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Time for court. Ukraine raises gas transit prices

Time for court. Ukraine raises gas transit prices
Translated by: Mariya Shcherbinina
The Cabinet of Ministers approved a new method of establishing gas transportation tariffs. Gazprom will have to pay more

Starting November 1, Ukraine will switch to the European system of tariff creation for the transportation of Russian gas on its territory. Theoretically, this means Gazprom will have to pay more for transit. The government already ordered Naftogaz to conduct talks regarding the reexamination of the transit contract with the Russian monopolist. Naftogaz thinks that amending the legislation will reinforce the position of the Ukrainian side at the meeting.

LIGABusinessInform tried to find out whether amending Ukrainian legislation will help in court with Gazprom and how much more expensive gas transit through Ukraine will become.

Transit and court

On October 9, the Cabinet of Ministers published order #510 (passed back on September 3), which fully changes the system of establishment of tariffs on the transportation of Russian gas through Ukrainian territory.

According to this document, Ukraine is switching to an input/output method of tariff calculation. This method is one of the demands of EU legislation.

Which means that starting November 1, the customer (Gazprom) will have to pay a separate tariff at each point of entry to the Ukrainian gas transportation system and each outlet from it. These tariffs are outlined in the document and will be effective until the end of the year. What is more, Gazprom will separately have to compensate the operator of the gas transportation system (Ukrtransgaz) with the volumes of natural gas used for productive and technological expenditures for transit. However, this is all still theoretical.

In practice, the relations between Naftogaz and Gazprom in the sphere of gas transit are regulated by the appropriate contract signed in 2009 by Yulia Tymochenko’s government. This contract prescribes a completely different tariff-creation system. The transit rate for every 100 kilometers of distance is calculated using a special formula and depends on the cost of Russian gas for Ukraine and the inflation level in the European Union.

The discordance of the new Ukrainian legislation with the conditions of the contract between Naftogaz y Gazprom is the main intrigue. The issue is that the transit contract is regulated by Swedish law and may only be changed with the consent of both parties or a decision on part of the Stockholm Court.

In the end of July, Naftogaz sent an official demand to Gazprom to reexamine the transit contract. In case the parties fail to reach an agreement, Naftogaz will go to court. The question is whether the switch to the European tariff creation method become an argument in support for Naftogaz in court.

“The amendment to Ukrainian law may theoretically be interpreted in court as an emergency situation, but only if it makes the contract execution impossible,” says barrister at Ilyashev and Partners Dmytro Shemelin. “If the amendment to the legislation only gives benefits to one of the sides, the court may interpret this circumstance completely differently.”

“The order will allow to reinforce the Ukrainian position in the talks process with Gazprom,” the Naftogaz press service reported. “Contract relations for gas transit have to be accorded with the norms of the third energy package of the EU, which Ukraine is to implement before January 1, 2015.”

A dilemma for Gazprom

If the contract with Gazprom is rewritten based on the new method, transit may become more expensive for Russian gas. It is a significant sum for the Russian company. Last year Gazprom exported over 165 billion cubic meters of gas to Europe, half of which were delivered using the Ukrainian gas transportation system.

In the fourth quarter of the previous year the rate for the transit of Russian gas through the territory of Ukraine constituted $3,03 per thousand cubic meters per 100 kilometers of distance (Ministry of Finance data – ed.). Taking into account the average length of transportation from the eastern to the western border of Ukraine, being 1240 kilometers (this number is noted in the 2009 contract), the transit of one thousand cubic meters of Russian gas costs Gazprom $37.

The new tariffs prescribe that Gazprom will not pay for the kilometers of distance but at the entry and exit from the gas transportation system. For example, the tariff at the entry point ‘Sudzha 1200’ is established at $14,16 per thousand cubic meters. At the exit on the border with Slovakia (‘Uzhgorod’ point), it is $31,3. As such, Gazprom will have to pay 20% more for transit – $45,46 per thousand cubic meters.

The domestic market

The switch to the input/output tariff-creation method means not only a change in tariff policies in regard to gas transit, but also the policies regarding the transportation of fuel inside Ukraine.

According to the government order, starting next year the new method should start working for Ukrainian gas traders as well. But the approval of one government order is insufficient for this, thinks CEO of Neftegazstroyinformatika Leonid Unigovsky.

“There is no systemic work to reform the domestic market at the moment,” he says. “The input/output method prescribes that inlets and outlets are determined throughout the entire GTS. The inlets are not just import: they are gas sources, pumping into the underground reservoirs. The outlets are consumption, pumping out of the underground reservoirs. There is no such government decision yet.”

Translated by: Mariya Shcherbinina
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