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More Gas War Background

by DoDo Fri Jan 13th, 2006 at 10:28:37 AM EST

In the recent spat about the Russian-Ukrainian gas war,

  • Ukraine and many Western papers contended that Russia is just out to punish the Ukraine for turning to the West politically.
  • Jérôme argued that the real conflict was between the oligarchs on the two sides, who wanted to re-divide the cake; a cake that consisted of gas given by Gazprom essentially barter for transit of Western exports and then distributed in the Ukraine for profit, and nominally Turkmen gas sold for profit by a private company owned by parts of Gazprom's management.
  • In contrast, skitalets, blackhawk and slaboymni argued that the real issue is that the Ukraine exploited generous terms, to the extent of re-selling cheaply bought gas on its Western borders for market prices.

I won't further deal with the first version, forget it.

However, in the Hungarian magazine Élet ÉS Irodalom [= Life AND Literature] today, a researcher (of developments in the post-Soviet area at a scientific institute) gave a historical summary of the gas issue that reinforces parts of both versions presented at ET, but also gives further details that contradicts them in important points. Details below the fold.


Up first, a note: I myself am no energy expert nor post-Soviet politics expert, thus couldn't check the veracity of any claims, so don't debate me or accuse of bias (I can only give further details from the article, or admit that I lost oversight of the previous articles and missed something relevant).

The Turkmen gas scam
If the article is right, Jérôme missed one very important detail: the private company Itera, which first controlled the Ukrainian import of Turkmen gas, was controlled by the previous Gazprom management, and was set up when that management already suspected that Putin will fire them (in 2001). Consequently, the gas war had a long internal Russian prelude (more follows).

The re-export idea
The article gives only one concrete example of re-export, however, it connects re-export into the bigger picture at various points. The first is just the development of the Turkmen gas business (still back in 2000 under Kuchma): Ukraine didn't aim to re-sell Gazprom's gas, but Turkmen (=Itera) gas, which it was enabled by the specifics of Itera's transit agreement with Gazprom. Consequently, after the old management was fired, Gazprom exported gas to the West through the Ukraine with much less profit than Itera.

(This part of the story also had a Hungarian angle: in autumn 2000, there was a buy-up attempt of two Hungarian companies that were main industrial gas users, and which would have became Itera's buyers. The purchases failed.)

Pipeline is power
Ukraine pre-empted any moves of Gazprom's new management with a five-year treaty with Turkmenistan, thus limiting dependence on developments within Russia (e.g. the Gazprom-Itera battle). Fed up with these games, the new management aimed high: Gazprom attempted to take control of the whole pipeline network, in Russia and the Ukraine.  

(Later, in a 2004 gas war less noticed in the West, this would work against Belarus - and today, as a Gazprom manager tells a German paper, their official reason for selling gas cheaper to Belarus involves the 100% ownership of the pipeline.)

Itera was pushed out soon (hence Gazprom became the sole party in the transit but not in the position to change terms), and by June 2002, Schröder, Putin and Kuchma agreed to establish a tripartite joint consortia for the control of the pipelines (and Ukraine also got a 10-year agreement for transit). But concrete talks got nowhere - so not even half-success for Gazprom.

The Hungarian Connection
Gazprom's next attempt to control the Turkmen-Ukrainian gas business was two-pronged: in December 2002, four proxies (including Hungarian businessmen) created Eural Trans Gas in Budapest, which was meant to be Itera 2.0; and in April 2003, Gazprom bought up the Turkmen gas. Only, the Turkmenbashi was selling the same gas twice. The result was that Kuchma was not willing to play along in Eural - it died by the summer of that year.

Itera 3.0: Rosukrenergo 1.0
Not wanting a two-front war, Gazprom left Ukraine alone while the start of 2004 gas war with Belarus was fought. Then in the summer of 2004, something more like what Jérôme described emerged: the Turkmen gas import was turned over to Rosukrenergo, a company controlled by two shady off-shore companies (which may or may not have Gazprom managers behind them, the article doesn't say) and the managers of the Ukrainian company (Naftogaz). Rosukrenergo was reexporting on Ukraine's Western borders, too. Left out were the Ukrainian opposition's oligarchs.

Prelude to the war: Tymoshenko
I am not sure I fully understood this section, but if I got it right, Tymoshenko first focused her attacks on Rosukrenergo: first stopping reexport(!) for a short time, than starting investigations. (Thus not only was reexport not connected to the new government and not selling Gazprom gas, but the reexporters were attacked in an internal Ukrainian fight.) I note at this point that the single example of reexport the article mentions is the 3 bcm Turkmen gas Hungary got from Rosukrenergo in 2005.

Prelude to the war: Gazprom
Meanwhile, for its part, Gazprom made an offer in summer 2005 that is essentially blackmail: warming up its earlier strategy, they demanded that the Ukraine either pays $160 per cubic meter or gives ownership of the pipelines. On the other hand, either of these arrangements would still have allowed the continuation of the Turkmen gas reexport business, only with lesser profit - but not December's $230 ultimatum.

Poll
Which version is closest to the truth?
. Western press 0%
. Jérôme 22%
. ET's Russian crew 0%
. ÉS 0%
. None 0%
. Let's go geothermal 77%

Votes: 9
Results | Other Polls
Display:
although to be honest it's still not enough for me to make sense of the situation!

Geothermal seems like the way to go to me.

by Metatone (metatone [a|t] gmail (dot) com) on Fri Jan 13th, 2006 at 01:02:28 PM EST
Do my wild speculations below serve that purpose? ;-)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Jan 13th, 2006 at 01:23:07 PM EST
[ Parent ]
I still vote for geothermal.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Jan 13th, 2006 at 01:26:31 PM EST
[ Parent ]
All my hot air was biothermal!

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Jan 13th, 2006 at 01:37:12 PM EST
[ Parent ]
Good follow up to all the previous gas talk. Look forward to hearing what our local experts Jerome, skitalets, blackhawk, slaboymni and other have to say.

Interesting that so far all votes are for geothermal - are we tired of gas fights and all planning to dig in our backyards or local sidewalks to find the earthly heat?

More seriously are there any geothermal experts here at ET? Several friends & family members are looking into installing geothermal heating systems and I just found out my mom's family plumber has had a ground water based geothermal systems for 20 years now and spends 1000 Euro's a year to heat his house in the Bordeaux area.

I did find Dodo's Germany geothermal article from last august .

by Alexandra in WMass (alexandra_wmass[a|t]yahoo[d|o|t]fr) on Fri Jan 13th, 2006 at 01:05:18 PM EST
After some mulling over the article, I present my own ()very wild and unprofessional speculations, which happen to be a synthetised version that unifies the Russian, Jérôme and ÉS versions:

What if... the two separate groups within the 'Orange Revolution' group were in the same position as Gazprom: shut out of the lucrative business ran by the Kuchma-era group. After Tymoshenko failed to reign in Rosukrenergo, and to boot was fired, the group behind Yushchenko decides to act as rival - by reexporting Gazprom gas. But that way, they didn't just hurt the interests of the rival Ukrainian oligarchs, but the shady Russian managers partnering behind Rosukrenergo, and Gazprom itself. The Rosukrenergo 2.0 agreement involves the continuation of reexports at a raised level (only way to make the 30%$230 + 70%$50 = $104 > $95 Rosukrenergo trade profitable!), and involvement of Yushchenko-aligned oligarchs - the other two Ukrainian blocks rebel.

What about it?

To see less speculation, I would like to see the Russian reexport claims blackhawk mentioned in detail.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Fri Jan 13th, 2006 at 01:21:10 PM EST
Again, I seriously doubt any re-export claims myself.

The only instances I know of are the same scam, as it used to be played out in CEE countries: instead of the national company (say, MOL) buying the gas from Gazprom, MOL and Gazprom set up a JV that buys some of the gas that MOL used to buy, and then distribute it on the Hungarian market (in practise, reselling gas to MOL). Gazprom can claim to enter the supposedly more profitable downstream (retail) market. But the funny thing is that these JVs were almost never owned by MOL and Gazprom, but by affiliates or by shady vehicles like RosUkrEnergo, and they end up buyind the gaz not from Gazprom but from Itera or equivalents.

Again, let me repeat: not a single molecule of gas can leave Russia without Gazprom knowing it and agreeing to it. These deals, which are detrimental to Gazprom, are nevertheless done with the full complicity of someone within Gazprom - someone with the power to sanction such obviously senseless transactions.

Let me state this again - not a single molecule of gas has been "exported" out of Ukraine without high level Gazprom complicity - it is physically impossible. It's not a contractual issue, it's physics (you know, "nature doesn't break its own laws" certainty).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Jan 13th, 2006 at 02:47:50 PM EST
[ Parent ]
Jérôme, I hope I don't strain your patience with further questions - I'm trying to get an understanding here as a total non-professional, so I'm hypothetising and 'quibbling' in the hope that you can help sort me out this mess.

It's not about RosUkrEnergo - for the reasons you name here and bearlier, that there is no current Gazprom management entanglement within it seems rather unlikely (tough, side question to our Russian crew, I would like to see spelled out where else they suspect its ownership circle). Also, when I say 'Turkmen' gas, I'm only referring to the separate contractual regime, not trying to seriously contradict you.

I think the crux of what doesn't add up for me is in the years when, according to the ÉS article, there was no JV intermediary between Ukraine and the 'Turkmen' gas. E.g., the time between Itera and RosUkrEnergo, 2002-2004.

  • The earlier Gazprom managers gave Itera (themselves) the right to reexport 'Turkmen' gas. (The ÉS article says 41%.) The first question is, when the new Gazprom mamagement achieved killing off Itera after one year in office, who 'inherited' the reexport business? Did the Itera contracts continue without Itera, or did Gazprom 'inherit' them, or did Naftogaz 'inherit' those rights, as implied by blackhawk's quote?

  • If the latter, how did the establishment of RosUkrEnergo, if at all, change Naftogaz's existing contracts and contract-making 'rights'?

  • What exactly did pushing out Itera in 2002 meant for Gazprom? Did they 'inherit' some legal limitation on transit rates? (If yes, then in these non-JV years, it seems true that Gazprom could only make money on the basis of - real or illusory - transit rates, while most of the profit was collected by Naftogas and the Ukrainian private companies selling at home.)

  • Do you think it is possible that a faction within RosUkrEnergo, or an earlier JV formed in the Itera years, could run re-export above the amounts in the 'Turkmen' regime, while pretending that the deal is still within its limits? (I got this idea from Ukrainian rhetoric a week ago: when they said that the branched-off amount after Gazprom reduced its exports was the collection of outstanding amounts in the 'Turkmen' regime. This also implies that the non-constant level of gas imports is another, different reason why 'Turkmen' gas is illusoric.)


*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sat Jan 14th, 2006 at 05:40:17 AM EST
[ Parent ]
There is just not enough data to suspect one scheme or another, or presence of any scheme at all. So any theory will be as good as other.

As for re-exports, I don't have exact data, but Romania was mentioned. Word games are that Gazprom says it's a re-export, but Naftgaz names it "selling of it's out gas". Bottom line is that Naftgaz demands to have additional gas balance to have extra gas for reselling.

Also quick googling reveals:

CIA factbook for 2003 states this amount is 5.8 bcm.


Ukraine Will Keep Russian Gas

The experts of Ukraine gas market think that the decision not to re-export gas was a mistake.. According to former head of Naftogas of Ukraine Yuri Boiko, "the seizure of re-export will lead to braking of contractual agreement with a Western buyers and will create a lot of fines that Ukraine would have to pay."

The Naftogas' Chairman Alexei Ivchenko stated yesterday: "The gas re-export is the source of significant profits for Naftogas of Ukraine, for that reason, the cabinet;s decision is absolutely unacceptable. We should not by all means stop the re-export or we going to lose a huge amount of money. The Turkmenian gas we get for $60 per thousand cubic meters and sell it to Romania for $198. The deficit should be covered with additional purchases, but the gas re-export has to be continued."

Is this enough?

by blackhawk on Sat Jan 14th, 2006 at 12:41:56 AM EST
[ Parent ]
Thanks. This is an interesting quote, but I'll elaborate on that in reply to Jérôme.

However, IIRC you earlier quoted a (2005) figure of 10-15 bcm, and I was curious as to the source of that. Also, in 2005, Rosukrenergo was on the field - so what I'd like to establish from you too: in the Russian claim of Ukrainian reexport, which company is the reexporter?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Sat Jan 14th, 2006 at 04:57:08 AM EST
[ Parent ]
Forgot to add: the timeframe is also critical. How do the illegal re-exports claimed by Gazprom/other Russian sources correlate with (a) the Orange Revolution and (b) the ouster of Tymoshenko?

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sat Jan 14th, 2006 at 05:43:59 AM EST
[ Parent ]
Re-export I'm talking about Naftogaz (Ukraine) export. 15 bcm is a conjection, based on 7.x bcm(export from Ukraine's gas balance) plus 7.x bcm "lost" in storage tanks (USTs) in 2005. This may not be exactly accurate, as gas in USTs may have been sold in the previous years. So the figure is somewhere between 7.x and 15. There is no timeframe tied to the political events - gas is just being exported as per contracts Naftogaz.

Now, for operator companies (Itera & Co). All Turkmen gas is being transported by them and details about how Gazprom gets payed for the transit differ. However, from Ukraine's perspective Itera was getting 41% of all gas volume, ETG 38% and RosUkrEnergo 37.5%. I assume this gas, minus technological losses, is being exported through Ukraine.

From Gazprom's perspective Ukraine is a trouble customer. Main problem is that it was nearly impossible to extract any payments. So bad debts accumulated. At the same time (1997-1999) import of Turkmen gas stopped. Reasons were: lower gas prices, high transit fees and different contractual and JV disputes between Turkmenistan and Gazprom/Itera. Also Turkmenistan was not considered a good supplier by Gazprom: Turkmenbashi has a history of renegotiating the contracts and stopping gas supplies.

Itera became a solution. Ukraine was getting Gazprom gas in swap for the transit (no money involved, so no bad debt) and Itera was transporting Turkmen gas bought by Ukraine. In no way Itera is a shell company: was involved in Turkmen pipelines repairs, new pipelines across CIS and at some point was selling gas to big end customers in Ukraine (i.e. enough "political" clout to get access to distribution). At the same time it became big enough to compete with Gazprom on CIS and EE markets and also was getting a lot of preferential treatment from Turkmenistan, Gazprom and Ukraine.

After Itera operator was Eural Trans Gas (ETG).

In 2005 RosUkrEnergo became an operator with 37.5% price for the transit. They inherited part of top management from ETG. Ownership of RosUkrEnergo, as announced at the beginning of 2005, is 50% Gazprombank (100% Gazprom) and Reiffeisen Investment AG (undisclosed ownership, has business interests in Ukraine and Russia).

Both ETG and RosUkrEnergo were criticized by several politians in Ukraine. Timoshenko is most outspoken and suggests getting Itera back into business.

by blackhawk on Sat Jan 14th, 2006 at 11:38:36 AM EST
[ Parent ]
Ivchenko says they got confirmation that Reiffeisen Investment AG is 100% owned by Reiffeisen Bank (branches in Ukraine, too) and in talks with Reiffeisen Bank to buy out their share in RosUkrEnergo.

So RosUkrEnergo's effective ownership is 50%/50% Gazprom/Reiffeisen Bank.

by blackhawk on Sun Jan 15th, 2006 at 03:37:40 AM EST
[ Parent ]


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