Russia's Gazprom may gain despite cheaper gas to Ukraine

Wed Dec 18, 2013 9:38am EST

* Ukraine deal seen political, but still may offer Gazprom economic benefits

* Gazprom may offset lower prices for Ukraine by increasing volumes

* Secret accords may give Gazprom access to Ukraine pipelines, storage, markets

* That might let Gazprom cut scale of South Stream pipeline project

By Vladimir Soldatkin, Olesya Astakhova and Denis Pinchuk

MOSCOW, Dec 18 (Reuters) - Gazprom will sell gas to Ukraine at a big discount under a deal agreed by President Vladimir Putin but the state gas company's losses may eventually be offset by an increase in Russian supplies to its neighbour.

Closer ties with Kiev could in time also give the state-controlled gas firm access to Ukraine's pipeline network, offering savings in pumping Russian gas to EU customers.

Putin, who oversees every major energy deal in Russia, said after Kremlin talks on Tuesday with Ukrainian President Viktor Yanukovich that Ukraine would now pay $268.50 per 1,000 cubic metres of gas instead of the current price of about $400.

The one-third price cut is at first glance a setback for Gazprom, meaning a reduction in profits to help Putin secure a deal which he hopes will keep Ukraine in Moscow's orbit and prevent it forging closer ties with the European Union.

"Gazprom is now funding it," Chris Weafer, senior partner with consultancy Macro-Advisory, said of the deal. "Here again, it is being used as part of Russia's foreign policy."

He added: "Minority investors in Gazprom are picking up the cost of that tab in terms of lost income from the cheaper gas."

The price cut, bringing Ukraine's bills down to levels more in line with European markets, had been expected, however. Gazprom shares, just over half of which are owned by the Russian state, were little changed on Wednesday.

Analysts said they expected Putin to use Gazprom in his efforts to both thwart EU plans to bring Ukraine into a free trade pact and also to forge a "Eurasian Union", an economic bloc stretching across much of the former Soviet Union.

"You can't measure everything by money in this life. The Russian elite still thinks that the Soviet Union's collapse is a bad thing," said Sergei Zhavoronkov of the Moscow-based Gaidar Institute for Economic Policy.

A source close to talks with Ukraine, which also stands to get up to $15 billion in Russian credits, said: "For Putin, it didn't matter what he could get from Ukraine. He was mostly preoccupied with how to hinder the Brussels' policy."

GAZPROM BENEFITS

However, sources at Gazprom and analysts said the company, which has a monopoly on Russia's pipeline gas exports, could nonetheless reap economic benefits in the longer term.

One source at Gazprom said some details were being kept secret to avoid fuelling protests in Kiev, where rallies have at times drawn hundreds of thousands of people angered by Yanukovich's rejection of the EU trade deal late last month.

"It's obvious that the volume of gas exports to Ukraine will rise," the source said, adding that Gazprom may also have secured lucrative rights to retail gas trading in Ukraine.

Analysts said Gazprom may also have won a stake in Ukraine's gas pipeline system, which feeds around a half of all Russian gas supplies to Europe. Gas storage facilities may be on offer too, the Gazprom source said.

One of Yanukovich's critics in Ukraine, Inna Bohoslovska, accused the president of giving Moscow access to the country's pipeline businesses. The two governments have declined comment.

Ukraine sees the pipeline network as a guarantee of its independence, and losing control over it could fuel protests.

Another Gazprom source said the Russian gas producer and Ukraine had already agreed on increasing gas supplies but he would not say by how much. Gazprom declined official comment.

VOLUMES BEAT PRICE

Russia and Ukraine have had fraught relations over gas. Gazprom shut off its export pipelines across Ukraine in the winters of 2005-06 and 2008-09 during price wars with Kiev.

A deal secured after the 2009 crisis forced Ukraine to pay one of the highest prices in Europe for Russian gas, and Kiev has said it had no option but to cut the volumes it buys.

According to Russia's Energy Ministry, Russia's gas exports to Ukraine fell by almost a fifth in January-October this year to 21.6 billion cubic metres (bcm), compared to 33 bcm in all of 2012 and 40 bcm in 2011.

Analysts said that if Russian gas exports to Ukraine, which was the second-largest gas market for Moscow after Germany last year, increased by around 10 bcm next year, this would offset the effects of price cuts on Gazprom's accounts.

Ukrainian Energy Minister Eduard Stavitsky has said Ukraine plans to import up to 33 bcm in 2014, which may still be not enough to offset the price cuts but would cushion the effect of cheaper gas for Gazprom.

"We believe that lower pricing for Russian gas means higher Ukrainian offtake. We estimate that should Ukrainian volumes return to the 2012 levels the impact on the (core profit) will be a positive 1.5 percent," Bank of America Merrill Lynch said in a note to investors.

To bypass Ukraine and secure safe passage of Russian gas to western Europe, Gazprom has built the 55 bcm-a-year Nord Stream pipeline on the bed of the Baltic Sea. It is also pushing ahead with South Stream via the Black Sea with total costs seen at $46 billion.

However, with more stable access to Ukrainian pipelines, Gazprom might reduce the scale of the South Stream project, some industry experts believe.

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