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Sunday, January 18, 2009

Gas [Or]Deal 2009: $360/$1.7 (A Preview)

During talks in Moscow on Saturday and early Sunday, Ukrainian PM Tymoshenko and Russian PM Putin appear to have approached a long-awaited gas deal.

Under the deal, to be finalized Monday, Ukraine gets 20% off Russia’s assumed asking price of $450/mcm while Russia retains the $1.7/mcm/100 km transit rate it paid in 2008. Starting with 2010, both countries switch to market pricing.

In the meantime, Ukraine will pay 80% of what Russia considers the going European rate for gas, pointing to Ukraine’s western neighbors.

By contrast, Russia will pay less than 50% of what Ukraine considers the going European rate for transit, based on the fees paid by the EU countries Russia quotes. (Ukraine transits up to 80% of Russia’s gas exports to the EU, over a distance of 1,240 km, or 770.5 mi.)

At the end of the day, Tymoshenko hardly emerges triumphant in what appears to be a win-lose outcome in the gas war between Russia and Ukraine.

As a presidential hopeful in the 2010 election, she now has to pass on the political price to Yushchenko, who had clung to a bid price of $201/mcm. His bid had come $49 short of Russia’s New Year ask price of $250/mcm. After the talks collapsed, Russia withdrew the offer, raising the price to $418/mcm and, later, to as high as $450/mcm.

Slapped with $360/mcm, Ukraine will struggle to minimize its losses, relying more on coal and boosting domestic gas production. The gas reserves provide a few months’ buffer stock, amid lower demand from the country’s crisis-stricken industry.

Some may even see a silver lining: The oligarchs will now have more incentive to invest in energy efficient technology rather than siphon their profits to offshore banks.


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