Following the revolution in Ukraine, the ousting of ex-President
Viktor Yanukovich and Russia’s annexation of Crimea, Gazprom, Russia’s
sole natural gas exporter, has almost doubled Ukraine’s natural gas
price.
According to the state-run gas giant, the price was raised due to the cancellation of two major discounts.
One of the discounts was granted to Ukraine for permitting the Russian fleet to use Crimea’s city of Sevastopol as its base. When Crimea became part of Russia, the agreement and the discount were canceled by Russian President Vladimir Putin in early April. The second discount, for timely payments, was canceled a few days later because Ukraine failed to fulfill its obligations to get a discount. Western political leaders have accused Russia of energy bullying and threatened it with sanctions.
In May, Russia signed a 30-year deal, worth $400 billion, to deliver gas to China. The media speculated on the reasons why, after 10 years of unsuccessful negotiations, the two countries managed to come to an agreement. One of the assumptions was that the deal was Putin’s reaction to the potential threat of European sanctions against Russia following the Crimean crisis.
During the St. Petersburg International Economic Forum in May, Alexey Miller, CEO of Gazprom,said the recent contract between Russia and China will likely influence gas pricing in the European market. With many details to discuss and hundreds of kilometers of pipelines to build, it is unclear what the selling price for China will be, or in what ways the contract can affect Europe.
According to Dr. Mikhail Korchemkin, managing director of East European Gas Analysis, a consulting company, the agreement between Gazprom and the China National Petroleum Corp. will not affect the price of Russian gas sold to Europe. “First, European prices are set by existing contracts,” Korchemkin said. “Second, East Siberian gas fields are not connected to Europe, so this gas cannot be sold to Europe.”
However, the setting of gas prices for European countries raises a lot of questions. The price varies from country to country. Gazprom is secret about commercial transactions, and the terms of agreements for long-term gas contracts are generally not disclosed. In Europe there is no market price for natural gas, as such. Also, there is no standard formula that would define gas prices for wholesale customers.
In the late 1960s, Gazprom introduced the contract model, in which gas prices were tied to oil prices. In 2012, the European Parliament called for liberalization of the gas market. The new model implies the development of an integrated European system of gas indexation, which would allow European gas companies to trade with gas providers on a more predictable basis. Instead of being dependent on oil price dynamics, gas prices would be set in gas hubs (centers of market trading).
Read more: Who Pays the Most for Russian Gas in Europe and Why | Student Reporter
According to the state-run gas giant, the price was raised due to the cancellation of two major discounts.
One of the discounts was granted to Ukraine for permitting the Russian fleet to use Crimea’s city of Sevastopol as its base. When Crimea became part of Russia, the agreement and the discount were canceled by Russian President Vladimir Putin in early April. The second discount, for timely payments, was canceled a few days later because Ukraine failed to fulfill its obligations to get a discount. Western political leaders have accused Russia of energy bullying and threatened it with sanctions.
In May, Russia signed a 30-year deal, worth $400 billion, to deliver gas to China. The media speculated on the reasons why, after 10 years of unsuccessful negotiations, the two countries managed to come to an agreement. One of the assumptions was that the deal was Putin’s reaction to the potential threat of European sanctions against Russia following the Crimean crisis.
During the St. Petersburg International Economic Forum in May, Alexey Miller, CEO of Gazprom,said the recent contract between Russia and China will likely influence gas pricing in the European market. With many details to discuss and hundreds of kilometers of pipelines to build, it is unclear what the selling price for China will be, or in what ways the contract can affect Europe.
According to Dr. Mikhail Korchemkin, managing director of East European Gas Analysis, a consulting company, the agreement between Gazprom and the China National Petroleum Corp. will not affect the price of Russian gas sold to Europe. “First, European prices are set by existing contracts,” Korchemkin said. “Second, East Siberian gas fields are not connected to Europe, so this gas cannot be sold to Europe.”
However, the setting of gas prices for European countries raises a lot of questions. The price varies from country to country. Gazprom is secret about commercial transactions, and the terms of agreements for long-term gas contracts are generally not disclosed. In Europe there is no market price for natural gas, as such. Also, there is no standard formula that would define gas prices for wholesale customers.
In the late 1960s, Gazprom introduced the contract model, in which gas prices were tied to oil prices. In 2012, the European Parliament called for liberalization of the gas market. The new model implies the development of an integrated European system of gas indexation, which would allow European gas companies to trade with gas providers on a more predictable basis. Instead of being dependent on oil price dynamics, gas prices would be set in gas hubs (centers of market trading).
Read more: Who Pays the Most for Russian Gas in Europe and Why | Student Reporter
