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LOOKING AHEAD
20.03.2009

March 13, 2009 (the date of publication in Russian)

Sergey Pravosudov

ABOUT THE "ENERGY WEAPON" ONCE AGAIN

Energy co-operation with ex-USSR states depends on their political stability, not on the desire to "be friends" with Russia

Gazprom went on supplying gas to post-Soviet states at reduced prices after the USSR collapsed. But this couldn't last forever. Now all the post-Soviet countries buy gas at prices, based on a price formula, which analogous to European Gazprom contracts. By the way, the corporation spread these rules over itself too: it also buys Central Asian gas at world prices.

The most difficult step was moving to market relationships with Ukraine. As it is known, a system of gas pipelines, which connected Russian gas fields with European consumers, was created at the USSR time. And now the major part of gas supply to Europe is realized through the territory of Ukraine. Ukrainian government tried to use its status of a main transit-country to get lower gas prices. Ukrainian Naftogaz didn't mind stealing blue fuel from transit gas pipelines in case their own volumes were not enough.

This year New Year's holidays were again clouded by a gas conflict with Ukraine. The problem was that Ukrainian politicians and businessmen didn't bother signing a contract for 2009. As the result the problem had to be solved not in a duplex mode, but with the help of representatives of European countries, which couldn't get Russian gas. The conflict came to an end on January 20, when Russian blue fuel went on to enter Ukrainian gas transport system. But this happened only after the heads of Gazprom and Naftogaz signed long-term contracts, which defined conditions of gas supply to Ukraine and its transit to Europe.

The transit contract stipulated saving special transit rates ($1.7 for transport of 1000 cubic meters of gas to 100 km). The volume of transit through Ukraine will make up 120 billion cubic meters. From January 1, 2010 transit rate will become market and will be calculated according to the universal European formula.

According to the contract, gas price for Ukrainian consumers is calculated according to the universal European formula with a reducing 0.8 coefficient. $450 for a thousand cubic meters of blue fuel is a basic price determined. Thus, during the first quarter of 2009 gas price for Ukrainian consumers is $360 for a thousand cubic meters. The price will change every three months according to the formula. During the second quarter gas price for Ukraine will decrease, as according to the formula price indices depend on oil prices with 6-9-months lag. The volume of gas supply to Ukraine is planned to be on the level of 40 billion cubic meters per year. And from January 1, 2010 Gazprom will begin selling gas for Ukraine at European prices with no discounts.

We can hope that "usual" New Years arguments on gas price will not repeat, as the signed contract is valid for a period of ten years. Moreover, intermediary RosUkrEnergo company was excluded from the supply scheme. Now the contract is made only between Gazprom and Naftogaz. The contract stipulates special measures for the increasing of Naftogaz purchasing discipline. In particular, if the company doesn't pay for full volume of gas supply or doesn't pay for the supply at all till the 7th of the month following the month of supply, sides begin to use a prepayment system of payments. According to the agreement, Gazprom will go on realizing a part of gas on the inner Ukrainian market independently.

ARMENIA'S EXAMPLE

It's necessary to notice that Gazprom provides countries, which sell stakes in their gas transport enterprises to the company, with discounts in gas prices. At present the company possesses a control stake (75.55%) in ArmRosgazprom. Last year Gazprom provided Armenia with gas at $110 for 1 thousand cubic meters. This year the price will make up $154.

In the nearest future Gazprom's stake in common stock of Beltransgaz (Belorussia) will come up to 50% (now the company possesses 37.5% of shares). Gazprom's share in Moldovgaz (Moldova) is 50%. If Ukraine chose this way, it could count upon price preferences. And more, Gazprom would invest considerable amount of money into the modernization of Ukrainian GTS and building of new gas pipeline branches, which would have a positive impact on the economy of the country.

It's obvious, that increasing the level of gas transit over the territory of the country is profitable to Ukraine. But this could happen only in case Gazprom will be sure in reliability of transit deliveries. And unfortunately, Ukraine has shown itself to disadvantage. That's why the Russian corporation is steadily increasing the level of transit through alternative territories. In particular, by Yamal-Europe gas pipeline, Belorussian part of which belongs to Gazprom entirely.

Recently the Russian corporation prefers to build underwater gas pipelines, which directly connect the country with consumers, avoiding transit states. Major trans-Black Sea Russia–Turkey gas pipeline (so-called Blue Stream) functions successfully. Trans-Baltic gas pipeline called North Stream will be built soon, and then South Stream will connect the Russian Federation and Bulgaria.

Gazprom seeks to provide the reliable blue fuel deliveries to their partners even to the prejudice of the company's interests. As we know, gas comes to Armenia through the territory of Georgia. Georgian gas transport system is in a sad state, as not enough money is invested into its reconstruction and development. Sooner or later a large-scale accident can happen here, which will leave Armenia with no gas (precedents have already taken place). Gazprom invests considerable amount of money into the development of Armenian gas transport system through ArmRosgazprom. Abovyan underground gas storehouse functions there to make up for temporary ceasing of gas supply if needed. But the construction of KajaranArarat sector of IranArmenia gas main was finished. So in case of a critical situation Armenian consumers can count upon Iranian gas.

KAZAKHSTAN IS A STRATEGIC PARTNER

Gazprom has spread market principles of pricing not only over consumers, but also over gas providers. Since the beginning of this year the Russian corporation buys Turkmenian, Uzbekistani and Kazakh gas at European prices (taking into account the price of transportation). That's why there's nothing surprising in these countries trying to increase the level of gas supply to Gazprom. A Caspian gas pipeline (which would pass the territory of Turkmenistan and Kazakhstan) is supposed to be built to provide the growth in purchase of gas in Central Asia and also to increase the capacity of the existing Central AsiaCenter gas pipeline system.

Karachaganak Field is the main gas field on the territory of Kazakhstan. The blue fuel which can be found here contains many detrimental impurities, so it has to be brought to salable condition before it gets to consumers. This operation is accomplished in Orenburg gas processing plant. The volume of gas production in Karachaganak field is going to increase, so Gazprom and KazMunayGaz have made a deal to create a joint enterprise on the basis of Orenburg GPP, which will finance its modernization. By the way, joint KazRosGaz enterprise, which was created by Gazprom and KazMunayGaz on parity basis in 2002, organized all the purchases of Karachaganak gas.

PARTNERSHIP IN CENTRAL ASIA

Gazprom not only sells, but also produces gas in Uzbekistan. Nowadays, volumes are not that big (about 1 million cubic meters per day); they are extracted from Shahpahty deposit. But Gazprom's subsidiary Zarubezhneftegaz corporation is actively conducting geological explorations in Ustyurt region of the country. Prospect drilling was carried out on eleven areas of six investment blocks of the Ustyurt region. Gazprom Zarubezhneftegaz is to drill few dozens of wells of 3,5-4,5 km depth; it plans to accomplish seismic surveys for the sake of examination of most large and difficult deposits and perspective raisings on the total area of 1200 sq. km, as well as seismic surveys of 13 700 running km volume for the sake of preparing new structures for prospect drilling.

Gazprom got a right for geological mineral prospecting in Kyrgyzstan on Kugart and Eastern Mailisu IV territories. Also Gazprom Neft (Gazprom's oil subsidiary), which owns a range of petroleum storage depots and refueling stations in the region, is actively working there. And Gazprom also gained a right for geological subsoil examinations in Tajikistan (on gas and oil perspective regions of Rengan, Sargason, Sarikamish and western Shaambari). Gazprom Zarubezhneftegaz is the operator of the project. Prospecting seismology works will begin in spring, and prospect drilling will take place closer to the end of the year.

BALTIC PRECEDENT

Lithuania, Latvia and Estonia, which are now members of the EU, have always been problematic from the viewpoint of Russian diplomacy. And still during all the modern history of mutual relationships there was not even a single "gas conflict" between them and Gazprom. Balts were traditionally distinguished by a high payment discipline, and even during the 1990s these countries didn't amass debts for Russian gas supplied.

Gazprom, from its side, has taken serious positions in Baltic countries with no political scandals created, and at present it owns some stakes in local gas transport companies Eesti Gaas, Latvijas gaze and Lietuvos Dujs. This increases the reliability of gas supply for Baltic consumers. Also one more big substantial asset belongs to Gazprom in Lithuania Kaunas heat and power plant. So now the Russian corporation sells both gas and electricity in Baltic countries. Ignalina nuclear power plant must stop its work in the end of 2009, so an energy deficit will emerge in Lithuanian market, so a considerable growth of electricity prices is expected there as a consequence. In this situation the increasing of capacity of Kaunas heat and power plant is quite possible.

WE NEED NOT POLITICAL CONCESSIONS, BUT NORMAL WORK CONDITIONS

A well-known tune has begun to sound in mass media around the world after the latest Ukrainian "gas crisis". As if an "aggressive energy empire" threats its peaceful neighbours again, prevents them from building a democracy, infringes on their sovereignty, blackmails them, and threatens to freeze, to turn them into a huge ice graveyard.

Facts given in our survey prove the opposite. The Russian Federation's energy partnership with other countries is entirely based on market, but not political principles. Are you ready to sell stakes in your gas transport system? Then you can count upon getting blue fuel at special prices. Will you authorize the construction of new gas mains over your territory? Positive answer gives you a chance to get high transit profits. Do you have difficult, even conflict relationships with the Russian Federation, but at the same time pay for gas you received in time? In that case you can count on regular supply in accordance with stipulated volumes.

The analysis of work in the ex-USSR states shows that countries with stable political regimes (no matter what the chosen political model is) can always become Gazprom's partners and have perspective projects with the company. And it doesn't matter, whether we talk about the "democracy of the European type" or about "market socialism". The Russian gas corporation has problems only with those countries, which lack the will to have mutually profitable partnership. And also with those countries, politicians of which are always willing to use this "gas" topic as an instrument of political speculations.

Sergey Pravosudov is the Director of National Energy Institute, Moscow


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