Friday, January 27, 2006

Ukraine takes gas

Ouch. Ukrainian officials have admitted they have been taking more gas than they should here.

In Kiev, a spokesman for Naftogaz Ukrainy, Dmitry Marunich, admitted that Ukraine had been taking more gas than it should have done, and said the Ukrainian government, which is trying to crack down on customers who use too much, could face sanctions from Gazprom. "Under intergovernmental agreements, we might have to pay more for this gas," Marunich said.

This is an admission that what Russia has been saying is right. The government really needs a better strategy on how to deal with this. Maybe admitting it is the right thing to do but they have just given a reason to believe the Kremlin on what it has always said about Ukraine. The truth is a good thing but it must be put in context. It is effective with context. But here there is none. "We took it and we should pay for it," is the position. The context of it though should be supplied. More of this won't sit well with the Europeans, I can tell you. The Europeans already have paid for it in their minds. It is theirs. Someone needs to step up and take this thing in hand. No one is though. Ukraine is leaking credibility and it could become a flood if someone isn't careful.

The article goes on to make it clear that the Europeans are looking for other alternatives. That cannot be in the interests of Gazprom or in the interests of the Russian people. But those interests have not been paramount with the Kremlin. That is one thing that's clear from all of this.

LEvko comments: You're right Scott, Ukraine is leaking credibility by admitting siphoning off someone else's gas without giving any credible explanation. If the gas transportation system cannot cope with high demands - this should be made clear.

But here's what one expert says:
Ukraine holds most of the storage capacity of the Soviet Union, and most of that is in the westernmost [regions]. Storage capacity is important in the gas business, as demand is seasonal (there is more in winter for heating) and can almost triple in Europe between summer and winter. If you can pre-position your gas near the markets when transport capacity becomes strained, you can extract a lot more value from that seasonality. The storage facilities near the Hungarian and Slovak borders were ideal for Soviet exports, but now they are in Ukrainian hands, and thus Russia must have a minimum of technical cooperation from the Ukrainians, who physically control and operate these facilities, not to lose a lot of money in their export. Source:

I suspect these massive underground storage facilities are being kept nicely topped up - better than money in the bank. Ukraine is buying at $95/Tcm but the price further down the line is $250+/Tcm.

Even in Great Britain which is largely self-sufficient in gas [for the time being], we have been told that in the event of a severe winter there could be shortages, but that industry would be the first to have to carry the burden of delivery shortfalls - domestic and municipal consumers would not be affected.

Ukrainian industrial magnates are powerful enough to pressure Ukrainian authorities and demand that they get their full quota. According to the figures I have, Ukrainian industry consumes 1/3 of Ukraine's total gas consumption, but most of this imported. Gas consumed by households, and municipal heating etc. is largely satisfied by domestically extracted gas.

But most likely Ukrainian authorities just like letting everyone else know, that it is they who have a controlling hand on the pipelines. They shouldn't push it too far..

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