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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Introduction Contd...

Some analysts felt that it was Gazprom which was undersupplying gas to Europe and blaming Ukraine, so as to bring European pressure on Ukraine to agree to its new price for gas.

Gazprom then invited SGS to oversee the amount of gas it was pumping at its stations meant for Europe, passing through Ukraine. Ukraine, however, refused to allow observers to undertake similar inspections. Under the terms of the various treaties that the former Soviet Union had with the European countries, Russia, and thereby Gazprom, was obliged to supply gas till its former Soviet borders. From there, the European countries took over the responsibility of gas delivery.

So even if Ukraine was withholding or illegally siphoning off Russian gas meant for Europe, it was Russia that could be sued, and not Ukraine. On January 4, 2006, Gazprom and Naftogaz announced that they had reached a settlement, wherein RosUkrEnergo, a Swiss registered company, agreed to buy the gas meant for Ukraine from Gazprom at $230 per Tcm and supply it to Ukraine at $95 per Tcm after mixing the Central Asian gas bought from Turkmenistan and Uzbekistan at $60-65 per Tcm. Analysts commented that rather than being a concrete settlement, it was more of a face saving deal for both Gazprom and Naftogaz.

Background

Gazprom, like many Russian companies, emerged out of the disintegration of the Soviet Union. Russia under its new President Boris Yeltsin privatized the state held monopoly departments and factories in order to embrace the market-oriented economic reforms and catch up with the West. Gazprom was one of them.

But whereas the oil industry was broken up into several fragments and privatized, Gazprom remained a monolith. In spite of its privatization, the state retained a significant stake in the company...

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9] 'Societe Generale de Surveillance' (SGS), based in Switzerland, is the world's leading company in inspection, verification, testing, and certification of materials and products.

10] The disintegration of the Union of Soviet Socialist Republics, usually called the Soviet Union, in 1991, resulted in the birth of 15 newly independent states: Russia, Ukraine, Belarus, Moldova, Latvia, Lithuania, Estonia, Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, and Turkmenistan.

11] Most of the agreements that Gazprom had with other gas companies of the former Soviet Union republics and European countries came under the ambit of Inter-governmental Protocols and therefore the state was as much responsible for the gas supplies as the company itself.

12] RosUkrEnergo, a Swiss-registered company formed in 2004, was a 50:50 joint venture between a Gazprom subsidiary, and an Austrian-registered company, Centragas, which was managed by an Austrian bank on behalf of undisclosed owners. (Source: http://news.bbc.co.uk/1/hi/business/4569846.stm, 4 January 2006).

13] Gazprom was privatized between 1993 and 1995, under the Russian Privatization law. Even then, in 2004, the Russian state held a non-majority stake of more than 38 percent in Gazprom. In 2005, the Russian government paid $7.12 billion to acquire a majority stake.