Ukraine has no hope of lower prices for natural gas

During a video-bridge between Kyiv and Moscow organized by RIA Novosti, Russian Duma Deputy Semion Bagdasarov stated that Russia was wary of the situation in Ukraine today and that “the current government in Russia should stiffen its economic position towards Ukraine, regarding relations with the North Atlantic alliance.” The deputy is of the opinion that Ukraine “needn’t especially count on any kind of discounted prices given the growing tensions in relations with the Russian Federation.”

               Mr. Bagdasarov went on to say, “The price of natural gas will now be regulated taking into account the three-way agreements between Russia, Iran and Qatar, the three largest producers of gas. This agreement was signed in order to prevent prices for natural gas from falling,” Mr. Bagdasarov added.

               In the opinion of Semion Bagdasarov, this agreement was also signed in order to depart from the formulas that were used for price-setting on gas, based on the price of oil. As the politician put it, the agreements between Russia, Iran and Qatar on gas prices are much more stable, compared to oil contracts with OPEC countries because OPEC involves many countries with different position. “Russia, Iran and Qatar will set their own terms. As to the formula where the price of gas was tied to the price of oil, you can forget about it,” the Duma Deputy emphasized, advising Ukraine to brace itself for very high natural gas prices.

               At the same time, according to media reports, Russia’s Gazprom is expecting average prices for gas to go down in Europe in H2’09, in line with declining oil prices. This statement was made by Gazprom’s Director of External Economic Activities Stanislav Tsygankov. “Given that the price of gas reacts with a nine-month delay and what’s going on on the market today, the average European price is going to fall to in the second half of next year,” said Mr. Tsygankov. The price in Gazprom external contracts is tied to world oil prices, which have fallen by two thirds, to $70/bbl, from its July peak.

               Reference: The formula whereby prices for Russian gas in Europe are tied to a basket of oil products has been in place since the 1970s, from the time when Germany’s Ruhrgas launched its project for delivering gas from Siberia to Europe. The USSR did not have enough large diameter piping to build a trunk pipeline and the Germans offered a trade scheme exchanging gas for pipes. The project stretched out for many years and Ruhrgas proposed tying the value of gas to prices for oil and petroleum products, since European banks were prepared to finance the project only on condition that it was predictable. As a result, nearly all soviet gas exports were contracted to Ruhrgas. How long this formula will continue to work is under question, now that Russia, Iran and Qatar have decided to establish a “Big Three of gas,” their answer to the OPEC oil cartel.