Scrapping Naftogaz To Avoid Gas Wars With Russia

KIEV, Ukraine -- The Ukrainian government plans to liquidate its national energy company Naftogaz, which has contracts with Gazprom for gas supply to Ukraine and its transit to Europe, Ukrainian Prime Minister Mykola Azarov said on Friday.

Ukraine is scrapping Naftogaz to avoid gas wars with Russia.

Ukraine's decision will require a revision of gas contracts between Russia and Ukraine, which could, in turn, lead the countries to reevaluate their relations in almost all spheres of cooperation, experts say.

The only alternative scenario is a new gas war that would be to the disadvantage of both parties.

"Naftogaz as a company will cease to exist. There will be a liquidation period. Some time later, after all necessary formalities are taken care of, entirely new companies will begin to operate on the market. As a result, all existing agreements will be revised," Azarov said.

Gazprom Chairman Alexei Miller confirmed that Naftogaz's liquidation will require all existing agreements to be revised.

Azarov added that revising existing gas agreements is crucial for the country's economy.

Ukraine believes that the price of Russian gas - $354 per 1,000 cubic meters in the third quarter of 2011, as determined by the formula sealed in the January 2009 contract - is too high.

A fair price, Kiev argues, would be around $200 per 1,000 cubic meters.

Can a gas war be avoided?

"It is quite clear that Ukraine wanted to revise the gas agreements in any way possible, and the course it has chosen seems the most sensible," Alexei Gromov, deputy director general of the Institute for Energy Strategy, told RIA Novosti.

"The restructuring of Naftogaz leaves open the chance for reaching an agreement. I believe that the Russian party indirectly approved of the move by responding very calmly to the news."

Seeking to revise the agreements by having a court invalidate the January 2009 gas contract signed by former Prime Minister Yulia Tymoshenko would have caused a scandal, Gromov says.

If the Ukrainian authorities managed to prove in the ongoing Tymoshenko trial that the current contract for gas supply is illegitimate, this would provoke a new gas war, Konstantin Simonov, head of the National Energy Security Fund, told RIA Novosti.

"This would mean that there are no legal grounds for Russian gas transit to Europe. That is, Ukraine could start siphoning off gas at any moment, which would lead to a new gas war."

Moreover, it would definitely raise the question of gas prices for Ukraine. Ukraine would begin calculating how much Gazprom owed them, the expert says.

Reliable suppliers and transit countries

A gas war would be a major setback for both parties, according Simonov. "After Ukraine cut off gas transit to Europe in the winter of 2009, Europeans made a simple conclusion: 'Russia cannot be trusted, and so we need to find other sources of gas,' " he recalls.

"A new gas war would prompt Europe to build gas pipelines bypassing Russia at any cost."

Currently, Europe is not pursuing the Nabucco pipeline project, which would pump gas from the Caspian region and the Middle East to the EU, because the EU "is trying to observe the proprieties and considers [Nabucco] a commercial project," Simonov says.

However, the project is not commercially viable, because the price of gas bought in Azerbaijan is significantly higher than that of gas bought from Gazprom under a long-term contract.

"In the event of a new gas war, the EU will no longer say that Nabucco is a business project. They will start laying the pipes regardless of the cost."

If the European partners lose all faith in Russia as a reliable gas supplier, Turkmenistan may join the Nabucco project, as it wants to build a Trans-Caspian pipeline to export its gas.

"Then we will see Turkmenistan and Azerbaijan connect their pipelines, and this will be a whole new story," Simonov says. "This will completely change the balance of power in the region, so we cannot afford a second gas war at present."

Ukraine, in turn, would cease to be a transit country in this case.

"The conclusion will be simple: Ukraine is not a state that honors its commitments, but a unit on the map. No one there can be trusted, because every new government declares the previous one illegitimate and puts every former prime minister in prison. The EU will not investigate who is to blame for the interrupted gas supply, it will simply switch suppliers, which is the main threat."

Borders of compromise

Since neither Russia nor Ukraine wants a gas war, they will have to reach an agreement, experts say. Russia is still waiting for Ukraine to propose how to reimburse Russia for a potential reduction of contract prices for Russian gas, Gromov says.

At the moment, there are two incentives for Russia to agree to a reduced price.

The situation could be improved first of all by merging the Ukrainian and Russian gas transportation systems.

Gazprom's Miller said at the end of June that his company could agree to lower gas prices for Ukraine only on the condition that Naftogaz would be merged with Gazprom, for example, by setting up a consortium with the participation of a European country, i.e. the buyer.

Control over Ukrainian pipelines would significantly reduce transit risks for the Russian gas giant.

The other incentive is the possibility of signing of a package agreement under which Ukraine would join the Common Economic Space that is being set up under the auspices of Russia.

"I think that a comprehensive decision will be made in which gas issues will not play the dominant role and other concessions will be made," said Gromov. In this case, the gas price for Ukraine could be lowered.

It is possible, however, that Russia will insist on Ukraine complying with the strategic partnership agreement.

"At the moment, there are no prospects for Russian-Ukrainian cooperation in such important areas as aircraft- and shipbuilding or in the space industry," says Valentina Goidenko, senior research fellow at the Institute of the CIS Studies.

Ukraine still has not fulfilled its promise to change the status of the Russian language in Ukraine. "Viktor Yanukovich actually won the presidential election by promising to make Russian a second official language," says Goidenko.

Source: RIA Novosti