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Russian gas monopoly seems to accept the proposal by the Central Asian producers

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15:46 13.03.2008
text: Gazeta.kz
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Russian gas giant Gazprom has agreed with Kazakhstan, Uzbekistan and Turkmenistan to buy Central Asian gas at European prices starting in 2009. This means that the price could more than double to between $300 and $350 per 1,000 cubic meters. Apparently, Gazprom’s agreement was motivated by fear to lose the resource base as there are enough potential buyers of Central Asian gas, with both Europe and China ready to pay much more than Russia currently pays.

The last time that Central Asian gas prices were reviewed was at the end of last year. As a result, Gazprom pays $130 per 1,000 cubic meters of Turkmen gas in the first half of 2008, and will pay $150 in the second half of the year. Starting in 2009, gas prices would be determined by market rules, Gazprom announced. After that Gazprom agreed on the price of gas with Uzbekistan. It did not announce the price, but said that it was buying gas “from all Central Asian suppliers on similar terms,” ITAR TASS reported.

Earlier reports suggested that the average gas price for European consumers could stand at approx. $360 by 2009, but the estimate is higher now, at $380, and it could rise further to $400 per 1,000 cubic meters towards the end of the year, a source familiar with the situation told RBC Daily. Given the current boom in oil prices, they could climb to $420, analysts warn.

Denis Borisov, an analyst at IFC Solid, believes that the price of Central Asian gas could rise to between $300 and $350 (this does not include the costs of transportation to Europe, currently at about $50 per 1,000 cubic meters). Having agreed to buy gas at European prices, Gazprom becomes the transporter of Central Asian gas, losing profits from re-selling it to Western Europe, says Ivan Andriyevsky, a managing partner at 2K Audit-Business Consultations. With the existing gas pumping volumes (10-15 billion cubic meters of gas) and price levels, Gazprom will earn over $900 million a year, he calculated.

Gazprom’s decision to move to European prices was prompted by fear of alternative proposals from Europe and China, Borisov says. Today, Central Asian gas plays an important part in Russia’s gas supply, and this trend will continue for the next few years, especially given the expected increase in demand both at home and on the EU market. To maintain the status quo, Gazprom had to agree to the terms of the Central Asian producers.

This further reduces the chance for the planned Nabucco pipeline to transport Central Asian gas to Europe bypassing Russia (an alternative to the South Stream project), Borisov reckons. Once the price issue no longer matters, there will be no need for Central Asian producers to build costly direct routes to Europe, Andriyevsky agrees.

Also, the new agreements could lead to an increase in gas prices for Ukraine, according to analysts. The price for Central Asian gas that Gazprom sells to Ukraine is $179.5 for 2008, while the price of Russian-origin gas, which was delivered to Ukraine in January and February, is $314.6. “If the gas price for Ukraine rises, the entire responsibility will rest with Yulia Timoshenko’s government as there are still no gas contracts for 2008 and beyond,” said Alexei Fedorov, an expert with the Center for Energy Research in Kiev.

In the autumn, there were plans to sign an agreement until 2011, pegging Ukraine’s domestic gas prices to Russian ones and making the Ukrainian market more predictable. But this opportunity seems to have been lost as both countries are now engaged in a new gas war. A sharp increase in gas prices will bring Ukraine’s economy to stagnation, Fedorov says.

According to a source in Gazprom, Gazprom and Ukraine’s Naftogaz are due to discuss gas supplies to Ukraine on March 12. The negotiations could be affected by the Central Asian producers’ decision to raise prices, analysts say. Gazprom has not commented on the issue.

Source: RIA RosBusinessConsulting