, citing its source familiar with the matter. The embedded supply volume for 2013 is 40 bcm, according to the source. The allegedly offered price is 16% below of what’s assumed in the 2013 Ukrainian budget  (USD 421/tcm). The average gas price that Ukraine will pay in 2012 is estimated at USD 423/tcm. 

Concorde Capital: The discount looks unexpectedly generous for Ukraine, while the theoretical price is not beyond the market: the current gas spot price in the EU, which is EUR 27.4/MWh, is equivalent to USD 335/tcm of Russian gas. The key question is why has this news leak appeared and what political concessions from Ukraine are expected to secure this price: integration with Customs Union and sale of Ukrainian gas transit system are among the straightforward ones.

The key implications if the deal is done:

– Profit erosion of independent gas producers: Kulczyk Oil (KOV PW), JKX Oil & Gas (JKX LN), Cadogan Petroleum (CAD LN) and Regal Petroleum (RPT LN).  The companies’ natural gas selling price is pegged to the price of Russian imports. This, combined with a 50% increase of the natural gas royalty for local producers effective Jan. 1, indicates a high risk of profit decline in the sector.

– Profit boost of gas-intensive companies: Ferrexpo (FXPO LN) will gain 3.1% in EBITDA; Metinvest’s (METINV) EBITDA would be 4%-5% higher from the move, and Astarta (AST PW) stands to benefit in 2.9% of its EBITDA.

– Revived for chances to renew cooperation with the IMF: Ukraine’s image and budget liquidity will benefit. The government’s reluctance to raise gas tariffs for households is among the key milestones in IMF discussions.

– Inflated risks for Ukraine’s independence from Russian political influence

The fly in the ointment of Gazprom’s offer is gas volume: Ukraine needs to import about 33 bcm of gas annually, which is 18% below Gazrprom’s  tentative proposal. The discount at a higher supply volume makes Ukraine’s total gas bill unchanged, thus leveling Gazprom’s generous proposal for Ukraine’s current account.