The true reason for the appearance of RosUkrEnergo as a monopolistic supplier of gas to the country was the complete failure of Ukraine's delegation in gas negotiations with Russia's Gazprom.
The information campaign spinning the Ukraine-Russian gas agreements through media reports looks convincing at times. One of the common spin messages can be traced to oppositionist politicians such as former Prime Minister Yulia Tymoshenko and her ally Oleksandr Turchynov, who have suggested that the scheme which yielded Swiss-registered gas trader RosUkrEnergo the right to operate gas shipments from Russia and Central Asia to Ukraine is corrupt.

However, neither they nor others have provided a clear answer to key questions: Why did RosUkrEnergo emerge as a supplier of gas to Ukraine and why has a greater part of Ukraine's domestic gas market been given away to this company?

The truth is so unpleasant for President Viktor Yushchenko and Prime Minister Yuriy Yekhanurov that they find it hard to deny corruption accusations and explain what is really going on.

The true reason for the appearance of RosUkrEnergo as a monopolistic supplier of gas to the country was the complete failure of Ukraine's delegation in gas negotiations with Russia's Gazprom. The cost of Russian gas for Kyiv in 2006, according to the new agreement, has been fixed at the top price corridor offered by the Russian monopoly - initially $140-160 per 1,000 cubic meters, and later, as high as $220-230 per 1,000 cubic meters - four-and-a-half times higher than in 2005.

Negotiations with Turkmenistan also have been far from brilliant. The price of gas in January was not last year's $44 per 1,000 cubic meters, and not even the $50 per 1,000 cubic meters as declared by Oleksiy Ivchenko, head of Ukraine's state oil and gas company Naftogaz Ukrainy. Rather, it was $65 per 1,000 cubic meters.

The numerous boastful declarations of Ukrainian government officials in the course of negotiations with Gazprom prevent them from revealing the pathetic truth to Ukrainian voters ahead of the upcoming parliamentary elections in March.

Having realized that Gazprom's threat to cut off gas supplies to Ukraine on January 1, 2006, was no bluff, the Ukrainian government struggled to look for a way out of the conflict that would allow them to save face. The answer they found was RosUkrEnergo, which was previously engaged in the transit and export of Central Asian natural gas to Ukraine, and, through its territory, into Eastern Europe.

According to the gas agreements inked on Jan. 4, RosUkrEnergo received the honorable right to buy Russian gas for $230 per 1,000 cubic meters, mix it with Central Asian gas worth $81 per 1,000 cubic meters at Ukraine's border, and sell the mix on the Ukrainian market for $95 per 1,000 cubic meters. Considering that the market price for this gas stands at no less than $130 per 1,000 cubic meters, the economics of this operation is highly disputable, as it would incur $1.8 billion in losses for RosUkrEnergo, which is currently searching for ways to cover these losses.

One option is to cover them by exporting some 15 billion cubic meters of gas inherited through the agreement to Eastern Europe, where prices are higher.

Last year, RosUkrEnergo bought 53 billion cubic meters of Central Asian and Russian gas, supplying 37 billion cubic meters to Ukraine and about 6.5 billion cubic meters to Eastern Europe. The company is expected to have generated about $700 million of income before taxes last year.

The only catch to this operation lies in the fact that RosUkrEnergo requires the approval of Naftogaz to use its pipelines to export gas to Europe. The participants of the January negotiations say that RosUkrEnergo was cornered into acting as a smokescreen, as it would risk loosing permission to use the pipelines as an export route if it disagreed.

This is not the first time that RosUkrEnergo has relieved Ukrainian authorities. In the summer of 2005, when Naftogaz was accused by Gazprom of stealing 7.6 billion cubic meters of gas, RosUkrEnergo came to the rescue. The firm agreed to buy most of the fuel stored in Naftogaz's underground reserves, settling the dispute.

Apart from the uncomfortable position of acting as a screen disguising the real price Ukraine is paying for gas, RosUkrEnergo has another big problem to worry about. Having agreed to act as a buffer between Naftogaz and Gazprom, RosUkrEnergo runs the risk of turning into a storage device for Ukraine's gas debts to suppliers. Ukraine, of course, has a history of debts for gas consumed in the billion-dollar range.

Today, the situation is more serious, as gas prices have practically doubled and far from all consumers can pay the new price on time and in full. This year's cold winter has triggered cash-strapped municipal consumers to burn more gas than planned. And there is uncertainty hovering over the issue of what price this gas is being consumed at - gas consumed in January has yet to be billed by Naftogaz.

By preventing Naftogaz from raising gas prices, Parliament has only brought more uncertainty into this picture. The only way out for RosUkrEnergo is to insist upon the establishment of a distributor which it controls to ensure that payment is made on time and in full. RosUkrEnergo simply cannot leave this responsibility in the hands of Ukraine, which has a 14-year history of debt problems.

RosUkrEnergo is, after all, accountable to its suppliers Gazprom and Turkmenistan from which it buys gas supplied to Ukraine and Europe.

The main issue for RosUkrEnergo today is not whether consumer debt will pile up, but rather how big and manageable it will be.

The biggest danger area for RosUkrEnergo is Ukrainian officials themselves, since they appear incapable of understanding the details and ramifications of the gas agreement.

Recently, Economy Minister Arseny Yatsenyuk revealed that the government is preparing a special resolution to curb consumer gas prices at $110 per 1,000 cubic meters. What nonsense. Regulation of gas prices is the job of the National Energy Regulatory Commission, an independent body, not the Economy Ministry.

It is worth noting that the commission has issued a license to Ukrgaz-Energo, the joint venture set up by Naftogaz and RosUkrEnergo to supply gas on the Ukrainian market. More importantly, the commission did not slap a price limitation on Ukrgaz-Energo.

How can you cap the price at $110 per 1,000 cubic meters considering the following factors? First, a 20 percent value -added tax is charged upon import; roughly $10 needs to be added to the price to pay for Ukrainian gas pipeline services and a minimum of $5 needs to be added to the final fee to cover the Ukrgaz-Energo's salaries and expenses.

These additional, but required charges bring the price up to at least $129 per 1,000 cubic meters, which is not even close to $110 per 1,000 cubic meters.

The lack of understanding by Ukrainian officials of the obvious fact that RosUkrEnergo subsidizes the price of gas for Ukrainian consumers, hiding their own complete failure in gas negotiations with Gazprom, leads to one clear conclusion: RosUkrEnergo's fate looks bleak.
By Konstantin Borodin, Director Kyiv's Energy Research Center and an advisor to Yuriy Boyko, head of Naftogaz Ukrainy in 2002-2005. Kyiv Post, Kyiv, Ukraine, Wednesday, Feb 15 2006 /AUR Subscription

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