Ukraine's gas transit revenues shielded from gas price slump: Naftogaz's Vitrenko

London — The fall in European gas prices is not impacting Ukraine's gas transit revenues thanks to the agreement reached in December last year with Russia's Gazprom that includes a fixed transit tariff, Naftogaz chief commercial officer Yuriy Vitrenko said Wednesday.

European gas prices have dropped sharply in recent months due to the combination of an oversupplied market and weak demand.

In the previous 10-year gas agreement between Gazprom and Naftogaz that ran from 2009 to end-2019, the transit fee charged by Ukraine was partly linked to the prevailing gas price.

However, the five-year contract to 2024 agreed by the two sides on December 30 is for a fixed transit tariff, regardless of the gas price.

"Gas prices in Europe have fallen sharply, but the gas transit tariff that Gazprom pays us is not lower because it is fixed in the new contract," Vitrenko wrote on his official Facebook page.

"In the previous contract, part of the tariff was tied to the price of gas, therefore the tariff decreased with gas prices," he said. "The new contract is beneficial for Ukraine from that perspective."

Vitrenko said that Ukraine was at the same time also benefiting from the lower gas price as it meant a lower price to pay for the fuel gas it uses to transit Russian gas.

Gazprom sold to Ukraine some 2.7 Bcm of technical gas last year for use in guaranteeing transit, according to the company's official sales data.

Vitrenko said the lower gas prices in Europe meant Gazprom's profit was falling as its gas sales revenues were lower but its transit costs were not.

Ship-or-pay terms

Under the terms of the December 30 agreement between Naftogaz and Gazprom, the Russian company agreed to transit 65 Bcm of gas via Ukraine in 2020 and 40 Bcm/year in 2021-2014.

The agreement included ship-or-pay arrangements, meaning Gazprom pays for transit on a "flat" basis -- meaning payments for an average of 178 million cu m/d -- whether it transits that volume or not.

Gazprom paid $175 million for transit in January and pre-paid $164 million for transit in the shorter month of February, Vitrenko said on February 4.

That assumes a daily transit cost of $5.65 million, meaning Gazprom is likely to have to pay $2.06 billion over the course of 2020 whether it transits the 178 million cu m/d or not.

So far in 2020, Gazprom's transit volumes via Ukraine have been lower than the 178 million cu m/d average due to weak demand and changes in contractual terms with some customers regarding delivery points.

Ukraine's gas grid operator GTSOU said in early April that Russian gas supplies via Ukraine were running at around 150 million cu m/d.