Ukraine's Cabinet forms working group in reaction to possible tripling of gas prices (08/07/05)

Ukraine's Cabinet forms working group in reaction to possible tripling of gas prices

by Yana Sedova
Kyiv Press Bureau

KYIV - A top Russian oil executive's warning that natural gas prices in Ukraine could triple prompted the Ukrainian Cabinet of Ministers to form a working group to deal with the matter.

In late July, Gazprom chairman Aleskei Miller informed Ukrainian energy officials that natural gas prices could spike in order to match world market prices and provide more revenue to finance the state-owned Gazprom's investment activity, the International Herald Tribune reported.

Soon afterwards, Ukrainian Prime Minister Yulia Tymoshenko called a special session of the Cabinet of Ministers for August 3.

Ukraine's Minister of Fuel and Energy Ivan Plachkov will lead a working group to negotiate with Gazprom's leadership, Ms. Tymoshenko announced at a press conference the following day.

"We will negotiate as a dignified, sovereign state," she said. "We hope to reach a mutual understanding."

Natural gas is critical to the Ukrainian economy because industries use it to fuel their machinery and citizens need it to heat their homes.

The present price for Russian natural gas is $50 for 1,000 cubic meters, which is the lowest price in Europe, according to Volodymyr Saprykin, an energy analyst at the Razumkov Center for Economic and Political Studies in Kyiv.

Mr. Miller's statement is exaggerated and impossible, he said.

"The average price European countries pay for natural gas is $150 to $160," Mr. Saprykin said. "The closer to Russia a country is located, the lower the gas price. Even Poland doesn't have to pay a price of $160."

Ukraine imports a third of its energy from Russia, another third from Turkmenistan and the remainder is produced domestically, according to Agata Loskot, an energy expert at the Center for Eastern Studies in Warsaw.

State-owned Gazprom has top priority among Russia's natural gas exporters, and the few remaining independent Russian natural gas producers have no access to the pipelines that transport natural gas to the European market.

According to Russian law, the price of exported natural gas must be higher than the price on the domestic market. Therefore, Gazprom has no profitability domestically and survives only off its gas exports, Mr. Saprykin said.

Moreover, now that the relations between the two governments have dampened following the Orange Revolution, Russia no longer wants to play the role of a nice neighbor to Ukraine, he said.

"When there is a monopoly holder, he will always try to raise the price," Mr. Saprykin said.

Russia's discounted price takes into account that it must transport natural gas to European countries through Ukrainian pipelines, energy experts said.

Therefore, whether Ukraine increases its transit fee in response to Gazprom's statement is still an open question, they said.

"Blackmail is a dead-end track," said Serhii Sapehin, the director of Psykheya Scientific Technical Center in Kyiv.

Ukraine has an agreement with Gazprom to barter its transit systems in exchange for Russian natural gas through 2013. "So we estimate the prices will remain stable," Ms. Tymoshenko said.

The Ukrainian prime minister said she is sure that for the near future Russia will keep the same transit systems, considering there are no others with as high a capacity.

Some Ukrainian government officials do not support replacing barter with financial payments as that would be much more preferable to Russia.

"I strongly object to a single-step change of current gas settlements into financial payments," said Anatolii Kinakh, the first vice prime minister of Ukraine. "We must implement this plan step-by-step in order not to harm the competitive ability of Ukrainian economy."

In contrast, Ukrainian energy experts believe financial payments might actually help the Ukrainian gas market develop.

"A competitive gas market can provide energy security for Ukraine," said Ivan Poltavets, an energy expert with the Institute for Economic Research and Policy Consulting in Kyiv. "Ukrainian natural gas production can supply the demand of domestic consumers."

At present, Ukrainian producers must sell their natural gas to the state-owned company, Naftohaz, which fixes the price.

"If the producers were allowed to export natural gas, it would help the market develop," Mr. Poltavets said.

The Ukrainian government has been subsidizing natural gas prices for home and industrial consumers for years. However, that does not cover expenses of gas exploration, Mr. Saprykin said, and the only way to make the Ukrainian gas industry profitable at present is to increase the price for domestic consumers.

On the assumption of the gas market's liberalization, any enterprise could choose a gas provider, Mr. Saprykin said. The market would become competitive and consumers would have the possibility to evaluate prices and services.

"The government has to fight for competitiveness and against monopolies, not for low prices," Mr. Poltavets said.

Despite the fact that many Ukrainians run into a municipal service debt because they cannot afford even the lowest natural gas prices, experts believe that creating economic growth and subsequent increases in personal income would make prices affordable.

"This is like a visit to a dentist. It hurts at first, but the final result will be positive," Mr. Poltavets said.

So far, the statistics are tilting in Ukraine's favor. The Ministry of Fuel and Energy reported that Russian gas transit through Ukraine declined from 70.1 billion cubic meters to 69.2 during the first six months of this year as compared to the same period in 2004.

At the same time, Ukrainian gas production increased to 9.5 billion cubic meters, 0.7 percent more than during the same period last year.

| Home Page |