Saturday, January 12, 2008

Who's robbing who?

Approximately 115 billion cu.m. of Russian gas transits westward over the territory of Ukraine p.a., over an average transit distance of 1090 km. Multiplying these numbers by the current transit rate of $1,7 dollars per 1000 cu.m per 100 km, the current total income for Ukraine from the transit of gas is $2,13 billion.

The authoritative periodical "Zerkalo Tyzhnya" consider a realistic European gas transit rate to be $9,32 per 1000 cu.m per 100 km. This would provide a total income from the transit of gas of $11,68 billion.

The periodical considers the 'European' price for imported gas to be $350 per 1000 cu.m at Ukraine's western borders, i.e. around $250 at its eastern borders.

By buying gas from monopoly supplier RosUkrEnergo at the current rate of $179,5 instead of a 'market' rate of $250 Ukraine saves about $4 billion, but is losing about $9,5bn on transit fees.

The Tymoshenko goverment has clearly got plenty of negotiation room. And the $2 billion Naftogaz default does not look that terrible.

The figures above give an indication of the the magnitude of kickbacks in this gas business.

"Zerkalo Tyzhnya" asks " can a state company, strategically important to the ecomomy of the country, which should be one of the main contributors to the budget, and which provides a fundamental portion of oil and gas transit routes to Europe, and also extracts nearly 90% of oil and gas in Ukraine, can be a loss-maker and have a financial deficit? Particularly at a time of record prices for oil and gas?!"

It includes this semi-cryptic paragraph in its conclusion:

The "Naftogaz" default is a serious problem and those responsible should be most ashamed of themselves. They can only hide from the reproachful gaze of the community in the "Mandarin" restaurant, in 'the building of the century' in Obolon, in the Emirates' office of "Petrogaz", and in the presidential suite of the Emirates' "Sail" hotel.

p.s. If anyone is interested in 'Petrogaz' just enter it into this site's search engine.

1 comment:

hans said...

While the $1.70 transport fee is probably lower than "market" value, the $9.32 figure is much higher than anything else being charged out there -- almost ridiculously higher.

European prices (not a strict analogy, but all there is really) range from about $1 to about $3.

(MUCH more here: if interested)

Transit prices can't be compared directly to the gas prices going through the pipes. Pipelines are a sunk cost, and transit prices are set to a) recoup the construction costs [already happened in Ukraine], b) pay for the actual operation of the lines [mostly consists of buying / using fuel gas to run the compressors], and c) making a bit of profit, either for the operators or for future investment.

A certain amount of inflationary pressure can cause an increase in rates, but in general, the pipelines are depreciating -- more leaks, less capacity, more explosions. Gas prices are essentially linked to oil prices (since they are "competitors"), which fluctuate based on supply and demand. Pipelines -- and their tariffs -- don't operate on the same economic model. (Haven't read all the ZN article yet though, so may have more to say on it later...)

That said, the two prices -- cost of gas volumes and of transport fees -- are linked in that Russia and Ukraine were willing to trade subsidies with each other because it suited them both. When the system was broken (i.e., cheap gas meant for Ukraine sold off to Europe, or Ukraine siphoning off more gas than "allowed") was when huge profits could be made.

Both sides are now working to close those opportunities (well, some people on both sides, but certainly not all people involved), because it's detrimental to the whole system, and each other's reputations.

As for the "cryptic" last paragraph, the Mandarin comment refers to RosUkrEnergo bigwig Firtash, as he recently bought the Mandarin Plaza real estate in downtown Kyiv. So figure the other locations are connected to similarly involved businessmen who managed to come out on top.

I'll shoot you an email with a couple more things regarding your comment on my blog. Good coverage here! My posting pace took a hit over the holidays, I'm impressed you've kept up well. Keep it up.