PREVIEW-Gas back on agenda for Putin’s Ukraine visit

* Ukraine wants cheaper gas, may agree joint venture

* Russia could gain some control of Ukrainian transit system

* But Kiev likely to refuse outright Naftogaz-Gazprom merger

By Richard Balmforth

KIEV, Oct 26 (BestGrowthStock) – Russia might take a step towards
securing a long sought-after stake in Ukraine’s gas pipeline
system in exchange for offering cheaper gas when Russian Prime
Minister Vladimir Putin visits Kiev on Wednesday, analysts say.

The system is a conduit for 80 percent of Russian gas
supplies to the European Union, and disputes between Kiev and
Moscow over pricing have led to gas wars in the past which have
hit supplies to EU countries.

Putin’s trip will be his first to Ukraine since he stunned
its new leadership in April by proposing a merger between
Russia’s energy giant Gazprom (GAZP.MM: ) and Ukraine’s
state-owned Naftogaz. [ID:nLDE63T1PV]

And though Ukraine is still holding that proposal at arms
length, Prime Minister Mykola Azarov said on Monday he was now
ready to discuss a joint venture between the two companies if it
buys cheaper gas. [ID:nLDE68713L] [ID:nLDE69O165]

The idea involves joint exploitation of some Russian gas
fields and a lower price of gas for Ukraine in exchange for a
Russian stake in Ukraine’s pipeline system.

That in itself would lead to a serious readjustment in the
relationship between Naftogaz and Gazprom and remove a strong
trump card that Ukraine has always been able to play in tricky
stand-offs with its giant neighbour.

The ex-Soviet republic of 46 million relies hugely on
imports of Russian gas particularly for urban domestic heating
in housing blocks where most town dwellers live.

But the monthly bill is a drain on the cash-strapped
government. The September bill, calculated on a basis of $248
per 1,000 cubic metres, amounted to $715 million, and Gazprom
says next year’s base price may rise to at least $250.

$1 BILLION TRANSIT FEES

Azarov last month urged Russia to cut gas prices, saying
their current deal was unacceptable and would not work for its
full 10-year term, despite a discount agreed last April.
[ID:nLDE6820VF]

On Tuesday, his spokesman said he still ruled out a merger
but saw as “realistic” the setting up of a joint venture.
[ID:nLDE69O165]

Ukraine has hitherto jealously protected its control over
the transit network which earns Naftogaz more than $1 billion
per year in transit fees.

Other factors weighing on it now include Russia’s apparent
commitment to the South Stream project which would build an
alternative transit network for Russian gas to Europe, bypassing
Ukraine. Ukraine is eager for Moscow to shelve the plan.

Ukrainian commentators were divided on Tuesday on how far
the Kiev government would go in surrendering to Russian pressure
during Putin’s visit.

Since President Viktor Yanukovich came to power in February
vowing to improve ties with Russia, the political opposition has
been on alert for anything it suspects of being a sell-out of
national interests.

A deal last April between Yanukovich and Russian President
Dmitry Medvedev providing cheaper gas in exchange for an
extension of the lease for the Russian navy in a Ukrainian Black
Sea port led to riots in parliament. [ID:nLDE63Q0NL]

With important local elections coming up in Ukraine on Oct.
31, Yanukovich may not want to hand his opponents easy
ammunition.

Current legislation anyway bans the privatisation or renting
of Ukraine’s export gas pipeline network, though analysts do not
rule out Kiev adapting legislation if it decides to go ahead
with a joint venture.

“It is theoretically possible to expect a memorandum on
mutual understanding in the energy sector, but there will not be
a detailed agreement,” independent analyst Volodymyr Saprykin
said.

“Ukraine’s transit system brings in more than $1 billion per
year and what a joint venture would bring is not yet clear …
and for Ukraine to give up its (transit fees) profits is not
very likely,” he said.

“The likelihood of a Naftogaz-Gazprom joint venture is very,
very high. Its creation under Russian conditions above all
pre-supposes a change in the base formula for the price of
Russian gas which Ukraine has been actively working for,” said
another independent analyst, Valentyn Zemlyansky.
(Additional reporting by Pavel Polityuk; editing by Andrew
Roche)

PREVIEW-Gas back on agenda for Putin’s Ukraine visit