As the gas saga rolls on, I have decided to outsource commentary on the subject to an article appearing in today’s Russian daily Vremya Novostei. The translation is mine, though bear in mind it was hastily done, so please forgive me any sloppiness:

Turkmen Recidivism

By Alexei Grivach

Yet again Saparmurat Niyazov has decided to hike gas prices
For the second consecutive year in President Saparmurat Niyazov has presented the same winter surprise for purchasers of Turkmen gas. During last Friday’s Cabinet meeting he informed the gathered ministers of an increase in the price for gas exports in 2006, to $60 per 1,000 cubic metres.

Russia, Ukraine and Iran will be offered the opportunity to finalise contract negotiations till 10 December. He adopted his customary explanation, citing the considerable growth of global oil-and-gas prices and costs of the equipment used for gas extraction.

In similar fashion, Turkmenbashi last year attempted to raise prices up to these levels, complaining about the rise in the cost of pipes and other assorted hardware. On that occasion, the bid was partly successful. Both Gazprom and Naftogaz Ukraina now pay $44 per 1,000 cubic metres of Turkmen gas in hard cash, whereas they previously paid for half that amount in industrial goods and services. Significant retail margin was lost along with the barter agreement, with the consequent price of Turkmen gas dropping by one-third. Gazprom and Naftogaz argue that they have sealed binding contracts with Ashgabat with a specifically designated price. However, bearing in mind Gazprom and Naftogaz’s shortfall in gas reserves, Moscow and Kiev may well be compelled to be more compliant.

The plan for 2006 was for Gazprom to buy 10 billion cubic metres of Turkmen gas as stipulated according to the terms of a 25-year contract; Naftogaz is due 36 million cubic metres as per a contract due to end in the five years’ time; and Iran, which has also signed a long-term agreement for gas supply, plans to import around 8 million cubic metres over the same period. According to calculations, therefore, Niyazov would stand to boost his coffers to the tune of $864 million, of which $160 million would come from Gazprom, while the bulk of the hike would be borne by the Ukrainian company, which would owe a further $570 million.

It is no surprise, therefore, that Naftogaz CEO Alexei Ivchenko should have reacted so promptly to Turkmenbashi’s initiative. “The Turkmen party’s agreement with us [for 2006] is for $44 per for one thousand cubic metres. Consequently, in spite of these various statements, we shall stick to our mutual contract obligations,” he told journalists last Saturday. That said, there wasn’t much else he could say.

Last Friday, a majority of the Ukrainian Supreme Council voted in favour of an inquiry to the Naftogaz CEO’s suitability for his position. Almost political forces in the Ukrainian parliament, with the exception of pro-Presidential fractions, have supported appeals for Ivchenko’s resignation. The reasons for this are based on his perceived inability to come to an agreement with Russia over conditions of gas transit and delivery, and his fraught relations with Ashgabat. Also, besides being Naftogaz CEO, Ivchenko is also the first deputy Minister for Fuel and Power, a conflict of interest recently recognised by the courts. Last Friday, Ukrainian Prime Minister Yury Yekhanurov pledged to separate these posts. Ivchenko’s only chance of maintaining chairmanship of Naftogaz will be if President Viktor Yushchenko’s feels it is necessary to resist caving in to pressure from the parliamentary opposition.

Gazprom have not offered any comments over the weekend. Previously, Gazprom management spoke to Vremya Novostei about the existence of a rigid, international contract covering 2006, and assured the paper that any persistence on the part of their Ashgabat counterparts could result in international legal arbitration. That notwithstanding, last year Gazprom was prepared to go a whole quarter without importing gas supplies from Turkmenistan, while secretly negotiating for a compromise deal. The result of these talks, as is well known, was the refusal to accept a barter agreement and to maintain the rate of $44 per 1,000 cubic metres.

Furthermore, in 2007 Russian gas imports from Turkmenistan are set to rise sharply, to at least 45 billion cubic metres. Negotiations for the pricing scale and start reference point for that year have not been agreed upon. It is unlike that Gazprom will be able to painlessly turn down such an enormous quantity of gas, which is effectively already part of its portfolio. Moreover, a few days ago Gazprom signed an agreement with Kazakhstan largest gas company, Kazmunaigaz, to handle the transit of Turkmen and Uzbek gas, the details of which suggests that the capacity of the pipeline will simply be unable to handle 45 billion cubic metres of Turkmen gas*. As things currently stand , it will be almost impossible for Gazprom to go proceed much further with Turkmenbashi.

[* According Kuzmunaigas CEO Uzakbai Karabalin, “the agreement is for five years and allows the transit of Uzbek and Turkmen natural gas via Kazakhstan to be increased to 55 billion cubic meters from the current 47 billion.”]