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Monday, July 28, 2008

Treaty Is a Treaty

Dmitry Medvedev and Gurbanguly Berdimuhammedow// Gazprom becomes Turkmenistan’s donor
July 28, 2008 - Kommersant by Natalya Grib, Olga Mordyushenko - Gazprom to pay Turkmenistan for its gas at a market price and give it a 0% credit Gazprom has signed an agreement about Turkmenian gas pricing principles. Starting from 2009 its cost for Russia will be counted basing on the European and Ukrainian prices, and thus rise from the current $140 per thousand cubic meters to $225–295. Besides doubling the purchasing price under the circumstances of an increase in financial resources price, Gazprom will pay for its maintaining control over Turkmenistan’s gas giving 0% credits to a number of local projects. Friday, in the course of Gazprom CEO Alexey Miller’s official visit to Turkmenistan two basic agreements about a new scheme of gas purchasing were concluded. They feature price formation principles and, according to Mr Miller, envisage a transition to market principles of pricing in the framework of a long-term contract of Gazprom and Turkmenistan till 2028. The second agreement binds Gazprom to allocate 0% credits for different Turkmenian projects. A high-ranking official told Kommersant that the draft agreements about pricing principles stipulate a different base for calculating the price formula. In the first case the base price is a mix of an average wholesale price in Europe, prices in Ukraine’s home market and in Southern Russia in equal proportions, that is in 33% - for the six previous months. According to the second variant, the base price consists of wholesale gas prices in Europe and Ukraine in the 50/50 proportion. The official explained it to Kommersant that transportation costs are deducted from this base price and “various coefficients are also introduced.” Valery Nesterov from Troika Dialog considers that “Gazprom won’t lose anything whatever the variant because it’ll impose extra costs on Ukraine when purchasing gas.” Depending on whether the low gas price in the south of Russia ($70–80 per thousand cubic meters) is included in the formula, the expert opines that with the present price in the EU at $410 the purchasing price in Turkmenistan can range from $225 to $295 per thousand cubic meters in 2009. In the first case Gazprom will have to pay for Turkmenistan’s gas $9.45 bln more than this year, and in the second case - $12.4 bln more. However, these are not the only extra costs. According to Turkmenistan’s television, Gazprom will finance and build gas transporting facilities and construct gas-fields in the country as well. “We have reached agreements about Gazprom’s financing and building new gas-main pipelines from the East of the country, constructing gas-fields and boosting the capacity of the Turkmenian sector of the Caspian gas pipeline to 30 bln cubic meters,” confirmed Alexey Miller. There’s been no information about the volume of the credit. East European Gas Analysis director Mikhail Korchemkin estimates that the listed projects will cost Gazprom $4–6 bln, and the Russian gas monopoly will have to borrow the money in the market on 6-8%, so, Turkmenistan will get $240–480 mln for free. On the other hand, Russia will keep control over Turkmenian gas exports. Gurbanguly Berdimuhammedow, the President of Turkmenistan, confirmed maintaining friendship with Russia during his meeting with Alexey Miller. He remembered his meeting with Russia’s President Dmitry Medvedev on July 4-5 and assured that “Gazprom is the leading strategic partner of Turkmenistan, as it’s always been.” Gazprom’s top-manager told Kommersant that the negotiations with Turkmenistan had been tough, and deputy president of the Russian monopoly Valery Golubev had spent a week in Ashgabat clearing the details of the agreement. “There were a few variants there. I don’t know which of them was signed,” the top-manager told Kommersant, “The Turkmen wrangled till the last minute. I think Alexey Miller had to concede in something to buy up all the gas and fulfil the political agreements of Moscow, Ashgabat and Kiev.” Interestingly, it’s been the third visit of Gazprom’s delegation to Turkmenistan since the beginning of summer. Nevertheless, the terms can’t be rendered crushing for Gazprom. Early this year officials with Turkmenistan’s government spoke about plans to sell gas at $350–360 per thousand cubic meters. That is why lowering the price to $290 at least can be regarded improvement. In this case the 0% credit will cost the monopoly less than a single-stage transition to average European prices when trading with Central Asia. “The main question is the period the formula has been set for. It’ll determine the time Ukraine’s economy will have to adjust itself to market conditions,” stressed Valery Nesterov. At the same time Mikhail Korchemkin calls the agreements reached on Friday “an allocation of political capital, since Gazprom may get no revenue from reselling Turkmenistan’s gas.” The expert believes this policy risky – after Gazprom constructs the transporting infrastructure Ashgabat may consent to building a European gas pipeline Nabucco omitting Russia and, as it is able to choose from different export routes, it’ll even more raise the gas price. “Starting from this day there is no cheap gas in the region any longer, because Gazprom will have to offer the same terms to Kazakhstan, which lies between Russia and Turkmenistan,” Mikhail Korchemkin thinks, “Perhaps, Uzbekistan will also want 0% credits, but it’ll be possible to omit it.” The only thing that, in the view of the expert, can play into Russia’s hands is that purchasing Turkmenistan’s gas by Gazprom solely can foster the prices in the world oil and gas market.

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