More on Russia's gas

Russia is using its supply of natural gas as leverage over its neighbor, Ukraine. Russia would like Ukraine to pay triple what is paying for gas now, and to pay in cash. According to a report at the Jamestown Foundation:

The Russian gas for Ukraine, however, is valued at $50 per 1,000 cubic meters, and Ukraine's transit service is valued at $1.09 per 1,000 cubic meters of Russian gas per 100 kilometers of Ukrainian pipelines. This is a pure barter transaction (the widely used term, "gas price," is a misnomer in this context) and both valuations are far below the existing rates in Europe. There, Gazprom is charging prices some $180 per 1,000 cubic meters of gas on average, and plans further increases in 2006.

The Russian-Ukrainian gas trade is based on a framework agreement signed 2001 and valid for the period 2003-2013. Under this agreement, Ukraine may payment either in the form of transit services or in cash for Russian gas. The volumes of that gas supplied to Ukraine and transited through Ukraine each year, as well as the forms of payment and the price or valuation of the gas supplied and transit services, are all to be negotiated in annual protocols and contracts on supply and transit. All these aspects, including the possibility of switching from one form of payment to another (e.g., from barter to cash) are subject to mutual consent in the annual negotiations.

At this time, the Russian side demands $160 per 1,000 cubic meters of gas supplied to Ukraine from January 1, 2006, onward, with payment to be made in cash. For its part, Kyiv insists on a gradual rise in prices over several years and for counting the value of its transit services for Russian gas as part of the price. For this heating season, Ukraine proposes to buy the usual 25 billion cubic meters, in a first tranche of 17 billion cubic meters at $50 per 1,000 cubic meters and a further tranche of 8 billion cubic meters at $80 to $82 per 1,000 cubic meters. Beyond that, Kyiv would accept to $90-96 at the start of the next heating season (autumn 2006).

Ukraine consumes some 80 billion cubic meters of gas annually, including some 25 billion received in barter from Russia, 18 billion extracted in Ukraine, and 36 billion cubic meters received from Turkmenistan via Russia. The delivery of Turkmen gas is subject to Turkmen-Ukrainian sale-and-purchase agreements and Turkmen-Russian transit agreements. Thus far, Turkmenistan has declined to sign the agreements on gas supply to Ukraine for 2006.

There is an agreement valid till 2013, though Gazprom says the terms are to be renogiated each year. Cleary, Russia sees a cash windfall in the new terms. In another report from the Jamestown Foundation:

Ukraine's gas company, Naftogaz, also says it has a contract through 2013 with Gazprom that stipulates the price of gas as $50 per thousand cubic meters. Gazprom insists that the price of gas is to be renegotiated every year.

Meanwhile, Russian officials made little secret of the economic motives behind the dispute. Yazev also said that increasing prices to $160/tcm would earn Gazprom $2.6 billion a year in Ukraine, of which the Russian state coffers would receive $1.15 billion.

The dispute may be a warning shot over Ukraine's bow for getting cozy with West.

The bilateral gas dispute has been seen as an indication of Russia's wariness regarding Ukraine's drift towards the West. Putin has described the past year as a year of missed opportunities. At a December 7 meeting with visiting Ukraine's parliament speaker, Volodymyr Lytvyn, Putin said that earlier the relations between the two countries had been more dynamic and suggested top Ukrainian officials should visit Russia.

"The Russian President made a blunt assessment" of the state of bilateral relations, the state-controlled Channel One commented. Ukraine insists on preferential treatment by Gazprom, something absolutely unacceptable for us, Voice of Russia radio added (Voice of Russia, December 7).

European countries look on with some nervousness, as they receive gas through Ukraine.

Subsequently, Russia moved to calm European Union fears over its dispute with Ukraine. "We should sign an agreement on transit with Ukraine very soon," Russian Prime Minister Mikhail Fradkov told reporters after talks with Jose Manuel Barroso, president of the European Commission (RIA-Novosti, December 7).

In news related to the German-Russian gas pipeline, Former German chancellor Gerhard Schroeder became board chairman of the pipeline.

Former German chancellor Gerhard Schroeder landed a job Friday as board chairman for a Russian-German gas pipeline that he championed while in office, a post that deepens his already close relationship with the Russian government and President Vladimir Putin.

At a groundbreaking ceremony about 250 miles north of Moscow, Alexei Miller, the chief executive of Gazprom, the Russian energy giant that holds a majority stake in the pipeline partnership, said the Schroeder-led board would be involved in "reaching all strategic decisions on all areas of the company's activity."

In September, Schroeder and Putin signed an agreement on behalf of their countries to build the $4.7 billion pipeline. Ten days later the German leader and his party lost an election, leading to his resignation last month. He resigned his seat in Parliament as well, and the German political world has been speculating about his future ever since.

Schroeder did not attend the groundbreaking ceremony, held in the Vologda region. His office in Berlin confirmed the announcement and said he was "very pleased" to take the job. It offered no other comment.

Opposition politicians denounced the appointment as a conflict of interest. "It stinks," said Reinhard Buetikofer, co-chairman of Germany's Greens, who were a coalition partner in Schroeder's Social Democrat-led government, the Associated Press reported.

Looking to South Asia, Russia is also looking to increase its influence in the region by making countries in the region more dependent on its gas. Russia would like to be part of a proposed Iran-Pakistan-India gas pipeline.

U.S. reservations of engaging with Iran notwithstanding, Russia is keen to participate in the $7 billion Iran-Pakistan-India gas pipeline project and share the risks involved in the "peace project", Asia Pulse reports.

Russian firm Gazprom wants to take part in construction, operation and maintenance of the 2,100-km pipeline that will transport natural gas from the gigantic South Pars field in the Persian Gulf to Pakistan and India.

"Russia and Russian company Gazprom are interested and prepared to share the risks along the route of the pipeline and we do hope that other stakeholders (in the project) will be benign towards the possibility of sharing risk with Russia and the Russian company," Russian Energy Minister Viktor Khristenko told reporters on the sidelines of the Asian Oil Ministers Round Table conference in New Delhi.

Russia is seeking to increase its energy trade with India.

Russia sees India as a "long-term partner" in the energy sector and is looking to vastly expand the scope of the bilateral relationship in the field of oil and gas exploration and production, Russian President Vladimir Putin said here on Tuesday.

In a joint press conference to mark the end of the sixth annual summit between India and Russia, he appreciated India's equity participation in the Sakhalin-I project and said the new Indian expressions of interest in further developing oil fields in Sakhalin — which require an overall investment of $10 billion — are "a clear indication of the fact that this has been a very successful beginning."

Prime Minister Manmohan Singh described Sakhalin-I as India's "most important overseas investment."

Asked about the Iran-India gas pipeline, Dr. Singh said the project made sense from the perspective of both energy security and regional détente. "India's needs for commercial energy are increasing very rapidly ... and [our] dependence on the outside world will increase," he said. "Therefore, we are in need of exploring the possibilities of utilising gas which is available in our neighbourhood in Iran for our development purposes. I think the overall demand picture is very encouraging and I believe if the countries of the region get together, this gas can become an important source of promoting regional cooperation."

Previous posts

Russia's gas weapon
Georgian-Russian relations continue to deteriorate
Update on the Russian-German pipeline

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Captain Ed comments on Gerhard Schroeder's position as board chairman.