Ukraine drafts new gas pricing proposal for households

Ukraine’s Energy Ministry has drafted a new resolution
that would set natural gas prices for households based on the “import parity”
principle, the ukranews.com news site reported on Jan. 17. Gas prices for
households would be set for 12 months starting April as the sum of the average
historical gas price in German hub NCG and entry rate to Ukraine, based on the
draft. The historical average prices and rates will be drawn from the period of
April-September of the previous year.

This differs from the pricing methodology approved by
the government in March 2017 at the IMF’s demand, but which the government has
been avoiding. That approved formula took into account the trailing 12-month
period to calculate historical average prices, and it also accounted for gas
transportation costs from the German hub to the Ukrainian border.

Recall, the government’s failure to implement the
import parity principle in pricing gas for households since October 2017 (i.e.
the failure of the Cabinet to obey its own regulation) is among key impediments
for Ukraine to secure the next IMF loan tranche.

The new draft regulation would enable Ukraine to raise
household gas prices as of April 2018 by a lesser amount (about 8%) than under
the existing regulation (over 18%), ukranews.com reported.

The new gas pricing methodology has yet to be agreed
upon by the government and the IMF, with a possible compromise being that
Ukraine fully meets the Fund’s demands on the other key issue, which is
legislation on creating an anti-corruption court, the news site said, citing an
anonymous source.  

Alexander Paraschiy: We think a
compromise is viable in which the Ukrainian government compromises on complying
with Western demands on the anti-corruption court in exchange for IMF
concessions on the gas price hike, or even vice versa. We give the likelihood
of reaching a compromise to secure an IMF loan tranche this year as higher than
50%.

Although the new pricing formula does not fully
correspond to the import parity principle (as it ignores gas transit costs), it
could make sense for Naftogaz (the state gas provider for households), which
claims it will be allowed to buy gas from Gazprom at the price of European gas
hub.