Gazprom Might Eject Middlemen

KIEV, Ukraine -- Gas giant Gazprom announced that it might agree to direct natural gas sales to Ukraine in the near future, doing away with the chain of controversial middleman companies that currently make hundreds of millions of dollars a year supplying Kyiv and exporting gas to Europe.

Chairman of Gazprom’s Board of Directors, Dmitry Medvedev

The Chairman of Gazprom’s Board of Directors Dmitry Medvedev told the German ARD television channel on Oct. 15, “We will probably revise the scheme of our relations and give up any intermediary structures that are not clearly understandable, at least those structures whose existence is not quite clear to us and which were proposed by our partners in a certain historical context.”

Kremlin-controlled Gazprom directs the flow of Central Asian gas to Ukrainian consumers and a portion of its Russian gas for European consumers through Swiss-registered RosUkrEnergo, in which it owns a 50 percent stake. The other 50 percent of the RosUkrEnergo middleman-company is controlled by Ukrainian billionaire Dmytro Firtash. Ukraine-registered UkrGaz-Energo, half-owned by RosUkrEnergo and half by Ukraine’s state oil and gas company Naftogaz Ukrainy, supplies gas to Ukrainian industry.

These intermediaries have reaped huge profits, with RosUkrEnergo making around $70 million in profits in the first quarter of this year, Gazprom reported earlier this month. UkrGaz-Energo’s profits for the first half of 2007 were about $100 million, according to the Ukrainian newspaper Delo.

Over the years, Moscow and Kyiv have blamed each other for the existence of intermediary companies such as RosUkrEnergo, the monopoly supplier of gas to Ukraine, and UkrGaz-Energo. Each side has said the private owners represent the interests of the other party.

Medvedev’s statement comes as a surprise and in the wake of Gazprom’s latest threat to shut off gas supplies to Ukraine over disagreements about payments by these very intermediaries. Faced with what Gazprom called a $1.3-billion overdue bill, Ukrainian Energy Minister Yuriy Boyko and Prime Minister Viktor Yanukovych flew to Moscow last week to settle accounts.

“Perhaps, this will simplify our relations and help them [Ukrainians] make payments on time and not accumulate such big debts,” Medvedev said.

The fact that the state-owned gas giant announced the payment glitch during Ukrainian coalition talks raised accusations that Moscow was using its control over gas supplies as a tool of foreign policy.

Medvedev repeated denials made numerous times by representatives of his company and Russian officials that Gazprom uses pricing to put pressure on neighboring countries insensitive to the Kremlin’s needs.

In January 2006, Gazprom shut off gas supplies to Ukraine, and thus partly to Europe, until a pricing agreement was signed making RosUkrEnergo the monopoly importer of Russian and Central Asian gas to Ukraine. As part of the same deal, Ukraine’s gas import bill doubled. This year the price was raised by another third.

The Tymoshenko factor

Yulia Tymoshenko, who is set to take over the government in Ukraine, has consistently criticized the current gas agreements with Russia, particularly the use of middleman companies. Her repeated pledges to oust the allegedly opaque intermediaries have raised fears that Moscow could retaliate with stiff price hikes once again.

During the 2006 gas price crisis, Gazprom offered Kyiv direct gas sales with a price of more than $200 per 1,000 cubic meters while enticing Ukraine to accept a more competitive rate of $95 through RosUkrEnergo.

In response to Medvedev’s recent statement, Tymoshenko said her government would work to establish direct gas sales between Gazprom and Naftogaz Ukrainy at an affordable price.

“I am convinced that the price of gas will be absolutely balanced and reasonable. We will reach a compromise with the Russian Federation regarding gas deliveries next year.”

Outgoing First Deputy Prime Minister Mykola Azarov warned the same day that changes to the current middleman system, namely the prospect of radical reshuffling by Tymoshenko, could jeopardize Ukraine’s energy security.

“If one raises the issue of canceling the existing scheme and buying gas at any price, then we will end up in the same serious situation we were in back in 2006,” he told journalists.

“For our government, the most important thing is stable supplies and the price,” he added.

Shadowy intermediaries

Both Moscow and Kyiv have been unable to clearly explain the role intermediaries such as RosUkrEnergo play in the gas trade between their countries and Central Asian producers. Tymoshenko and other high-ranking officials have claimed these intermediaries act as parasites, feeding on state-owned enterprises and fueling corruption at the highest echelons.

Volodymyr Saprykin, an energy analyst at Ukraine’s Razumkov Center, said the prices set by Gazprom for gas deliveries to Ukraine have nothing to do with economics.

“There are no economic laws at work here, only political ones,” he said.

Saprykin called Medvedev’s recent statement to the German media “soothing words” meant to allay Western fears of further disruptions and a continuing lack of transparency in the supply of Russian and Central Asia gas to Europe.

Russia supplies the EU with about a quarter of its gas needs with the lion’s share passing through Ukraine’s vast gas transit system. Insiders said Ukraine could once again try to raise transit fees if gas import prices are raised.

EU policymakers have recently sought to decrease the bloc’s dependence on Russian energy imports, while simultaneously restricting Russian investment in Europe’s energy sector. Brussels and Moscow are currently in the midst of negotiations on reforming the EU energy market, including a controversial set of restrictions on foreign energy bidders known as the “Gazprom clause.”

Source: Kyiv Post

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