The information Department of OAO Gazprom (RTS:GAZP) issued a press-release with the results of the working meeting between the Chairman of the Board Alexey Miller, and the Ukrainian Minister of fuel and energy - Yury Boiko. The meeting was held in Moscow on December 4, 2007. The price of the gas supplied to the Ukraine was discussed at the meeting. The sides agreed that in 2008, the price of the gas at the border between Russia and Ukraine will be USD 179.50. Gas transit fees in the territory of Ukraine will be USD 1.70, while gas transit fees in the territory of Russia for Ukraine will be USD 1.70.
Earlier, Gasprom planned to supply gas to the Ukraine for USD 160. This price suited the other side. But after Turkmenistan increased the price of gas from USD 100 in 2007 to USD 130 in H1 2007 and to USD 150 in H2 2007, the margins of gas supply to Ukraine considerably fell. Gazprom sells the gas from Central Asis to Ukraine and receives income from transportation and trading services.
This news is positive for Gazprom. Firstly, Ukraine accounts for around 60% of company's CIS sales and for around 10% of the company’s total output. So a USD 20 difference changes the revenue of the company by USD 1.2 bn. Secondly, Ukraine held a strong position in these negotiations because Gazprom transports around 80% of its gas across this country to European consumers, and the company positions itself there as a reliable supplier and guarantor of energy.
We had concerns that the growth of the gas price for Ukrainian consumers would lead to a considerable growth in the transit fees close to the European level of USD 2-2.50. But that did not happen, and the transit fees for the Russian side were increased from USD 1.60 to USD 1.70. Therefore, transportation costs across the Ukraine will see only a slight increase.
The press-release of Gazprom does not contain any information about the price equation which is to be applied to set the price of the gas supplied to the Ukraine in 2009, and implementation of the principle of the equal yield starting from 2011 which is applied to some of the CIS countries. This creates some uncertainty in the future forecasts of the margins of gas supplies to Ukraine. However, taking into account completion of the negotiations with Ukraine which resulted in a profitable price for Gazprom in 2008, we believe that future talks about this would be also successful for the gas monopoly.
Presently, we do not have any recommendation for shares of OAO Gazprom.
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