Ukraine Cabinet delays domestic gas price cut for industry

Макроэкономика 26.12.2013 An expected discount on imported Russian natural gas will enable the Ukrainian government to decrease prices for state organs by about 1/3, or UAH 1000/tcm, as of January 2014, Prime Minister Mykola Azarov informed the weekly Cabinet of Ministers meeting on Dec. 25. At the same time, he highlighted that a similar decrease in gas tariffs for private industrial consumers will be delayed till the fourth quarter of 2014, as Ukraine has already accumulated gas inventories at an average cost of USD 400/tcm. The amount of gas inventories that cost above USD 400/tcm is close to 8 bcm as of end-December, Energy Minister Eduard Stavytskiy said that day. Alexander Paraschiy: Industrial consumers (those buying gas at market prices) consume about 24 bcm of gas annually. The “expensive” stockpiles of 8 bcm of gas will be fully used by industry by May 2014, we estimate. Thus, if Gazprom will fulfill its promise to sell gas to Ukraine at USD 268.5/tcm throughout 2014, industrial consumers will be eligible to buy the gas at the 1/3 discount only in June-July 2014, which means the positive effect of Russia’s gas discount on the Ukrainian economy will be delayed. Azarov’s Dec. 25 statement was the first mention of a possible decrease in gas tariffs for industrial consumers, which is clearly negative for Ukraine-focused independent gas producers like JKX Oil & Gas (JKX LN), Serinus Energy’s (SEN PW) Kub-Gas, Cadogan Petroleum (CAD LN) and Regal Petroleum (RPT LN). Providing that Russia does not cancel its discount in late 2014, the benchmark price for industrial consumers (at which most independent producers sell their output) will decrease by about USD 100/tcm by 4Q13, from the current level of about USD 500/tcm. At the same time, gas producers will have a unique chance to increase their profit as early as 1Q14 because gas producers’ selling prices (linked to benchmark prices for industrial consumers) will be flat or will only slightly decrease in 1Q14, as we understand Azarov. That means gas producers’ revenues will not decrease much in 1Q14, but their costs will fall noticeably: by up to USD 35/tcm. That’s because their production-based tax depends on the average price of Ukraine’s imported gas. If Gazprom provides the promised discount, the production tax for JKX Oil & Gas, Serinus Energy’s Kub-Gas and Cadogan Petroleum will decrease to USD 67/tcm in 1Q14 (from the average estimated USD 102/tcm in 2013). For Regal Petroleum, the tax will decrease to USD 38/tcm in 1Q14 from USD 57/tcm in 2013.