Ukraine Naftogaz to import less gas after price deal

12:11, 22 January 2009
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Naftogaz First Deputy...

Ukraine`s Naftogaz will sharply reduce gas imports from Russia in the first quarter, a senior official said on Wednesday, which should soften the blow on the company`s ailing finances as it faces steep price increases, according to Reuters.

But President Viktor Yushchenko, critical of a deal with Moscow on the prices after a three-week cutoff of supplies, cast doubt on its financial situation and said the government would need to change its budget policy to prop up the state company.

Naftogaz First Deputy Chairman Ihor Didenko told a news conference the company planned to import 5 billion cubic metres (bcm) of gas in the first quarter against the usual 12 bcm, and 40 bcm this year against 55 bcm.

Officials have named a gas price for the first quarter of $360 per 1,000 cubic metres (tcm) -- defined as a 20 percent discount on European prices. That is far higher than $179.50 last year, but they expected the market price later to fall sharply.

Didenko said Ukraine expected to import 5 bcm at $360 per tcm in the first quarter, 10.5 bcm in the second quarter at $270, 12 bcm in the third quarter at $219 per tcm and 12.5 bcm in the last quarter at $162.

According to Reuters calculations, the cost of importing Russian gas in 2009 will amount to $9.288 billion, up from $8.6 billion last year when it imported 48 bcm. Some of that amount, however, is offset by fees Russia pays to transit gas through Ukraine to Europe.

The finances of Naftogaz have been in doubt since 2006 when Russia almost doubled the price for gas, while household prices remained unchanged for years. The creation of an intermediary to sell that gas in Ukraine also took away some revenue streams.



Yushchenko, in a power struggle with Prime Minister Yulia Tymoshenko, said Ukraine would have to pay an additional $3.2 billion as a result of the deal. He had previously doubted her claims that market prices, and hence those paid by Ukraine, would fall significantly.

"Apart from that, Naftogaz needs to meet creditors` obligations of 26 billion hryvnias ($3.37 billion), aside from the loans that Ukrainian banks gave, and will need to be extended," he said in a letter to the prime minister.

"So, there is now a serious danger of imbalances to Naftogaz`s cash flow. It is clear that this risk needs serious changes in the budget and in government policies."

Yushchenko did not specify which loans Naftogaz has to pay and to whom. Naftogaz`s $500 million Eurobond matures in September. It was close to technical default on that loan twice after it failed to provide audited accounts to bondholders.

One of the holes in Naftogaz`s finances are household prices which are still much cheaper than the sums it pays for Russian gas, despite a 35 percent increase on average as of Dec. 1.

Tymoshenko says the government sees no reason to raise household prices. But Naftogaz may disagree.

"Gas is not a gift, it`s a good and we will sell it," Didenko told reporters.

"The prime minister has promised that, despite the difficult political situation, the government will agree to Naftogaz`s proposals for raising prices for gas for all types of consumers. That`s enough. Naftogaz has already been sufficiently milked."

Russia began sharply raising prices in 2006 to bring them to market levels. The price rises have hit Ukraine`s trade and current account deficits, which have widened quickly from a positive position in 2005.

That in turn has weighed on the hryvnia currency, which fell sharply against the dollar in the last four months of 2008, hitting a historic low of 10/$. It has since gradually strengthened and was quoted on Wednesday at 7.85-7.86/$.


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