In late October, Gazprom announced that in the first quarter of 2009, the price of natural gas it sells to its European customers will drop from approximately $460- 520 per 1,000 cubic meters to a rate of $350-400.
This decrease is due to dropping world oil prices from a high of $147 per barrel in August to below $65 a barrel in late October.
Gas prices are linked to oil prices and usually adjust in six months. If the price of oil continues to drop in 2009, Gazprom might be forced to lower its prices again by the third quarter of 2009.
How will this impact the price Ukraine will pay for gas in 2009?
Ukraine will most likely pay in the range of $230-250 for 1,000 cubic meters of gas in 2009. And while gas-rich Central Asian producers have yet to set their price, most analysts agree that it will be within this range.
In all likelihood, the Ukrainian demand for gas will decrease in 2009. The gas-intensive steel industry in Ukraine is suffering and production will diminish in the coming year. The only question is, by how much?
The preliminary contract negotiated by Prime Minister Yulia Tymoshenko and her team appears to be the best possible one under the circumstances. Its major defect is that it is not a long-term take-or-pay (TOP) contract – apparently at Gazprom’s insistence.
If the middleman that currently supplies Ukraine with gas, Swiss-registered RosUkrEnergo, is indeed pulled out of the food chain, then there is hope that beginning in 2010, Gazprom will agree to a long-term, transparent gas supply contract with Ukraine which would do much to normalize Ukrainian-Russian gas relations.
Traditionally, the Ukrainian-Central Asian-Russian gas triangle has not been rational or transparent. Long-term take-or-pay contracts do not exist and destination clauses, which prohibited Ukraine from re-selling imported gas, were always included, even after such clauses were dropped by Gazprom from its German and Italian contracts.
Part of the blame for this confusing state of affairs can be placed on Gazprom which resisted – and still resists – signing a TOP gas contract with Ukraine.
Ukrainian energy managers, both in the government and in state gas and oil company Naftogaz Ukraine, must also share part of the blame for the mess. For years they did not insist upon a TOP contract and eagerly signed short-term contracts, which only compounded the growing gas debt.
Some, like Igor Bakai, diverted Russian gas and resold it to European customers with the profits going into off-shore bank accounts. Others, like Yuriy Boyko, helped set up non-transparent middlemen schemes like Eural Trans Gas and RosUkrEnergo, which enjoyed the full support of Gazprom and the Kremlin.
Boyko did not insist on TOP contracts with Gazprom and preferred the short-term RosUkrEnergo arrangement. His rationale was that Ukraine was getting a cheap price for gas, which pleased politicians and businessmen, especially those in the gas-intensive chemical and metallurgical industries. The down side was that cheap gas led to increased consumption by industrialists who often avoided paying for the gas their steel mills and fertilizer plants consumed.
The time to clean up the mess has finally arrived. Unfortunately, it comes at a time when the world is in a financial crisis and threatened by a long-term worldwide recession.
In the long run, it would be wiser for Ukraine to buy Russian gas, not gas from Turkmenistan or other Central Asian producers. The Turkmen connection was understandable when the country sold gas for $35 per 1,000 cubic meters. But the low price had a down side. It created a variety of opaque middlemen schemes which bred corruption among the Ukrainian and Russian elite and threw out of kilter the entire energy relationship between Ukraine and Russia.
Gas corruption was by no means limited to the Moscow-leaning Party of Regions. It helped destroy the Orange coalition and made Ukraine’s President, Victor Yushchenko, appear like a fool who did not understand one iota about energy security.
Ukraine has a long way to go before it achieves anything resembling a rational energy policy. The hugely wasteful, energy-inefficient industrial base in the eastern part of the country needs a total overhaul. The pipeline which transports Russian gas to Europe is badly in need of expensive repairs.
The Russians understand this and should not be demonized for laying out tens of billions of dollars to build new pipelines which bypass Ukraine, while the Ukrainian leadership is throwing away money on new elections with dazzling regularity.
The lack of a political culture in Ukraine and Russia has taken a terrible toll over the last 17 years. If anything positive should come to these countries out of the great world crisis of 2008, it might be the understanding that they need to live according to the rules which govern all nations. Roman Kupchinsky is a partner in the consulting firm AZEast Group.
