Ukraine: Gazprom Sends Message To Nascent Parliament

Russia's First Deputy Prime Minister Dmitri Medvedev (left) meets with Ukrainian Fuel and Energy Minister Yuriy Boyko in Moscow on October 2 (ITAR-TASS) October 3, 2007 (RFE/RL) -- The timing of Gazprom's threat to reduce supplies to Ukraine by the end of October unless outstanding debts are paid is curious, coming as the votes of Ukraine's parliamentary elections are still being counted and with the formation of a new government on the way.

It also sparked fears of a repeat of the January 2006 gas crisis in which the Russian energy giant briefly shut off the flow of gas to Ukraine -- which in turn affected European supplies.

Gazprom and Ukraine quickly sought to assure Europe that such a scenario would not play out again, and reports emerged from Russia today that a deal had already been reached in connection the debt.

However, Ukrainian officials today were still questioning the amount of that debt, estimated by Gazprom to be $1.3 billion, with Finance Minister Mykola Azarov saying that amount must be based on "inaccurate data."

Azarov also strived to downplay the timing of the dispute, saying, "In view of the political situation in Ukraine now, this ordinary statement by an ordinary [Gazprom] official has drawn a lot of attention. If it had been made a month later, nobody would have paid any special attention to it. I stress once again, this issue has nothing to do with the political situation."

Bargaining Position Strengthened

Speaking in August, Fuel and Energy Minister Yuriy Boyko said that Ukraine's bargaining position ahead of negotiations on the price Ukraine will pay Gazprom for supplies in 2008 would be strengthened by the amount of gas held in Ukraine's underground storage facilities -- about half the amount needed for domestic consumption next year.

Boyko said at the time that the underground storage facilities contained 25.5 bcm of gas, of which about 4 bcm is locally produced, and about 8 bcm is gas from RosUkrEnergo. He estimated that the facilities would contain 32 bcm of gas by September 15.

"This means that we are to some extent protected against price fluctuations" Boyko said, going on to say that all of the stored gas would be consumed in Ukraine.

However, most of that gas belongs to RosUkrEnergo, the middleman company in which Gazprom has a controlling stake, and there are no legal restraints forbidding it from exporting its own gas to Europe.

'Difficult' Negotiations

Now that the time to negotiate has arrived, the current price of $130 per 1,000 cubic meters is expected to rise, but ongoing negotiations between Gazprom and Turkmenistan, according to Turkmen President Gurbanguly Berdymukhamedov, are "extremely difficult" and the results are difficult to predict.

Ukraine has relied mainly on Turkmen gas to meet its annual demand of over 70 billion cubic meters.

However, under the January 2006 agreement with Russia, Ukraine was effectively prevented from buying gas directly from Turkmenistan when RosUkrEnergo was given a five-year contract to handle all gas deliveries to Ukraine from Russia and Central Asia. Russia has a 25-year agreement to buy most Turkmen gas production, but Berdymukhamedov has questioned this agreement and is seeking to obtain a better price from buyers as well as find alternative customers.

Speaking at an energy conference in Kyiv in September, Russian Ambassador Viktor Chernomyrdin hinted that there was a political twist to the gas-price issue when he told the conference that the future Ukrainian government would determine the price.

"Unfortunately, Ukraine has lost Turkmenistan," former Ukrainian President Leonid Kuchma told the conference. "The contract on Turkmen gas deliveries to Ukraine expired in 2006, and Ukraine missed the opportunity to sign a new one. Now Ukraine will be buying Turkmen gas via Russia. It does not matter with whom Turkmenistan will be oriented -- with Washington, Brussels or Moscow. It will sell gas at market prices just the same. The time of charity is over."

Critics were quick to point out that Kuchma played a major role in establishing RosUkrEnergo in 2004. Two years later, the enterprise was selling Turkmen gas to Ukraine as "Russian gas."

Who Will Be Prime Minister?

The critical question in the current negotiations is who will be the new Ukrainian prime minister and what Ukraine's position will be on RosUkrEnergo's future role. If Yulia Tymoshenko becomes prime minister, the Russian side believes that she will insist that the company be removed from the agreement and that Naftohaz Ukraine deal directly with Turkmenistan or Gazprom on future gas purchases.

In the event that Viktor Yanukovych remains prime minister, he will most likely instruct his negotiators to maintain RosUkrEnergo as the middleman -- but without Ukrainian businessman Dmytro Firtash and his partner Ivan Fursyn, who control 50 percent of RosUkrEnergo through Centragas. According to sources in the Russian gas industry, Gazprom is upset with Firtash and is seeking to end the relationship with him. These sources also claim that Firtash is responsible for a good part of Ukraine's debt to Gazprom.

Much of the bargaining will need to take into consideration the position of Ukrainian President Viktor Yushchenko. During the 2006 negotiations, Yushchenko instructed Ukraine's energy minister to accept RosUkrEnergo into the settlement, although the Ukrainian security service and Tymoshenko insisted it was "a criminal organization."

In the run-up to Ukraine's September 30 parliamentary elections, Yushchenko was highly critical of RosUkrEnergo and told the press that during his scheduled meetings with Russian President Vladimir Putin he would ask that the company not be part of a future deal. However, Yushchenko's meeting with Putin never materialized, and the Ukrainian president subsequently dropped the issue.