Russian gas deal with Ukraine derailed by valuations of GTS

By bne IntelliNews January 20, 2012

bne -

Gazprom has been negotiating two JVs that would give it a stake in Ukraine's gas transportation system (GTS) and a monopoly over gas imports, trading and distribution, reports Vedomosti. However, sticking points over the price and method of payment for the GTS stake, may have blocked the plan for now.

Ukraine has been locked in talks with Moscow for months as it seeks to secure a lower prices for gas. The details have remained unknown, but it has become clear that Russia has been playing hardball as its neighbour's economy struggles. Now the business daily has published what it claims were the main points of discussion.

The main issue to be thrashed out looks to be the valuation of the GTS, with Ukraine looking for $20bn, twice the value that Gazprom puts on it, whilst there are also likely differences in the method of payment.

Gazprom wants to set up two parity joint ventures with Ukraine, according to a document Vedomosti claims to have seen. One JV would hold full ownership of the GTS initially on a 50-50 basis. A consensus on a third European partner would then be reached, whereby Gazprom and the European company would each hold 33%, with Ukraine's Naftogaz retaining 34%.

The second JV would have a monopoly on gas imports to Ukraine and the purchase of gas from Ukrainian gas producers. Ownership would be split 50-50. The JV would also have exclusive rights to sell gas to Ukraine's domestic users and distribute the gas. For this purpose, Naftogaz would transfer to the JV all its gas distribution assets, and perhaps consolidate into the structure all private gas distribution structures.

However, Gazprom reportedly wants to pay for its shares in the JVs not in cash, but in treasury shares, while Gazprom's valuation of the GTS appears to be half of that of the Ukrainian side.

A Gazprom source is quoted as saying that the Russian company assesses the value of the GTS at $10bn, given depreciation of the assets. However, Gazprom CEO Alexei Miller said earlier that Kyiv values the GTS at $20bn.

The Russian valuation would mean that the 50% stake in the JV would cost Gazprom 3.6% of its shares; the Ukrainian valuation would demand 7.2%. Gazprom's subsidiaries hold around 3.6% of its shares, Vedomosti points out.

The proposition also contains a number of guarantees from the Ukrainian side to Gazprom against all losses in the event of third-party claims on the assets, against state regulation of gas transit tariffs and for security of investment and property. It also prevents any privileged rights such as a golden share.

The document also seeks guarantees that the JVs would not be affected in the event that the third energy packet of the EU's Energy Charter - which demands the unbundling of supply and distribution assets - were introduced to Ukraine. However the document contains no guarantees from Gazprom regarding investment, and also does not specify the price of gas for Ukraine.

"The fact that Gazprom planned to contribute its shares instead of cash might be one of the reasons why the deal did not go further," argue VTB Capital analysts. "However, we believe that the valuation issue was a much more important part of the negotiations (and one which has yet to be resolved)." The analysts view the deal as politically motivated and fear it could be value destructive if valuation of Ukraine's GTS is too high.

"Gazprom's valuation is more realistic" argues Uralsib analysts. With Ukraine set to receive less than $4bn in gas transportation revenues in 2012, assuming a similar margin of 50% as for Transneft, and with capex requirements potentially large enough to consume all cash flow for the next two-three years, they find Gazprom's $10bn estimate far more realistic than Ukraine's.

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