Gazprom Raises Ukraine Gas Price as Government Seeks Cash

Apr 01, 2014 1:21 pm ET

(Updates with Moody’s rating review in ninth paragraph.)

April 1 (Bloomberg) -- Russia’s natural-gas export monopoly raised prices for Ukraine 44 percent after a discount deal expired, heaping financial pressure on the government in Kiev as it negotiates international bailouts.

OAO Gazprom said Ukraine is losing its right to pay less because it has piled up a debt of more than $1.7 billion since 2013. Ousted President Viktor Yanukovych won a lower price at the end of last year as he grappled with protests after ditching an association agreement with the European Union, on top of a previous discount in April 2010. That may also be overturned, according to Russia’s government.

“The December gas discount can no longer be used,” Gazprom Chief Executive Officer Alexey Miller said today. Ukraine has failed to settle its debt for previous gas shipments and isn’t paying in full for supplies now, he said.

The move raises the prospect that state-run Gazprom may threaten to halt sales to Ukraine, which relies on Russia for about half its gas. European shipments were disrupted at least twice since 2006 when Russia cut Ukraine’s supplies during price disputes. Gazprom’s pricing decision came after Russian President Vladimir Putin moved to reduce military tensions after annexing Crimea, saying yesterday that Russia’s withdrawing some troops from near the border with Ukraine.

Price Threats

Ukraine, completing a deal with the International Monetary Fund and waiting for U.S. aid, is critical to EU energy security because about 15 percent of European gas supplies travel through its Soviet-era pipeline network. In January 2009, a dispute between Russia and Ukraine disrupted deliveries to Europe for about two weeks during freezing weather.

The second-quarter gas price for Ukraine is rising to $385.50 per 1,000 cubic meters from $268.50 in the first quarter, Miller said. The average price for European customers this year is seen at about $370 to $380, according to the company’s forecasts.

The announced price still includes the 2010 discount, Sergei Kupriyanov, Gazprom’s spokesman, said by text massage. Ukraine’s price may rise by an additional $100 per 1,000 cubic meters “on the same day” that the Russian state makes a final decision to annul all documents signed under the so-called Kharkiv accord, Kupriyanov said.

That would move Ukraine’s price to a level about 30 percent higher than Gazprom’s EU customers pay.

Rating Review

Moody’s Investors Service said in a statement today that it may cut the bond ratings of Gazprom and OAO Rosneft, after it put Russia’s government bond rating on review for downgrade on March 28. Moody’s said it expects the companies’ ratings will not differ from the sovereign rating at the end of the review.

In Kharkiv in 2010, Ukraine agreed to extend Russia’s lease to the Black Sea Fleet base in Crimea from 2017 to 2042 in exchange for cheaper gas. Russia has no need for the accords after the peninsula’s accession, Prime Minister Dmitry Medvedev said last month, calling for Ukraine to pay about $11 billion lost to Russia’s budget.

Russian lawmakers began to approve legislation on annulling the Kharkiv accord yesterday. The government hasn’t publicly announced a deadline for a final decision.

Ukraine is also increasing the fees it charges Gazprom to ship fuel to Europe by 10 percent, Miller said. Gas transit to Europe through Ukrainian pipelines is proceeding as normal, Gazprom and Ukraine’s pipeline operator UkrTransGaz said today.

Ukraine’s Energy Minister Yuri Prodan asked the EU to step up efforts to ship natural gas shipments to his country to lessen the pressure from Russia, according to a letter he wrote to European Energy Commissioner Guenther Oettinger and published March 27 on the ministry’s website.

‘Serious Shock’

“Any serious shock is unlikely for now,” until Moscow voids the last discount agreement, Dennis Sakva, an energy analyst at Dragon Capital in Kiev, said today by e-mail.

Ukraine may use fuel from its underground storage facilities before it gets the IMF aid, which is expected this month, Sakva said.

Ukraine has a “very low” 7.2 billion cubic meters of gas in underground storage, Andriy Kobolyev, chief executive officer of state-owned NAK Naftogaz Ukrainy, told reporters in Kiev today. Naftogaz has asked regional governors to limit utilities’ gas consumption this month, he said.

Kobolyev said he planned to meet Miller this week, declining to elaborate on what they’ll discuss. Prodan told reporters that a delegation will travel to Moscow on April 3.

Ukraine still hasn’t got any materials from Russia on overturning the Kharkiv agreement, Prodan said.

“Ukraine considers Crimea its territory, so Russia’s Black Sea Fleet is located in Ukraine,” he said.

--With assistance from Kateryna Choursina and Daryna Krasnolutska in Kiev.