Gas divides Russia & Ukraine again

Russia and Ukraine are still struggling to agree a price for gas supplies for 2008. And if history is a guide, the negotiations may well continue up to New Year's eve.

Gazprom has high hopes, but these particular negotiations have a sorry history. On the first of January 2005 it had to cut supplies to Ukraine, after 10 months of talks failed.

Gazprom wants Ukraine to move away from a heavily subsidised price of $US50 per 1000 cubic metres to one which matches world prices.

“With the gas contracts that Gazprom has with its European customers, the gas price there is adjusted to reflect the trend in the oil price with six month time like – that is the way it normally is done. So, it has actually been very unusual that there is a fixed price negotiated with Turkmenistan at $US100 per 1000 cubic metres for a couple of years. And than, of course, that led to the fixed price deal with Ukraine,” observed Chris Weafer.

Ukraine agreed to higher prices but in return wanted to earn more from tariffs from transiting gas.

Now Gazprom might be feeling deja vu. Gas exporter Turkmenistan is raising its price to Gazprom to $US130 dollars per 1,000 cubic meters next year, up from the current price of $US100.

Gazprom currently buys more than 40 billion cubic meters of Turkmen gas every year and the bulk of that goes to Ukraine. That will push up prices by at least 30%. And they could go even higher.

“The price of Turkmen gas for Russia will be $US130 in the first half of 2008 and $US150 in the second. It means that the minimum price for Ukraine in the first half of 2008 for 1000 cubic meters of gas  will be $US160 dollars and even higher in the second half, like $US180 or $US190 and if the Ukrainian government is smart, it will try to develop an energy saving policy to save the country from an energy shock,” supposed

Ukraine's economy minister, Anatoly Kinakh, says a gas price nearing $US200 would damage Ukraine's economy and warned that Ukraine could respond by hiking transit tariffs – as it did last time. Russia has offered a gradual increase in prices and with the most recently quoted price of $US160.

Analysts say that Ukraine cannot raise tariffs without breaking previous agreements. And, as Ukraine transits 80% of Russian gas, that could, once again, threaten deliveries to European countries.