Gazprom - Naftogaz Ukrainy Dispute: Business or Politics?

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Case Details:

Case Code : BENV003
Case Length : 15 Pages
Period : 1991 - 2006
Pub Date : 2006
Teaching Note : Not Available
Organization : Gazprom, Naftogaz
Industry : Energy
Countries : Europe, Russia

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"I'll remind you that some European countries, members of the European Union, cover 90 percent of their gas needs with Russian hydrocarbons. Ninety percent! And no one's complained so far."¹

- Vladimir Putin, President of the Russian Federation at an EU² - Russia Summit in October 2005.

"Why does Turkey pay $100 per thousand cubic meters, the Baltic countries pay $110, the Caucasus pays $100, and Ukraine, which is Russia's closest neighbor, must pay $230?"³

- Viktor Yushchenko, President of Ukraine, questioning Gazprom's demand for higher gas prices in December, 2005.

Introduction

On December 14, 2005, the Open joint-stock company Gazprom (Gazprom), a state-controlled Russian company with monopoly over gas exports, announced a stiff hike in its gas prices for 2006 for Naftogaz Ukrainy (Naftogaz),⁴ the Ukrainian state gas company. Gazprom, which had earlier demanded $160 per thousand cubic meters (Tcm),⁵ hiked the price to $230 per Tcm and threatened to cut off supplies, from January 1, 2006, if Ukraine did not agree to its new prices. No agreement could be reached with Naftogaz, which had paid $50 per Tcm of gas in 2005. On January 1, 2006, in the midst of a harsh winter, and the day on which the Russian Federation (Russia) assumed the presidency of G8,⁶ Gazprom began to reduce the pressure of gas into the pipeline system meant for Europe that passed through Ukraine.

The message was clear - it had decided to go ahead with its threat to cut off gas supplies to Ukraine.

Within hours, more than half-a-dozen countries in Europe reported reduction in the gas supplies received at their terminals (Refer Exhibit I for Gazprom's gas exports to Western Europe and Exhibit II for Russian gas exports to Europe transiting through Ukraine and other countries).

By evening, the trading of accusations began. Gazprom claimed that Ukraine⁷ was stealing gas meant for Europe that passed through its territory. Ukraine replied that it was only taking 15% of the gas that it was legally entitled to take as transportation charges as well as the gas coming from Turkmenistan through Gazprom's pipelines.⁸

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1] Daniel Twining, "Putin's Power Politics," The Weekly Standard, 17, January 16, 2006.

2] The European Union (EU) is an intergovernmental and supranational union of 25 democratic countries founded to enhance political, economic and social co-operation.

3] http://blog.kievukraine.info/2005_12_01_kievukrainenewsblog_archive.html.

4] Naftogaz owns the transit pipelines that carry Russian gas to European countries.

5] On November 22, 2005, Gazprom demanded that Ukraine pay $160 per Tcm of gas.

6] G8 stands for Group of 8, a group of rich and powerful democratic countries, whose members meet every year to discuss political and economic matters of international importance. Its members are Canada, France, Germany, Italy, Japan, the UK, the US and the Russian Federation.

7] As Gazprom is controlled by the Russian state and Naftogaz by Ukraine, the terms Gazprom & Russia and Naftogaz & Ukraine have been used without any distinction, unless specifically mentioned otherwise.

8] Ukraine also imported gas from Turkmenistan.