Gazprom to charge Ukraine USD 385.5/tcm of gas in 2Q14

Макроэкономика 01.04.2014 Gazprom CEO Alexey Miller reported on April 1 that the natural gas price for Ukraine will be USD 385.5/tcm in 2Q14. In 1Q14, the price had been USD 268.5/tcm, reflecting an agreement reached between the Russian and Ukrainian presidents at their meeting in Moscow on Dec. 17. As another measure to pressure the Ukrainian economy, the lower chamber of the Russian parliament voted on March 31 to cancel unilaterally all its agreements with Ukraine concerning the hosting of Russian Black Sea Fleet in Sevastopol. The parliament’s upper chamber will cancel them today. The cancellation includes the Kharkiv Agreement that offered a USD 100/tcm discount for Russian gas to Ukraine. Without the discount, average price of Russian gas for Ukraine would have been USD 385.5/tcm in 2Q14. In other news, Ukraine’s power sector regulator has set new retail prices for natural gas for April, the Interfax-Ukrayina news agency reported on March 31, which only partially reflect an expected increase in the gas price to be imported from Russia. In particular, the gas price cap for industrial consumers was set at UAH 4,020/tcm for April, which is 29% higher compared to the cap set for 1Q14. In hryvnia terms, the April price is 16% higher compared to the December price, when Ukraine also had no discount from Gazprom. Though in dollar terms, the April price is 15% lower compared to December if we use the official NBU exchange rate: USD 367/tcm vs. USD 433/tcm, respectively. Alexander Paraschiy: The today’s gas price announcement by Miller adds some optimism that the USD 100/tcm discount for gas will remain in place for the future (at least for 2Q14). The core question right now is whether Ukraine is able to respond to Russian denunciation of the Kharkiv Agreement (and preserve the USD 100/tcm discount in the future). In our view, there is a good chance for Ukraine to preserve the status quo: neither the Kharkiv Agreement nor the basic agreement on hosting the Russian Black Sea Fleet in Crimea presumed any possibility of invalidation. The basic agreement, signed in 1997, stipulates that “any disputes concerning its interpretation or application should be resolved by a joint commission”, or otherwise it should be resolved “by diplomatic means as soon as possible”. Thus, the deal’s cancellation would require some dialogue, which is not possible when Russian diplomats and top officials are trying to avoid any contact with their Ukrainian colleagues. The domestic gas price hike approved by the power regulator is only the beginning of the story. Naftogaz may offer a smaller price for industrial consumers for April, compared to the cost of its April import, since it accumulated gas stocks that were imported in 1Q14 at a discounted price. In case Ukraine does not succeed in saving the Kharkiv Agreement, the retail price of natural gas in Ukraine would be raised considerably by mid-2014. The only beneficiary from this development will be Ukraine’s independent gas producers, who will be able to sell their products at the new inflated price: Serinus Energy (SEN PW), Regal Petroleum (RPT LN), and JKX Oil & Gas (JKX LN).