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Ukraine: Kyiv May Re-Export Turkmen Gas To Europe

Ukraine has announced it will re-export gas from Turkmenistan in a move that could help Ashgabat return to European markets for the first time in a decade. But the plan may mean no new profits for Turkmenistan and a potential conflict with Russia's Gazprom, which has previously tried to stop Ukraine's reselling of imported fuel.

Boston, 10 September 2002 (RFE/RL) -- Ukraine may be testing the limits of its energy relations with Russia by planning to export gas from Turkmenistan to Europe next year.

Speaking on 5 September in Kyiv, the head of the state oil and gas utility Naftohaz Ukrayiny told reporters the company plans to export "surplus" gas from Turkmenistan to Europe in 2003, Reuters reported.

Yuriy Boyko said: "We expect a gas surplus of about 6 billion cubic meters [bcm] by the end of the year. It is Turkmen gas. This gas surplus will be sold onto foreign markets next year, and it will help improve the financial situation." According to Reuters, the term "situation" refers to Ukraine's unsettled debt of $1.4 billion to Russia for previous gas supplies.

But the plan to re-export Turkmen gas may raise several issues at once in relations with Russia.

First, Moscow has effectively barred Turkmenistan from exporting gas to Europe since 1993. Ukraine's plan could reopen that door.

Although Turkmenistan once enjoyed relative prosperity from the hard-currency income of direct exports, Russia claimed control of the former Soviet gas-transit system years ago, saying it was needed for Russia's own trade. After that, Moscow steered Turkmenistan's gas toward debtor nations like Georgia and Ukraine.

A return to the profitable European energy markets has been one of Turkmen President Saparmurat Niyazov's top goals. But in the intervening years, Turkmenistan has changed the way it does business with its biggest commodity. Frustrated by Russia's restrictions and profits from transport, the country now sells gas at its border instead of the destination. Ukraine has become the country's biggest customer in a deal that lets Kyiv pay for half the gas in goods and services at less than full cost.

Ukraine may profit by selling the gas, although the plan may mean no new income for Ashgabat. But Russia may still take a dim view of the export competition in Europe, which gets one-fourth of its gas from the Russian monopoly Gazprom. Russia still controls the pipelines to Ukraine and could make transport for such a trade so costly that both Kyiv and Ashgabat would lose.

A second problem is that re-exports are touchy for Russia because of past experience. Ukraine admitted two years ago that it had diverted some of Gazprom's gas from transit pipelines to Europe and sold it on the spot market. Gazprom had already complained about diversions for years, but officials became furious when they found out that Ukrainian traders were actually undercutting Russian gas prices on the spot market in Europe using diverted transit gas.

Ukraine agreed to stop the practice and initially slapped an export tariff of $140 per thousand cubic meters on its gas exports to prevent it. The question of re-exports now appears confused.

According to Platts Global Energy news service, an accord signed in June 2000 prohibited Naftohaz Ukrayiny from re-exporting without Gazprom's consent. But in October 2001, "The Moscow Times" reported that Ukraine was not barred from re-exporting under a debt-restructuring deal. Another version reported by Interfax quoted Russian Prime Minister Mikhail Kasyanov as saying that Ukraine would not re-export until it had a "sufficient reserve."

Whatever the legalities are, Boyko seemed to show sensitivity to Gazprom's concerns by stressing that Ukraine would only re-export a surplus consisting of Turkmen gas, not Russian fuel. Russia is still a major gas source for Ukraine, which buys some supplies and collects more as a transit fee. The reselling could reignite the argument with Gazprom and return negotiations to the conflict of two years ago.

A third issue is whether Boyko's announcement represents a new plan for paying Ukraine's $1.4 billion debt. Last October, Naftohaz Ukrayiny agreed to issue bonds as part of the debt-restructuring plan. But Gazprom has held up the transfer for the past 11 months after discovering that it would owe $700 million in tax to the Russian government.

Boyko may have been offering the re-export plan as a new way to pay Gazprom in spite of the impasse, but he may also have been seeking profits that have nothing to do with the debt. At the same time, an agreement in June to form an international consortium with Russia to manage Ukraine's pipelines also appears to be at a standstill. Ukraine has insisted on retaining majority control, leaving the two countries at odds.

It is questionable whether any of the agreements can be implemented without the others in the long disputes over transit, access, and debt. The re-export plan could prove to be a new complication rather than a solution to problems that have already taken years to resolve.