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By John Helmer in Moscow

There can’t be too many young children, who were still awake when the Ukrainian gas pantomine finished its traditional January run on Monday evening in Moscow. The problem was that those presiding at the curtain-fall, the Prime Ministers of Russia and Ukraine, and the heads of their respective gas companies, couldn’t deliver lines that, despite all their earlier run-throughs, would satisfy a simple-minded grown-up.

As the Kremlin clock was edging past 6:30 pm, on Monday, Gazprom officials were saying they could not confirm the precise terms of the agreement on resumption of gas deliveries to Ukraine, which had been announced by Prime Ministers Vladimir Putin and Yulia Tymoshenko after their meetings on Saturday and Sunday. All that Gazprom was able to say was that negotiations were still continuing between Gazprom and its Ukrainian counterparty, Naftogaz Ukrainy; that the pricing and delivery terms had not been signed; and that deliveries would not resume until the signatures hit the paper.

Seven minutes later, the flags were up, the pens were wet, contract papers were flourished, and Putin and Tymoshenko announced something very big. Russia and Ukraine, they said, had agreed on a 10-year gas supply from now until the year 2019. What will happen for the next three months, however, remained almost as foggy as before. Only now everyone will be able to peer through the murk with their gas-fires blazing. How and who will pay the new bill, and what exactly it will come to, is no better known now than before this gas stoppage began.

If there had been any other outcome, this wouldn’t be the great old panto Russian-Ukrainian gas relations have always been.

According to Putin and Tymoshenko, they have agreed to resume deliveries, according to a direct contract between Gazprom and Naftogaz. This eliminates the intermediary trader, Rosukrenergo. But there is no clarity on who will pay the transportation costs previously covered by Rosukrenergo; nor what will happen to gas in storage in Ukraine already owned by Rosukrenergo, but as yet unsold.

Putin and Tymoshenko also announced that they have agreed to lift Gazprom’s price for Ukraine from last year’s level of $179.50 per thousand cubic metres, and reach the full European price level in 2010. For 2009, the two prime ministers claim they have agreed on a 20% discount to the European price level. However, they did not identify the benchmark, nor the discount price, and left these to be finalized by negotiators for the two gas companies. This may take another ten years of pratfalls.
All Gazprom has officially said by the close of Monday is that “according to the agreements reached by the heads of governments of Russia and Ukraine last night, OAO Gazprom and NAK Naftogaz are preparing the gas transit agreement and a contract on gas supplies for Ukrainian consumers for subsequent signing. The main result has been achieved – we agreed on the restoration of the Russian gas transit by Ukraine via its territory as well as on conditions of work this year and during the follow-on period,” said OAO Gazprom official spokesman Sergey Kupriyanov.”

Denis Ignatiev, chief foreign relations spokesman for Gazprom, says he could not say what the 20% discount would mean for Ukrainian pricing. “This is still unclear”, he said. “I should hold my comments until the end of the negotiations. We are waiting for the announcement to come.”

Industry sources in Moscow provide widely divergent estimates of the proposed pricing; the only consensus is that the agreement is restricted to the first quarter, and allows both sides to return to the conflict at the end of March. According to one source, the price for the first quarter of 2009 has been set for Ukraine at $360/thousand cm. For the rest of the year, Kiev should be able to purchase gas at a 20% discount to the European price, which, if tied to a Brent marker of $48 per barrel of crude oil, would imply about $230/thousand cm.

The shortage of Gazprom deliveries has also served to increase the spot price for gas in western Europe by 10% over the past fortnight, prodding the market in the direction Gazprom strategists have long sought — to delink the contract price of gas from the Brent benchmark for crude oil.

The prime ministers’ agreement also provides that the Ukrainian transportation charge for gas transit across its territory would remain unchanged from 2008 at $1.70/thousand cm/100km.

Independent energy analyst Konstantin Simonov said: “everything is very unclear on all the issues. The 2008 price for Ukraine was $179.50. It is unbelievable for the price to be doubled; besides, Ukrainian sources, including [pro-Moscow opposition leader Victor] Yanukovich says that they can’t afford more than $250 economically.”
Putin and Tymoshenko also dropped two earlier ideas for agreement — the establishment of a European-staffed inspection body to monitor gas transit across Ukraine; and a European financed scheme for the purchase of the “technical gas”, required for purchase from Gazprom to remain in the Ukrainian pipeline network to sustain pumping pressures.

Ignatiev said he is unable to quantify the revenue shortfall or losses incurred by Gazprom since the halt of gas shipments on January 7. He claimed that the loss figure is about $1 billion. Deputy Prime Minister Igor Sechin said last Saturday the number was $1.2 billion, and growing every minute.Other Gazprom announcements claim $1.8 billion. Assuming the 2008 average daily shipments of gas to Ukraine — without counting transit gas — priced at the 2008 level, Gazprom has foregone about $351 million in sales to Ukraine, alone.

Estimating Gazprom’s profit and loss on gas sales to Ukraine is difficult, because the company is reportedly obligated by an agreement Putin made last year with Uzbekistan and Turkmenistan to buy their gas at $340/thousand cubic metres. Since most of that goes to Ukraine, a price below $357/thousand cm would not compensate Gazprom for the product price, plus transportation fees and trading margins. Thus, the stoppage may have saved Gazprom from this loss on gas shipments.
The revenue shortfall or losses from the stoppage to Europe are impossible to quantify, because Gazprom is not disclosing how much additional gas it may have been able to pump through Belarus and Turkey; nor how much of its commitments for the stoppage period may have been supplied from underground storages in Europe.
Ignatiev was also asked if there was additional pumping capacity to enable Gazprom to make up the shortfall in deliveries during the 13-day stoppage period. He said: “what was under-supplied and what was lost in profit can’t be recovered.”

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