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23 Jan, 2009 17:10

Gas deal brings end to dispute as parties weigh up the costs

Ukraine and Gazprom signed a peace deal this week, but experts say new gas price is too high for Ukraine’s economy and expect Kiev to make further attempts to renegotiate the contract.

The long-term contract between Gazprom and Naftogas marked a ceasefire in the Russia – Ukraine gas dispute.

With major political and commercial maneuvers over, and gas deliveries to Europe resumed in full, the market is trying to find out who won, and who lost, and whether it is truly the end of the conflict.

Many think Ukraine lost the battle. According to Ukraine’s Prime Minister, the average annual gas price for the country may stand at $228 per thousand cubic meters this year – an increase of almost 30%.

Chris Weafer, Chief Strategist at Uralsib says the Ukrainian economy can’t digest such a price.

“Even though they are getting a discount this year of 20%, Ukraine is still going to pay substantially more money than it did in 2008, and we know in 2008 it struggled to pay for its gas, which obviously led to the whole conflict with the arrears situation. The price that Ukraine will pay is linked to the international price, and we know, of course, that that could swing up substantially higher, depending on where oil trades. So Ukraine’s economy definitely is in a much more difficult position, now, as a result of this deal.”

The deal, struck by Ukraine’s Prime Minister Timoshenko, was a blow to her rival, President Viktor Yushenko. Timoshenko showed herself a “can do” politician boosting her chances to win the next presidential election. But political instability in Kiev and higher gas prices mean the conflict may have further to run according to Aleksandr Nazarov, Oil and Gas Analyst at Metropol.

“The conflict is solved only in the part of continuing the gas transit to Europe. Regarding the Ukrainian consumption of gas, I expect more conflicts, more issues, maybe in the summer, maybe next year.”

As for Gazprom it won in the long-term as it managed to shift its gas trade with Ukraine to a market price, ending a long period of subsidy. However, it lost more than $2.5 billion in export revenues. Gazprom’s losses may increase as some European energy companies plan to demand compensation over the gas supply cut, in court.

Supply disruption also hit Russia- EU relations but experts say they won’t stay cool for long. The EU relies on imported energy and will need more in coming years. Russia, in turn, needs the revenue from sales to Europe.

The clear winners turned out to be Asian gas producers, who get a higher price for their gas. The conflict also gave a boost to rival pipeline projects Nord Stream and South Stream that bypass Ukraine.