Gazprom raises gas export price as Ukraine looks for cash

By Elena Mazneva
Bloomberg News

Russia’s natural-gas export monopoly raised prices for Ukraine 44 percent after a discount deal expired, heaping financial pressure on the government in Kiev as it negotiates international bailouts.

OAO Gazprom (GAZP) said the increase complies with its supply contract and is necessary because Ukraine owes more than $1.7 billion for gas bought since the start of 2013. The government of ousted President Viktor Yanukovych negotiated a discounted price last year as he grappled with protests after ditching an association agreement with the European Union.

“The gas discount can no longer be used,” Gazprom Chief Executive Officer Alexey Miller said Tuesday by e-mail. Ukraine has failed to settle its debt for gas supplies from 2013 and isn’t paying for current supplies in full, he said.

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The move raises the prospect that state-run Gazprom may threaten to cut supplies to Ukraine, which buys about half its gas from Russia, something that’s happened at least twice since 2006 because of payment disputes. Gazprom’s decision came as Russia moved to reduce military tensions after its annexation of Crimea, withdrawing some troops from Ukraine’s border.

Ukraine, completing a deal with the International Monetary Fund and waiting for U.S. aid, is critical to EU energy security because about 15 percent of European gas supplies travel through its Soviet-era pipeline network. In January 2009, a dispute between Russia and Ukraine disrupted deliveries to Europe for about two weeks during freezing weather.

European customers

The second-quarter gas price for Ukraine is rising to $385.50 per 1,000 cubic meters from $268.50 in the first quarter, Miller said. The average price for European customers is seen at about $370 to $380 this year, according to the company’s forecasts.

At the same time as raising prices, Gazprom also met a contractual obligation to increase the fee it pays Ukraine’s pipeline operator UkrTransGaz for shipping fuel to Europe by 10 percent, Miller said.

Gas transit to Europe through Ukrainian pipelines is proceeding as normal, spokesmen at Gazprom and UkrTransGaz said by phone.

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Ukraine and the EU should intensify their work on natural gas shipments to the country to prevent conflict with Russia, Ukraine’s Energy Minister Yuri Prodan told European Energy Commissioner Guenther Oettinger in a letter released on the ministry’s website on March 27.

“Any serious shock is unlikely for now,” Dennis Sakva, an energy analyst at Dragon Capital in Kiev, said Tuesday by e-mail. “Gazprom essentially is returning prices that Ukraine had in 2013.”

Underground storage

Ukraine may use fuel from its underground storage facilities before it gets the IMF aid, which is expected this month, Sakva said.

Ukraine has a “very low” level in underground storage facilities of 7.2 billion cubic meters of gas, Andriy Kobolyev, chief executive officer of Ukraine’s state-owned Naftogaz, told reporters in Kiev. Naftogaz has asked regional governors to limit utilities’ gas consumption in April, he said.

Kobolyev said he planned to meet Miller this week, declining to elaborate on what they’ll discuss.

As part of the preliminary IMF package agreed on last week, Ukraine pledged to raise retail energy prices for households to bring them closer to market rates.