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Russia's state-controlled monopoly Gazprom is the world's largest gas company, and the 10th-largest company in the world after its shares rose over 13 percent on the London market in mid-January. But its ambitions don't necessarily end there. Is Gazprom looking to assume control of the gas-transit market in Eastern and Central Europe?

After the disintegration of the Soviet Union in 1991, Viktor Chernomyrdin -- then head of Gazprom and on the way to being appointed prime minister -- devised a plan to maintain as a single unit, falling under Gazprom's purview, the gas- transportation infrastructure of Russia, Ukraine, and Belarus.

In formulating the plan, Chernomyrdin and his advisers were following the most fundamental principle in gas geopolitics -- the winners need not only access to large gas reserves, but also efficient systems for delivering that gas to market.

He who controls the pipelines, therefore, controls the buyer -- and, to some degree, the country where the gas originates.

It was a good plan -- but it failed. Ukraine and Belarus refused to give up what they considered the lucrative business of gas transit and insisted on nationalizing the pipelines on their territory. The main components of the former Soviet system were divvied up between the three states.

But Gazprom, looking at the defeat as a short-term setback, set itself the far-reaching goal of buying up much of the gastransit systems in the former Soviet Union as well as in Eastern and Central Europe. Its hope was to someday control the entire regional gas distribution system.

To date, Gazprom has had only mild success realizing its plan in the FSU. The pre-independence gas pipeline system in Belarus, for example, is still controlled by Beltransgas, the state-owned pipeline company. (This should not be confused with the post-Soviet Yamal-Europe pipeline, built and owned by Gazprom, which carries Russian gas through Belarus to Poland and on to Germany.)

In Ukraine, the Soyuz pipeline and the two-thread UrengoyUzhgorod pipeline remain under Kyiv's control. Georgia -- still shivering from its abrupt shutoff of Russian gas after apparent pipeline sabotage last week -- likewise resists pressure from Moscow to cede control over its pipeline in exchange for cheaper gas.

Elsewhere, Gazprom is gaining ground. Armenia, trying to diversify its energy sources, is currently building a pipeline to Iran. Gazprom, however, has insisted the diameter of the pipe be smaller than originally planned -- in order to prevent Armenian from shipping surplus Iranian gas to Georgia.

In Estonia, Gazprom owns a greater share of the national gas company, AS Eesti Gaas (30.64 percent) than the Estonian government (27 percent). Eesti Gaas, in turn, owns the country's gas transportation system.

The list of other Gazprom holdings in former Soviet republics includes Moldova's Gazsnabtranzit, where Gazprom owns 50 percent of the authorized capital; and Lithuania's Stella Vitae, of which it owns 30 percent. Gazprom also owns 25 percent of Latvia's Latvias Gaze.

And Gazprom, of course, has a significant presence even beyond the former Soviet Union.

The gas pipeline system running through Poland was built jointly with Russia, and Gazprom holds a 50-percent share. Gazprom also holds 46 percent of the Polish company EvRoPol Gaz.

In 2005, Gazprom arranged for Poland to buy 3.4 billion cubic meters of gas from RosUkrEnergo (RUE), the Swiss-based company now serving as an intermediary in Russia's controversial gas deal with Ukraine. "Platts Commodity News" reported that in September 2005, RUE became the main supplier of Russian gas to Poland. Gazprom also holds a 35-percent stake in Poland's Gas Trading consortium, and nearly half of EuRoPol Gaz joint-stock company.

In the early spring of 1991, Gazprom attempted to buy a 25- percent stake in Verbundnetz Gas AG, which operated the entire gas distribution system in the former East Germany.

But despite help from the German chemical company BASF, Gazprom was not allowed to take part in the tender and the stake was bought by Germany's Ruhrgas.

Gazprom's bid was primarily based on a wish to lower its dependency on Ruhrgas. Ruhrgas had been dictating the prices it paid for Russian gas, a practice that angered Chernomyrdin. He felt that Russia, as the seller, was in a position to name the price it wanted to charge.

But in the ensuing years, Gazprom was able to gain a considerable presence in the German gas market through its partnership and joint venture agreements with the German gas company Wintershall. Today it has three major joint ventures with Wintershall, Wingas WIEH and WIEE, as well as agreements with Ruhrgas, Verbundnetz Gas and Siemens AG.

Gazprom holds a 50-percent stake in Hungary's Panruysgaz. And in 2001, it set its sights on the country's chemical company BorsodChem. This was not only for its chemicals, but also because it owned a minority stake in TVK, Hungary's second- largest chemical firm, which also controlled a large part of the country's pipelines.

A Europol report from September 2001 reported that 24.8 percent of BorsodChem's shares were owned by a principal Hungarian bank that was "simultaneously acting on behalf" of Sibur, the Russian petrochemical firm controlled by Gazprom, in acquiring more shares.

The report went on to say a further 8 percent of BorodsChem was owned by MDM, a Russian bank. A further 5 percent was owned by unidentified financial investors, two of whom were linked to organized crime groups in St. Petersburg, and another of whom worked in collusion with MDM.

Europol also noted that Austrian investment bank Vienna Capital Partners "colluded with Sibur in coordinating share bids in BorodsChem."

In the end, Gazprom did not succeed in gaining a share in Hungary's pipeline system. But Gazprom has used the same tactics elsewhere, to better effect.

Gazprom's activities in Slovakia are significant since most gas which transits through Ukraine bound for Europe first enters Slovakia and is then routed further west.

In April 1997, a series of agreements were signed between Chernomyrdin and Slovak Premier Vladimir Meciar that gave Slovakia's national gas company SPP a discount of $5 per thousand cubic meters. (Slovakia used 6 billion cubic meters of gas in 1997.) In return, a Gazprom-Slovak joint venture was created to transport Russian gas to the EU. The exact terms of the joint venture were never published. The 1997 agreements are to expire in 2008.

In July 2002 the European Commission approved the purchase of a 49-percent stake in SPP by Gazprom, Ruhrgas and Gaz de France.

The deal was worth $2.7 billion and was financed by Ruhrgas and Gaz de France. Gazprom paid a third of this sum in installments. The SPP pipeline system transports about 70 percent of all gas supplied from Russia via Ukraine to Europe. Gazprom also holds a 50-percent stake in Slovakia's Slovrusgaz.

And the investments don't end there. Gazprom has shareholdings in Italy's Volta (39 percent), the British-Belgian company Interconnector (10 percent), France's Fragaz (50 percent), and similar companies in Austria, Serbia, Greece, Finland, Bulgaria, and Turkey. In October 2005, the amount Gazprom had spent on those investments was estimated at $2.6 billion.

The "International Herald Tribune" cited Emmanuel Bergasse, administrator for Central and Eastern Europe and the International Energy Agency, as saying "Gazprom has substantial market power from being the supplier of gas down to the customer. It is the chain that counts."

He added: "Gazprom's stated aim is to extend its dominant position, with obvious consequences for European energy diversification."

END NOTE: TERMS OF NEW UKRAINIAN GAS DEAL UNCLEAR xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

NEWSPAPER SAYS KYIV SIGNED SIX MORE GAS DEALS WITH MOSCOW IN JANUARY. The Kyiv-based weekly "Zerkalo nedeli" wrote in its 4-10 February issue that apart from the well-publicized gas deal with Gazprom and RosUkrEnergo of 4 January, the same day Naftohaz Ukrayiny signed six more accords with either Gazprom or RosUkrEnergo or both companies that have so far remained confidential and will presumably inflict big losses on Ukraine. In particular, Naftohaz Ukrayiny reportedly signed a 25-year deal with RosUkrEnergo on the storage of the latter company's gas in Ukraine for $2.25 per 1,000 cubic meters per year (while Naftohaz Ukrayiny's current storage charge for European gas consumers is $14-$17). Also, Naftohaz Ukrayiny reportedly signed a 25-year deal on gas transit to Europe, under which Gazprom and RosUkrEnergo will pay $1.60 per 1,000 cubic meters per 100 kilometers (while the average transit charge in Europe is $2.50). JM

UKRAINIAN PREMIER SAYS CRIMEAN LIGHTHOUSES POSE ECONOMIC, NOT POLITICAL PROBLEM. Prime Minister Yuriy Yekhanurov said in Simferopol on 4 February that the use of lighthouses by the Russian Black Sea Fleet in Crimea is an economic issue rather than political, Interfax-Ukraine and ITAR-TASS reported. "If the lighthouses are Ukrainian and the Russians are using them, they must pay for them," Yekhanurov told journalists. According to him, there have been illegal "cottages" erected around some lighthouses used by the Russian Navy in Crimea. Yekhanurov said the use of land in Crimea by the Russian Black Sea Fleet is also an issue of primarily legal and economic importance. He claimed that some 160 hectares of land is used by the Russian fleet illegally. "The position of the Ukrainian side is as follows: You must pay for what you have not paid," Yekhanurov said. "If you don't want to pay, then free it. I don't want the budget to suffer losses." JM


Officials in Kyiv announced on 2 February the finalization of a gas deal from January, under which Ukraine is now to receive gas from Russia at $95 per 1,000 cubic meters. According to Kyiv, the price of $95 is to remain unchanged for five years. However, RosUkrEnergo, a Swiss-based company that was made the monopolist of gas supplies to Ukraine, signals that this is not quite so.

On 2 February, Naftohaz Ukrayiny, Ukraine's gas transportation company, signed an accord with the Swiss-based gas trader RosUkrEnergo in Kyiv on the creation of a joint venture to sell gas in Ukraine. Both companies were obliged to do so by a framework gas agreement of 4 January, under which RosUkrEnergo became the monopolist of gas supplies to Ukraine for the next five years.

Ukrainian Prime Minister Yuriy Yekhanurov praised the five-year accord as advantageous for Ukraine. But he told journalists that he is also fully aware that the document may be bitterly criticized by his political opponents: "My future political career is not important here. It is important that it will be warm in your apartments tomorrow. In summer you may curse me to your souls' content. But in winter you may find a good word for me."

On 4 January, Naftohaz Ukrayiny, RosUkrEnergo, and Gazprom signed a deal whereby Ukraine is to obtain 34 billion cubic meters of gas in 2006 from Russia for $95 per 1,000 cubic meters -- up from $50 in previous years. The deal also provided for the creation of a joint venture between Naftohaz Ukrayiny and RosUkrEnergo to sell gas in Ukraine and share profits from it.

Critics of the deal said it was valid for only the first six months of the year as regards the gas price for Ukraine, simultaneously pointing out that it set the gas transit tariff for Gazprom for five years. Such critics also slammed the government for making RosUkrEnergo -- a dubious intermediary created by Gazprom -- the monopolist responsible for gas supplies to Ukraine.

On 10 January, Ukraine's parliament, the Verkhovna Rada, passed a no-confidence motion in Yekhanurov's cabinet over the gas deal. Yekhanurov and his ministers, however, have remained in office due to a constitutional reform that took effect on 1 January and effectively prevents the current legislature from appointing a new cabinet.

The joint venture created on 2 February, named UkrGazEnergo, has a charter capital of 5 million hryvnyas ($1 million) with stakes shared evenly between its founders. The same day UkrGazEnergo and RosUkrEnergo signed a contract under which Ukraine is to obtain 34 billion cubic meters of gas in 2006 and some 60 billion cubic meters annually in 2007-2010.

Naftohaz Ukrayiny spokesman Eduard Zanyuk told journalists in Kyiv on 2 February that neither gas storage facilities nor gas pipelines in Ukraine will be included in UkrGazEnergo's charter capital. Zanyuk was thus addressing the common fears in Ukraine that Moscow is using gas price as a weapon to gain control over Ukraine's gas transportation network.

In a no less important statement, Zanyuk announced that the new gas price for Ukraine will remain stable for five years: "Responding to questions from skeptics in Ukrainian political circles, we announce that the gas price defined in this contract is fixed for five years and is $95 for 1,000 cubic meters."

If this is really so, then the new contract represents a major victory for Kyiv, which had initially been promised the price of $95 per 1,000 cubic meters just for the first half of 2006. The victory seems to be even more significant if one takes into account that the gas price for Ukraine is lower than that charged by Gazprom for all other post-Soviet countries except Belarus. For example, Gazprom set the new gas price for Moldova and Georgia at $110 per 1,000 cubic meters.

However, the same day, RosUkrEnergo managers Konstantin Chuichenko and Oleg Palchikov cast doubt on Zanyuk's words. Chuichenko said the price may be changed depending on the price of Russian gas for RosUkrEnergo. In his turn, Palchikov asserted that there is no "price formula" included in the contract, adding that the price for Ukraine will depend on the price of Central Asian gas in the total gas volume supplied to the country.

And Andriy Halushchak, Naftohaz Ukrayiny's representative on the UkrGazEnergo supervisory board, admitted that a change in the gas price may actually take place, but only with the consent of both sides. If there is no such consent, he added, the sides should appeal to court.

Thus, it seems that the deal does not end the gas supply controversy between Kyiv and Moscow and may lead to a renewed row in the longer run, particularly if Turkmenistan, a major gas source for Ukraine, moves to increase its price for RosUkrEnergo.

It should also be expected that the gas supplies will continue to be a topical issue for the opposition in the ongoing parliamentary election campaign in Ukraine. There is still a mystery surrounding the owners of RosUkrEnergo, which came into the global spotlight on 4 January. And this latest gas contract, instead of dispelling this mystery, has added some of its own.

IS GAZPROM PLANNING NEW BLACK SEA PIPELINE? Gazprom chief executive Aleksei Miller said in Ankara on 3 February that he wants to build a new pipeline across the Black Sea, which would run parallel to the existing Blue Stream pipeline, to deliver gas to Turkey in the wake of the recent gas dispute with Ukraine, RIA Novosti reported. The pipeline would also deliver gas to Italy, Greece, and Israel via Turkey. Also on Miller's agenda was a project to build a pipeline from Turkey's Samsun on the Black Sea to Ceyhan on the Mediterranean to deliver Russian oil to world markets. "We also discussed investment in the Turkish energy sector, in particular, the construction of gas-storage facilities and a gas-distribution network," Miller noted. A team of experts will hold a follow-up meeting on 15 April. PM