Ukraine, Russia could sign gas deal by the weekend, Russian minister says

Макроэкономика 30.09.2014 The latest trilateral meeting to determine natural gas pricing between Ukraine and Russia – with EU mediation – may be held on Oct. 2-3 in Berlin, Russian Energy Minister Alexander Novak reported on Sept. 29, according to the Interfax news agency. The parties have yet to agree on a blueprint (or memorandum of understanding). Yet if the process goes smoothly they may sign a document closer to the end of this week, Novak said. Recall, the Berlin meeting held on Sept. 26 resulted in some preliminary verbal agreement between Ukraine and Russia, though they have yet to put it on paper. The only parameters of the deal that had been agreed upon are: 1) the Ukrainian side will pay USD 3.1 bln to Gazprom by the end of 2014; 2) Ukraine will be eligible to buy about 5 bcm of natural gas directly from Gazprom this winter. Naftogaz CEO Andriy Kobolev told the Handelsblatt newspaper on Sept. 29 that not all the parameters of the future deal have been agreed upon, thus far. In particular, he said that the core question under the discussion is how much Ukraine owes Gazprom for the gas imported by July 2014. Ukraine is insisting that its debt totals USD 3.1 bln, while Gazprom claims it’s USD 5.2 bln, according to Kobolev. He also clarified Ukraine’s position at the ongoing negotiations: Ukraine is ready to repay half of the debt that it has recognized and pay USD 1.9 bln for the 5 bcm of natural gas to be supplied by Gazprom this heating season. Ukraine also wants an option to purchase additional gas from Russia of up to 5 bcm this winter. On top of that, Naftogaz will demand that a renewed gas contract be “commercial”, i.e. the preliminary agreed-upon gas price (USD 385/tcm) shouldn’t be a derivative of some discount that is granted to Ukraine by the Russian government. Alexander Paraschiy: Recall, the active contract implies that effective price of Russian gas for Ukraine (USD 385/tcm) consists of the base rate (USD 485/tcm) and a USD 100/tcm discount granted by the Russian government. Russia wants to keep this exact way of deriving the final price for Ukraine for two reasons: 1) the size of the discount will remain subject to the “good will” of the Russian government and may be potentially changed any time; 2) the existence of the “discount” in the gas pricing formula is important for PR purposes – i.e. the Russian government can claim it’s “subsidizing Ukraine.” Meanwhile, the position of Ukrainian side is, “We don’t need your stinking discounts. Just give us the market price, which is USD 385/tcm.” The difference in the pricing approaches looks critical enough that it might end up ruining the ultimate agreement, we believe. On top of that, we are slightly confused by the impudence of the Ukrainian side about the pricing of already imported Russian gas. The USD 3.1 bln bill suggested by Kobolev implies that Naftogaz assumes all the earlier purchased gas should be priced at USD 286.5/tcm (the company did not pay for 11.5 bcm of earlier imported gas). Out of the unpaid amount, Naftogaz imported 7.9 bcm of gas in 2Q14, which theoretically could be priced at USD 286.5/tcm. At the same time, Naftogaz hasn’t paid for 3.68 bcm of gas imported in 4Q13, for which the USD 268.5/tcm price cannot be applied. The deal assuming such a discounted price was settled only in December 2013, and this deal was about gas imported since January 2014 (the contract-implied price for gas purchased in 4Q13 is USD 394/tcm). Yet this pricing approach could be another stumbling block on the way to agreeing on a new gas deal.