GAZPROM AND UKRAINE AGREE ON 2008 PRICES, 2009

C O N F I D E N T I A L MOSCOW 000715 SIPDIS SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR HARBERT, HEGBORG, EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER E.O. 12958: DECL: 03/14/2018 TAGS: EPET ENRG ECON PREL RS SUBJECT: GAZPROM AND UKRAINE AGREE ON 2008 PRICES, 2009 PRICES MAY BE A PROBLEM REF: A. ASTANA 494 ¶B. MOSCOW 637 Classified By: Ambassador William J. Burns for reasons 1.4 (b/d) -------------- 2008 PRICE DEAL -------------- ¶1. (SBU) In what may be the last chapter in the Ukraine-Russia gas trade saga for this year, Gazprom announced a deal was reached on March 13 with Ukraine's NaftoHaz that sets prices for 2008 gas supplies. According to Gazprom, from March to December 2008, NaftoHaz will pay $179.50 per thousand cubic meters (mcm) for "no less than" 49.8 billion cubic meters (bcm) of gas from Central Asia, delivered to the Russian-Ukrainian border. NaftoHaz will also pay $315 per mcm for an unspecified amount Russian gas delivered in January and February, which was at the heart of the debt dispute of past weeks (ref B). The agreement allows NaftoHaz to pay this debt in gas in lieu of cash, a potentially more attractive option for Ukraine. ¶2. (SBU) As part of the agreement, Gazprom will be able to sell "no less than" 7.5 bcm of gas to Ukrainian industrial consumers through a subsidiary. This clause presumably compensates Gazprom for the loss of its 25% share of intermediary UkrHazEnergo (UHE),which will be eliminated. Previously UHE, owned 50-50 by intermediary RosUkrEnergo (RUE, itself 50% owned by Gazprom) and NaftoHaz, sold gas directly to the lucrative Ukrainian industrial market. (Note: Presidents Putin and Yushchenko had reportedly agreed to eliminate RUE as well, but the fate of RUE is not addressed in this latest agreement.) ¶3. (SBU) According to Gazprom's announcement, negotiations over 2009 supply terms "will proceed with regard to Central Asian gas prices." In that regard, two days earlier, Gazprom announced that it had reached an agreement with Central Asian producers that calls for "European" prices for their gas beginning in 2009 (ref A). -------------- COMMENT -------------- ¶4. (C) The agreement leaves unanswered the question of long-term prices. The Gazprom-Central Asia deal, if implemented, would be bad news for Ukraine, which could find itself paying substantially more for gas next year. However, that said, true "market prices" would significantly reduce the distortions and disputes caused by the current annually-negotiated pricing schemes and could also reduce any justification for RUE or any other intermediaries. While higher Central Asian prices loom in the out-years, the likelihood that they will be real "market prices" (i.e. responding to supply and demand in the face of competitive alternatives) remains to be seen. BURNS