Dreaming Of LNG
BMI View: Ukraine's government has confirmed its intention to bring a n LNG import terminal online by 2015. Closely following this announcement, Spain's Gas Natural Fenosa , supposedly the main stakeholder in the project, categorically denied any involvement in th e project , shedding light on what appears to be -at the very least- a gross political misunderstanding. We believe that Ukraine is unlikely to find necessary financing to complete the LNG project on time.
Ukraine ' s gas market has been long- driven by the geopolitical factors surrounding Eastern Europe. The high dependence of the country on Russia for gas supply has triggered several crises following political disagreements. In 2012 , Ukraine is expected to consume about 54.8 bn cubic metres ( bcm ); we forecast this demand to rise to 62bcm by 2016. W e only expect production to grow from 20.4bcm to 22.1bcm over the same period , increasing the country 's gas import requirement .
Russian gas behemoth Gazprom 's monopoly on Ukrainian gas imports are leaving cost determination at the discretion of the company, reaching US$ 532 per thousand cubic meters (about US$19 per mn British Thermal Units, or MMBtu). We expect the theoretical cost of net imports to reach about US$19.02bn for 2012 and US$18.49bn in 2016 on falling oil-linked gas prices .
|Ukraine's Gas Consumption & Production (bcm)|
Ukraine's political authorities have been seeking to reverse this and break the country ' s energy dependence on Russia. On November 26, Vladislav Kaskiv, head of Ukraine's state investment agency , announced details about the development of a liquefied natural gas ( LNG ) import terminal by a consortium in which Spain ' s Gas Natural Fenosa supposedly held a 75% stake. He also confirmed a commitment to completing the project by 2015. In an awkward turn of events , on November 27, the Spanish company denied having any involvement in this project.
Tricky Political Games
The timing is very unfortunate for Ukraine. The government is currently in negotiation with Gazprom to lower gas prices and reduce yearly Russian gas imports from 27bcm to 18 - 20bcm. Clearly, this event illustrates the uncertainty surrounding the business and regulatory environment in Ukraine. This uncertainty could deter supply deals from countries such as Azerbaijan or Qatar - who had expressed their interest in providing Ukraine with an alternative source of gas to Russia- , thus triggering a downside risk to our LNG imports forecast. Similarly, companies could be reluctant from providing financing to this project as they will try to avoid joining a consortium with uncertain members. At the same time, it creates an upside risk to our long-term import bill forecast for Ukraine, as we do not see any short- term escape from its energy dependence on Russia that could give it leverage in bargaining down prices with the Russian state-owned Gazprom .
Future Of A LNG Regasification Terminal
Ukraine will continue to face difficulties in gathering the necessary financing for the LNG project. Widening fiscal imbalances driven by extensive gas price subsidies (see our online service, February 2 2012, 'Serious Underlying Fiscal Threats Present') and a lacklustre business environment will act as significant obstacles to this development as it reflects poor investment protection and opportunities. Nonetheless, we believe that Ukraine is firmly committed to boosting its energy security. Therefore, while we do not see the LNG project completed by 2015, we see a political commitment to this as the country pledges to reduce Russian gas imports to 20bcm in the years ahead. In the meantime, Gazprom will maintain its monopoly of this part of Ukraine's gas imports and at the same time, full discretion on prices.
|The Cost Of Cheap Gas|
|Ukraine - Fiscal Balance, Including Naftogaz Liabilities (% of GDP)|