Gazprom Turns From Threats To Actions

The Russian gas major cut its planned gas supplies to Ukraine in 2005 by 34% to 15.2 bln cm. It deducted 7.8 bln cm of gas from transit fee payments for the gas that was allegedly stolen from Ukrainian gas storage tanks. The implied price for this 7.8 bln of gas is, therefore, USD 50 per 1,000 cm rather than the USD 160 per 1,000 cm Gazprom said it would demand earlier. Gazprom plans to deliver only 1.1 bln cm of gas to Ukraine by the end of this year, as payment for the transit of its gas to Europe. Gazprom’s Ukrainian counterpart, Naftogaz, responded to Gazprom’s move by threatening to tap Gazprom’s gas exports to Europe to make up for the lack of supply to Ukraine. Concorde Capital: Naftogaz’s current management failed to hold efficient negotiations with its Russian counterparts. This may result in the resignation of Naftogaz’s current CEO Oleksiy Ivchenko. We project that gas prices will rise in Ukraine no later than 2006; the only question is how high the increase will be. On the other hand, Ukrainian-Russian relations concerning the gas issue have always been non-transparent and used murky schemes with dubious intermediaries allegedly associated with representatives of political and business circles from both countries. This caused Ukraine?s over dependency on Russian energy resources and led to lavish gas consumption by Ukrainian industries due to lower than global gas prices. The situation was destined to change with the arrival of the new political elite in Ukraine in 2005 and is deemed to be positive in the long term. Yet, such a drastic turnaround may adversely affect Ukraine’s industry in the short term with metallurgy and chemical industry being most the most vulnerable.