Gazprom pipelines and export capacity

Газопроводы Газпрома и экспортные мощности

Gas pipelines of West Siberia

Газопроводы Западной Сибири

Export flows of Gazprom

Экспортные потоки

Spot, Gazprom, Brent

Цены на нефть и газ

End-use price of gas

Russia and USA

Daily gas production

Суточная добыча


Important Changes in Russian Gas Business Environment


Economics of Russian-Ukrainian Gas Conflict: Summary for Beginners

Questionable benefits of Gazprom. Deal with Turkmenistan looks like a bluff.

There are many political statements on financial gains of Gazprom and Russia after the raise of gas price for Ukraine. We believe these hopes are groundless.

To begin with, Gazprom is not selling gas to Ukraine since 1998. Before 1998, Gazprom had two categories of gas transactions with Ukraine: (1) “free” gas delivered as payment for transit services, and (2) export gas that supposed to be paid for. Deliveries of “free” gas and export gas in one package created many opportunities for grey schemes. According to Gazprom, only 38% of Ukrainian gas bills were paid.

From 1998, Gazprom is delivering only “free” gas in payment for transit services. Export flows were handled first by “Itera”, then by “Eural Trans Gas” and finally by “RosUkrEnergo”. The separation of “free” gas from export gas has unveiled illegal off-takes, which were formerly hidden in the flows of “free” gas. Remarkably, both Gazprom and “Itera” gained from the separation of gas flows. Gazprom has eliminated the problem of collecting money from bad clients and got additional revenues from sales of gas transportation services. “Itera” took the cream of Ukrainian market by selling gas only to the most reliable clients.

Gazprom was steadily decreasing the volumes of payment gas from 30 bcm in the late 1990s to 26 bcm in 2004 and 21 bcm in 2005 (bcm = billion cubic meters). Specific volumes were negotiated between the gas monopolies of Russia and Ukraine. From 1998, the parties used gas price of $50/mcm and transit tariff of $1.0937/mcm per 100 km (mcm = thousand cubic meters). Under these terms, transit expense of Gazprom was roughly equal to the gas procurement expense of Ukraine. There were no cash sales until 2004, when Gazprom exported additional 6 bcm at $80/mcm as compensation for the re-exports of “RosUkrEnergo”. The reasons for these re-exports and transfer of Gazprom’s profits to Switzerland are unclear. However, re-export of “RosUkrEnergo” is the only reason for additional sales of Gazprom to Ukraine. We expect these re-exports to stop and do not take them into account.

As of late 2005, Gazprom is not receiving any money for gas delivered to Ukraine and is paid in kind by transit service. Turkmenistan is exporting gas to Ukraine for cash with “RosUkrEnergo” acting as a broker.

Now Gazprom wants to raise the price of gas for Ukraine from $50 to $230/mcm. Benefits of this step are doubtful, but losses are obvious.

If Gazprom plans to sell the same 21 bcm at $230/mcm and pay just a share of revenue for transit service, the management of Russian gas monopoly is very likely to be disappointed. Ukrainian NAK “Naftogaz” can raise the transit tariff and introduce a “European” tariff for the reservation of gas storage capacity. Formally, Gazprom is not using the storage facilities now under the special low-cost transit agreement. In reality, Ukrainian storage facilities provide the export flow of Russian gas to Europe in winter. The difference between export flows in winter and summer is about 100 million cubic meters a day, while the gas flow to Ukraine is roughly the same through the year (see chart). Gazprom needs Ukrainian storage capacity more than NAK “Naftogaz” does. When the transit terms change, Gazprom would have to pay for storage. In Europe, storage capacity reservation for a year can cost anything from €100-150 per one cubic meter per hour.

If Gazprom plans to sell more gas to Ukraine, it should squeeze Turkmenistan out of the market. The deal between Gazprom and Turkmenistan concluded on December 29, 2005 looks like the move in this direction indeed. Gazprom reports that it buys 15 bcm of Turkmen gas in the first quarter of 2006. Actually, this is exactly the combined capacity of all pipelines running from Turkmenistan to Russia, which means no other gas, including from Uzbekistan and Kazakhstan, is getting through.

Moreover, a simple analysis of the gas balance of Turkmenistan indicates that the new agreement is a bluff. In January-March 2006, Turkmenistan is capable to produce about 6.0 bcm a month, at least 1.5 bcm/month of which should go for domestic consumption. Exports to Iran take another 0.5 bcm/month. There is no 15 bcm of Turkmen gas available for Gazprom in the first quarter of 2006.

We advice to wait until Turkmenbashi confirms the volumetric and pricing details of Gazprom's statement. There is also something wrong with Gazprom buying Turkmen gas at $85-$90 at the Russian border ($65 at the border of Turkmenistan) and reselling it to Ukraine at $230/mcm. Turkmenbashi is not that simple person. However, even such a profitable resale would bring Gazprom a big total loss compared with the terms of 2005 (Table 1). The loss is bigger if Turkmenistan gets its fair share, or if Ukraine raises its transit tariff to the level paid by Gazprom in Bulgaria or Austria. The tariff for reservation of Ukrainian storage capacity also has space for an increase. In addition, Gazprom would need to ban exports of Russian independent gas producers to Ukraine, because the independents can offer much lower price than $230/mcm.

Table 1. Comparison of Revenues and Expenses of Gazprom

 
 Unit
 $60/mcm 
 $230/mcm 
 Ukrainian transit expense:      
 Volume of payment gas
 bcm 
 26 
 26 
 Value of payment gas
 $ billion 
 1.6 
 6.0 
 Ukrainian transit tariff 
 $/mcm/100km 
 1.09 
 3.00 
 Storage capacity reservation tariff 
 $/cub.m/hour/a 
 -   
 150.00 
 Payment in kind (by gas) for transit service
 $ billion 
 (1.6) 
 -   
 Revenue from gas sale
 $ billion 
 1.6 
 6.0 
 Cash payment for transit services 
 $ billion 
 -   
(4.3)
 Cash payment for storage reservation
  $ billion 
 -   
(2.1)
 Total cash payment to Ukraine 
 $ billion
 -   
(6.4)
 Export duty - 30% 
 $ billion
(0.5)
(1.8)
 Total transit expense of Gazprom: 
 $ billion
(0.5)
(2.2)

 Transit revenue:

 

 

 

 Transit volume from Turkmenistan
bcm
 34 
 -   
 Transit tariff of Gazprom
  $/mcm/100km  
 1.09 
 3.00 
 Transit revenue: 
 $ billion
 0.3 
 -   

 Resale of Turkmen gas:

 

 

 

 Volume of gas
bcm
 -   
 34 
 Cost at the Russian border
$/mcm
 64 
 90 
 Import duty - 5% 
$/mcm
 -   
 5 
 Total Gazprom expense at the Russian border  
 $ billion
 -   
(3.2)
 Gross revenue from resale to Ukraine
 $ billion
 -   
 7.8 
 Turkmenistan share in profits - 25%
 $ billion
 -   
(1.2)
 Export duty - 30% 
 $ billion
 -   
(2.3)
 Net revenue from resale:  
 $ billion
 -   
 1.1 
 Total net result of Gazprom: 

 $ billion

(0.2)
(1.1)

In best case, Gazprom is likely to supply 60 bcm and spend the major share of revenue on transit service and reservation of storage capacity in Ukraine. The transit expense will go up and profits from exports to Europe will decrease. Note that additional export duties (30% of $230/mcm) will exceed $3.6 billion a year. In the most favorable case, Gazprom loses over billion dollars a year.

NAK "Naftogaz Ukraine" gets 60 bcm of gas at net cost of $7.4 billion. This transfers into the average Ukrainian internal price of $124/mcm. The most favorable case for Gazprom means the worst case for Ukraine, so the average Ukrainian price may be lower than $124/mcm.

We must note that Ukraine has more other options for an adequate response to price raise. However, packaging of gas transit issues with other political matters is inappropriate from our point of view.

At the first glance, the Russian state looks like a sure winner in this game. Indeed, the tax collection increases, though the increase is cut by the lower profit tax of Gazprom.

However, the state is likely to lose as the main shareholder of Gazprom. In the context of growing gas price in Europe, the capitalization of Gazprom could have been higher under different terms of Ukrainian transit.

We have made preliminary comparison of net present value of additional tax income of the state and NPV of lost cash flow of Gazprom. The state loses if the price is below $220/mcm and gains if the price is higher. The break-even price is substantially higher if additional measures of Ukraine and effects of probable increase of price of gas from Uzbekistan and Kazakhstan are taken into account. The calculations were done before the announcement of new deal with Turkmenistan. The agreement with Turkmenistan increases the gain of the Russian state because of the huge increase of export duties' collection from Gazprom.

Unlike the Russian state, minority shareholders of Gazprom will just lose. The loss may not be noticed while the European gas price is growing. However, the shareholders are likely to understand that the main goal of Gazprom is not the profit maximization, but rather tax maximization and fulfillment of political goals of the current presidential administration.

Mikhail Korchemkin

December 29, 2005 (updated on December 30, 2005)

 

Previous publications on Russian-Ukrainian gas dispute:

Russian-Ukrainian Gas Conflict: Financial Effects of the Russian Side - 2

Russian-Ukrainian Gas Conflict: Financial Effects of the Russian Side

Brief history of Soviet and Russian gas pipeline policy

Clarifying the math of Ukrainian transit tariff


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