Naftogaz wants to renegotiate the terms of Russian gas transit

What if the twist here, will the money drip again?

Photo: Reuters

The national joint stock company Naftogaz of Ukraine wants to change the terms of transit of Russian gas through Ukraine. Until now the tariff for the transport of Ukrainian gas has been set according to the Soviet standards, which are not applicable in Europe. In addition, Naftogaz pays for the line fill gas required for transit from its own pocket.

Change this as well

The 10-year contract on pumping Russian gas signed in 2009 was tied to the price of the fuel itself: the higher it is, the higher the tariff for transit. Co-chair of the Energy Strategies Foundation Dmytro Marunych says in Q4 2013, when the price of imported gas was US $382 per 1,000 cu m, the transit rate was close to US $3 per 1,000 cubic m per 100 km. In Q1 2014, after Gazprom reduced the gas price for Ukraine, the transit rate decreased to US $2.6 – 2.7 per 1,000 cu m per 100 km. At the same time, Marunych noted that Ukraine had already received the money for transit of Russian gas to the extent that allowed Gazprom to pump its gas till October 2014. Yet, if the volume of transit decreases, the expiry date of payment for transit is deferred to a later date.

On Monday CEO of Naftogaz Andriy Kobolev announced the proposal to revise the contract with Gazprom on gas transit through the territory of Ukraine. He added a statement was sent to Gazprom. Kobolev noted that Naftogaz wanted to change the policy of accounting for transited gas, but it was only one of the changes demanded by the company. Earlier, Ukrainian officials representing the energy industry mentioned provisions that they would like to see in the new contract. One of them is a hike in the transit rate and transfer of the receiving point for European consumers of Russian gas to the Russian-Ukrainian border.

Revenues from transportation of Russian gas account for 20% of total revenues of Naftogaz. In 2013 the company provided transit services worth UAH 23.9 bn (approximately the same amount in 2012).

However, Gazprom’s strategy aimed at increasing transit bypassing Ukraine may significantly reduce this source of income, which in fact is already happening. Ukrtransgaz (operator of the Ukrainian gas transportation system) reported that over the first six months of 2014 the amount of Russian gas transit to Europe through Ukrainian territory decreased by 8% compared with the same period last year – to 35.1 bn cu m. On the eve of an even greater reduction of transit Naftogaz’ desire to revise tariffs for transportation of Russian fuel is quite understandable.

European approach

President of the Center for Global Studies Strategy XXI Mykhailo Honchar said in a conversation with Capital that the tariff for the transit of Russian gas through Ukraine was formed based on a completely different system than transit through the territory of European countries. For transit through the territory of Ukraine the rate for transportation of 1,000 cubic m of gas per 100 km was used. This system has remained in effect since the Soviet era. At the same time, Europe uses the “enter – exit” system, which sets transit rates for the passage of gas through the entire gas transportation system, and not for 100 km. “In Europe the distances are small, therefore, they work by a different principle,” said the expert.

Honchar added that transit rates in Europe are tied to the energy value of gas and not to its volume: “For example, the gas of Central Asian or Siberian origin has different calorific value. Such a difference is not huge, but it exists. And with large volumes of gas, this difference is tangible”.

According to the expert the issue of changing the pricing system of transit of Russian gas was raised long ago. But now this issue has become more relevant in connection with Ukraine’s closer integration into Europe. “Membership in the Energy Community forces Ukraine to switch to the European system of setting tariffs for gas transit,” he said. Honchar also noted that even though among European countries transit tariffs may vary by 1.5 – 5 times, the cost of gas transit through Ukraine is significantly lower than in any European country.

Pay ourselves

Partner at the RusEnergy Consulting Agency Mykhailo Krutikhin confirmed that the contract for the transit of Russian gas has at least one provision, which, in his opinion, has to be changed. At present, the cost of acquisition of service gas required to operate pumping units, which among other functions provides for transit of gas, lies on Ukraine’s shoulders. “If I were the head of Naftogaz, I would suggest that the service gas for compressor stations be supplied by Gazprom. Seeing as at the moment there is a shortage of gas in Ukraine, it would be good if Gazprom supplied gas required for pumping large volumes of transit gas,” he said.

The cost of running gas-pumping units that provide gas transit may be significant. In particular, in December last year Ukrtransgaz purchased from Naftogaz 3 bn cubic m of gas worth UAH 12.7 bn to provide for production and processing needs and for its own purposes.

Gazprom may mellow

It would be naïve to think that the Russian monopolist would immediately agree to revision of the contract on gas transit through Ukrainian territory. Honchar says while Gazprom demonstrates unyielding stiffness, closer to winter there will be more problems not only in Ukraine, but also at Gazprom itself as Ukraine being one of its largest sales markets does not bring in profits. Honchar also reminded that the full legal responsibility for the stability of supplies of Russian gas to Europe lies on the Russian company, not on Ukraine. “Therefore, like it or not, Gazprom will be forced to change its attitude regarding many issues that the company’s management is currently ignoring, including the revision of gas relations with Ukraine on the whole,” says Honchar.