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Moscow relief at higher cost

By IGOR TOMBERG, UPI Outside View Commentator   |   Nov. 30, 2007 at 11:18 AM   |   Comments

MOSCOW, Nov. 30 (UPI) -- When Turkmenistan announced last week it would raise the gas price for Gazprom by 30 percent, the Russian energy giant actually sighed with relief.

It had long expected Ashgabat to raise the prices, and $130 per 1,000 cubic meters is a moderate price for today, considerably lower than the rumored $150. In the end, the news is one more proof that Russia's increase of gas prices for Ukraine is justified.

On the other hand, an agreement on new prices has not been signed yet. Ukrainian President Viktor Yushchenko said Ukraine was prepared to pay $160 per 1,000 cubic meters; this is not a contractual price but only a vocalized desire. The price might be $180, depending on the format and party leanings of the new Ukrainian Cabinet and the board of Ukraine's state-owned oil and gas company Naftogaz.

Prices are not the only problem in gas relations between Moscow and Kiev. Another problem is debts, which the two sides addressed a month ago. The system of paying for Russian gas through the sole supplier of Russian gas to the country, RosUkrEnergo, which is 50 percent owned by Gazprom, malfunctioned because of the rapidly growing consumer debts.

The debt portfolio of RosUkrEnergo went from $100 million to $3 billion in 2006. By October 2007 the debts of Naftogaz to RosUkrEnergo exceeded $700 million, and UkrGazEnergo, a joint venture established by RosUkrEnergo and Naftogaz, owed $300 million.

The debt problem showed that it is not enough to make direct gas deliveries to Ukraine; it is also essential for the clients to pay for them. Analysts encouraging Gazprom to learn the routine of collecting payments cannot be serious. Gazprom said logically that if the political future of the Ukrainian authorities depends on Russian gas deliveries, they should ensure the uninterrupted operation of effective, if not very efficient, schemes.

The signature of Ukrainian Prime Minister Viktor Yanukovych on the agreement on debt repayment will settle the problem, but it would also make the Ukrainian government the guarantor of repayment. This will give Gazprom a formal pretext for turning off gas in case of debts arrears. If Yulia Tymoshenko comes to power, it will be much more difficult to make the Ukrainian authorities pay for Russian gas.

Even a layman will tell you that Gazprom will have problems with its clients. Ukraine, Belarus, Moldova and other former Soviet republics depend on Russian gas deliveries almost fully, while Europe imports 25 percent of its gas requirements from Russia. Yet gas prices depend on European deliveries, and their growth will determine Gazprom's strategy of gradually leveling off prices for all of its clients.

Gas prices are growing rapidly, and Russia will have more conflicts with the former Soviet countries over its attempts to adjust gas prices to European standards.

Gazprom intends to raise gas prices for Western Europe by 60 percent in 2008. Deputy CEO Alexander Medvedev, head of Gazprom Export, said on Nov. 20 that gas prices for Western Europe might grow from the current $250 to $300-$400 next year.

A "third gas war" may be provoked not only by growing energy prices and the fall of the U.S. dollar. According to Medvedev, Gazprom believes that the European Commission's plans to liberalize the EU energy market are spearheaded at the Russian gas monopoly's investment plans.

"The liberalization of the European (energy) market will create a situation where prices will soar," he said.

This may threaten Gazprom's plans to increase its share in gas supplies to Europe to 33 percent by 2015 in response to the growing gas consumption. Putting forth the concern's views on the European energy initiatives, Medvedev warned the EU about "a serious negative effect (this may have) on long-term supplies of natural gas to Europe," unless the European Commission revises its stance. He even hinted that Gazprom might turn off gas, as it did in relations with Ukraine and Belarus.

The expected decision by Turkmenistan to raise gas prices for Gazprom is one more proof of the global trend of unstoppable growth of fuel and energy prices. The process is bound to provoke conflicts, because the clashing interests of the supplier and the consumer increase tensions at the price talks.

One more factor in the case of Russia's CIS neighbors is the psychology of consumers who had received Russian natural gas for peanuts for many years. No wonder the transition to market relations is so painful. Moscow has put an end to its fuel paternalism and is also ending its strategy of using subsidies to support domestic producers. All consumers will soon have to pay market (read: high) prices.

Gas-consuming countries have long sensed the trend. Brussels is thinking of diversifying gas supply routes yet has put Nord Stream to deliver natural gas from Russia to Europe along the bottom of the Baltic Sea on the list of priority projects, contrary to its own directives. Europe knows that it will be unable to satisfy its growing energy and environmental requirements without Russian gas.

Likewise, the CIS countries are aware of the worth of Russian gas, which is why 10 out of the 12 CIS prime ministers came to Ashgabat for a routine meeting last week, the highest attendance ever. All of them wanted to know the price of Turkmenistan's gas for Gazprom, but the news was made public only after the end of the meeting.

Gas suppliers and consumers in the Commonwealth of Independent States should at least coordinate their actions, if not act jointly. "We need an alliance of gas transiting, exporting and producing countries," Yanukovych said.

Although nobody openly supported the idea of a "gas OPEC" in Ashgabat, the centripetal trend is growing stronger by the day. Gas suppliers from the former Soviet countries will be able to coordinate their actions after they sign the agreement to build the Caspian pipeline. It is clear that Gazprom will accept the new price of the Turkmen gas, thereby opening the door to its expanded deliveries through the Russian gas transportation network.

The presidents of Russia, Turkmenistan and Kazakhstan are expected to sign the agreement in December, thus expanding gas transit from Central Asia across Russia. The construction of the Caspian pipeline and the expansion of the Central Asia-Center system will together account for some 100 billion cubic meters of gas a year.

Is an increase of $30 per 1,000 cubic meters too much to pay for promoting gas cooperation of the CIS countries?

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(Igor Tomberg is a senior research fellow with the Center for Energy Studies, the Institute of World Economy and International Relations at the Russian Academy of Sciences. This article is reprinted by permission of RIA Novosti. The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.)

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(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

© 2007 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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