Ukraine To Halve Russian Gas Purchases In 2012

By Ilya Kharlamov and Maxim Izmailov

In 2012 Ukraine plans to buy 27 billion cubic meters of Russian gas, which is almost twice less than it was planned earlier, Energy and Coal Industry Minister Yury Boiko said. He added that gas talks between the two countries would continue.

Boiko said that the talks would go on until the parties find a solution which is acceptable for Ukraine’s economy. Kiev still finds the current gas contracts with Moscow to be one-sided and is demanding a lower gas price. Although the Ukrainian Prime Minister Nikolai Azarov expects progress in talks to be made already this year, Ukraine has decided to limit its Russian gas consumption.

Under the current contracts, Kiev is to pay Moscow for the purchase of 33 billion cubic meters of gas annually regardless of the amounts of gas consumption. The head of Russia’s Gazprom Alexei Miller stressed that the parties are working under the formula “take and pay”.

Last year, Kiev bought 40 billion cubic meters of gas from Moscow. Now Ukraine has decided to buy 27 billion cubic meters instead of 52 billion planned earlier. The intention is still the same – namely to lower the price on Russian gas, the head of the Ukrainian department at the Institute of the CIS countries Vladimir Kornilov says:

“The high gas price kills competition among Ukrainian companies, making their products unprofitable. The experience of 2008 showed that some companies in the chemical and metallurgy industries may have to stop their operations if the gas price is that high.”

Meanwhile Ukraine has not made any concrete proposals to Russia on gas projects but Moscow hopes to hear them soon. The most possible variant, which has been discussed for quite awhile is the sale of the Ukrainian gas transportation system to Russia and the creation of a joint gas transportation consortium. Experts believe this scenario would really help to cut the gas price for Ukrainian companies. In its turn this would increase their competitiveness and create new working places. But for Russia the purchase of the Ukrainian gas transportation system is not profitable. Kiev wants $20 billion for it but this price is unreasonably high, Miller says. The head of the Russian-Ukrainian information center Oleg Bondarenko agrees with the head of Gazprom:

“It is likely that a joint venture will be set up and Ukraine’s gas transportation system will have several owners – Russia’s Gazprom, Ukraine’s Naftagaz and, for example, a German company.”

Meanwhile the priorities of the development of Russia’s energy sector still include the construction of new international gas routes such as the North and South Stream pipelines, which are to link Russia with Europe bypassing transit countries. By the way, the construction of the South Stream will cost less than buying Ukraine’s gas transportation system. According to Alexei Miller, apart from buying out a share in the joint venture Moscow will have to invest into the upgrade of the transit pipe, which may cost up to 8 billion euros. The gas price discounts that Ukraine wants to receive should also be taken into account. They would cost Russia $9 billion annually. For reference – the construction of the South Stream pipeline one half of which is paid by European partners will cost only 16 billion euro.