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Ukraine: Deciphering New Russian Gas Deal

(RFE/RL) WASHINGTON, October 10, 2006 (RFE/RL) -- Ukrainian Fuel and Energy Minister Yuriy Boyko raised more than a few eyebrows when he told journalists in Kyiv on October 6 that Ukraine will not import Russian gas for domestic consumption next year.

His statement that "there will not be any Russian gas in Ukraine's balance" was clear enough. How he calculated that meeting Ukraine's gas needs was possible without a Russian contribution was not.

Numbers Game

Boyko's had announced two days earlier that Ukraine has signed contracts to purchase 42 billion cubic meters of Turkmen gas, 7 billion cubic meters of Uzbek gas, and 8.5 billion cubic meters of Kazakh gas in 2007.

That would add up to 57.5 bcm, sufficient in Boyko's opinion to fulfill Ukraine's prodigious appetite for natural gas. A curious conclusion considering that the forecast for 2006 is 76-77 bcm and Ukraine imported 73 bcm under a gas-purchasing agreement with Russia in which it received a "mixed basket" of gas from Russia, Turkmenistan, Uzbekistan, and Kazakhstan.

That agreement, under which Ukraine paid $95 per 1,000 cubic meters of gas, was apparently scrapped in late September during secretive discussions with Russia on gas supplies.

Despite Boyko's statement regarding the replacement contract, it is a stretch to say that Ukraine will be free from the Russian gas yoke. After all, while it will be purchasing gas under the new contract via RosUkrEnergo and not from Gazprom directly, the Russian gas giant remains the owner of 50 percent of the shares in RosUkrEnergo.

According to the new agreement, which is to go into effect in January 2007, Gazprom will not sell Russian gas to Ukraine, but will resell the 50 bcm of gas it buys from Turkmenistan for $100 per 1,000 cubic meters to Ukraine.

This after Ukraine's failed negotiations with Turkmenistan led to Russia making a play for Turkmen gas at the $100 rate. Seeing that in 2006 Ukraine is paying Russia $95 per 1,000 cm of gas, the fact that Gazprom's Aleksei Miller announced on September 27 that that rate will stand until the end of the year could mean a loss of nearly $400 million for Gazprom.

Good-Neighborly Deal

The exact price Ukraine will pay for its imported gas in 2007 has not yet been announced, but Prime Minister Viktor Yanukovych has in recent weeks repeatedly touted a price at or around $130 per 1,000 cubic meters.

On September 28, Yanukovych told his cabinet that the country "will pay less for gas than its neighbors in 2007-09." He followed up on that prediction by telling the cabinet on October 4 that "We know that the price of gas for 2007 for our neighbors -- Moldova, the Baltic countries, Georgia, and Azerbaijan -- is already about $200 [per 1,000 cm]. In October we will see what price Ukraine will have to pay. We expect, and we have reasons for this, that the price will be about $130."

Meanwhile, the 2007 draft budget prepared by the Yanukovych government factored in the new price for gas to be $135/1,000 cm and allocated ample funding to account for increased gas expenses, while also lowering the gas price for the public.

The new arrangement apparently caught the Ukrainian government off guard.

As late as September 22, Boyko had told the media that beginning in January 2007 thru the end of 2009, Ukraine would buy an annual total of 62 billion cubic meters of gas from Turkmenistan, Uzbekistan, Kazakhstan, and "partially from Russia." Again, Boyko said the 62 bcm involved would be "fully sufficient to meet Ukraine's gas needs."

Five days later, Gazprom CEO Miller and Boyko announced that Ukraine would only be buying 55 bcm of gas per year beginning in 2007 thru 2009 -- again saying that despite the 18 bcm difference compared to 2006, the gas would "fully meet Ukraine's needs."

How Much Does Ukraine Need?

It is difficult to account for the vast discrepancy in the volume of gas purchased by Ukraine in 2006 and the new amount for 2007.

The oft-cited decrease of around 18 bcm would be enough gas to meet the demands of a medium-size country. Has Ukraine's consumption of gas declined so drastically in one year?

Ukraine currently ranks sixth in the world in terms of gas usage -- burning more gas than Poland, the Czech Republic, Hungary, and Slovakia combined.

It produces approximately 20 billion cubic meters of its own gas and in 2005 sold 5 bcm abroad. Thus, it is feasible that imports of 55 or 57.5 bcm might be sufficient to meet Ukraine's needs in 2007, although that would also mark the end of profitable sales of gas abroad.

In the weeks preceding the Ukrainian-Russian negotiations, numerous Russian officials -- among them Anatoliy Chubais, the head of Unified Energy Systems, the country's electricity generating monopoly, Andrey Kiriyenko, the head of the country's nuclear energy agency, and German Gref, the economic development and trade minister -- all warned that Russian gas production will not be able to keep up with domestic demand by 2007.

Meaning that the fall in Ukrainian gas imports is likely not by preference -- but can rather be directly traced to Russia's own rapidly rising domestic demand.

Gas Facts

Gas Facts

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