COMMENT: Russia-Ukraine gas dispute in danger of flaring up again

By bne IntelliNews February 23, 2009

Viktor Stefanyshyn of Erste Bank -

Due to unpaid debts from consumer, the state gas company Naftogaz Ukrainy probably won't be able to pay Gazprom for the February gas. This will result in sanctions and possibly in further tensions between both parties. The payment is due on March 7 and is estimated to be $360m-450m based on the price of $360/'000 cubic metres (cm) of gas, without sanctions.

The total consumer non-payments to Naftogaz have already crossed the UAH6bn mark since the beginning of 2009. This happened due to non-payments from the utility companies, industry and households. The debt of utility companies totals UAH4.57bn. The government is currently experiencing problems with filling in the income side of the budget, which has negatively impacted the subsidies to local utility companies (heating, warm water supply etc.), which are heavily dependent on budget support. Local industries are also going through difficult times as the markets cool. And the income of the households has decreased too, as many employees were fired and wages/bonuses cut. Thus, the payment discipline for gas has strongly worsened.

Naftogaz has already begun to implement extreme measures. Heating in the cities of Dnipropetrovsk and part of Lugansk were cut off, as the gas supply was limited for non-paying utility companies. Similar measures were threatened in Lviv, Zaporizhia. More such cases are expected, as only 10% of utility companies pay up on time. In Ivano-Frankivsk the planned stopping of gas supplies didn't succeed due to the organized resistance of local people. It is clear that this situation will result in further social tensions.

What can we expect?

If Naftogaz won't pay in full for the gas on March 7, it will result in a change of payment approach from post payment, which we had currently, to pre-payment starting from the following month and till the end of the contract in 2019. Additionally, Gazprom might impose a fine of 0.03% of the delayed payment for each day of delay. Knowing the difficult situation in Naftogaz, this might result in further problems for the state monopoly.

Another area of the contract that might cause problems is the high amount of contracted gas for this year at a time when gas consumption will fall due to the cooling of the local economy. Previously, Ukraine has imported 54bn cm of gas in 2008 and 50bn cm of gas in 2007. For 2009, the contracted amount is 40bn cm of gas, and for 2010-2019 is set at 52bn cm/y. The yearly contract size can be changed six months in advance for each year, but the new amount cannot be higher or lower by more than 20% from 52bn cm/y; and this option might be implemented only for 2010 and following years.

If the yearly consumption volumes fall below 80% of the contracted amount (below 32bn cm of gas for 2009), Ukraine will still have to pay for 80% of the contracted amount. Further weak place of the agreement is the regulation of monthly contracted volumes and fines for monthly under-consumption. These volumes are agreed 15 days in advance for each coming month, and can be changed within the quarterly contracted volumes according the agreement of both sides. For the consumption of less than 94% of the contracted monthly volume, the consuming side pays the fine of 150% in October-March or 300% in April-September of the unconsumed gas. We don't have the information about the contracted amount of gas for February, but if we spread the quarterly contracted amount evenly over the months, this would result in 2.0bn cm of gas to be consumed in February 2008. According to the Ministry of Fuel and Energy, the import of gas in February is estimated at 1bn-1.25bn cm. Thus the risk of risk of fines is quite possible.

What can be done to prevent an escalation?

Naftogaz might pay Gazprom from its own resources. Due to the problematic financial situation of the company, Naftogaz could receive a loan from one of the state-owned banks to carry out this payment. But it is obvious that such solution is not a long-term one.

The company could also implement further measures to improve the payment discipline of customers, which might increase the risk of social tensions. The Association of Ukrainian Cities has recently asked the Ministry for Housing and Communal Services of Ukraine to introduce a bill allowing for property seizures for housing utility debts in an attempt to find a solution for the non-payment problem.

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