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By John Helmer in Moscow

A gas supply agreement signed yesterday by the presidents of Russia and Ukraine dramatically changes the prospects for both oil and gas shipment across and under the Black Sea; extends Russia’s Black Sea Fleet lease of the Sevastopol base by another 25 years; and costs Gazprom nothing.

The terms of the deal promise to change the future investment prospects for the Ukrainian ports of Odessa and Yuzhny at the expense of Burgas, Bulgaria. Constanta , Romania, will also gain at Burgas’s expense if the new agreement changes the routing for Gazprom’s South Stream gas pipeline across the Turkish and Bulgarian seabeds, to permit the shorter seabed route via Ukraine and Romania.

According to the press announcements so far, Presidents Dmitry Medvedev and Victor Yanukovych have agreed to a 30% discount price for 30 billion cubic metres of Russian gas to be delivered to Ukraine this year, and 40 bcm to be delivered annually from next year to 2019. The effective purchase price for Kiev will be about $230 per thousand cm, well below the $334 asking price from Gazprom, which has been on the table since the start of this year. The export volumes to Ukraine for this year have been lifted from 33.75 bcm, agreed with Naftogaz-Ukraine last November, to 36.5 bcm; the discount will cover the first 30 bcm sent to Ukraine, and the first 40 bcm thereafter.

The savings, estimated at $40 billion ($4 billion per annum) over the term of the agreement, will be applied to the extension of the Sevastopol naval facility lease. But Gazprom will not lose this amount from its revenue stream. Instead, a zero export duty for Gazprom deliveries to Ukraine will be introduced, which is equivalent to the 30% discount in pricing. As a result, the Russian government will receive less tax – about $3 billion less per annum, according to one bank estimate.

By removing the risk of Ukraine-related disruptions of gas flows and Gazprom’s sales revenues to Europe, the agreement relaxes a costly drag on Gazprom’s share price and market value. The company’s current market capitalization is $141 billion, down 6% in the year to date, trailing well behind Russia’s other oil and gas companies, and behind the RTS stock market index as a whole.

A Ukrainian offer is also on the table for Gazprom to take equity in Ukraine’s gas distribution and pipeline system to further reduce the likelihood of supply cutoffs for European consumers in future.

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