Transcript for The Domino Effect: An Interview with Katherine Hardin

The Domino Effect; implications of Higher Central Asian Gas Prices for the Eurasian Gas Trade.

An interview with Katherine Hardin

What was the nature of the discussions between Russia and the Central Asian countries on gas prices?

Last March, GasPam representatives, and representatives of Kasmeni Gas and

NewFyNefti Gas and Turkanefti Gas got together

and agreed that starting in 2009,

They would base Russian purchase prices of Central Asian gas

on a European level price.

Which means that the European price for gas would be taken into account

in negotiating the price at which Russia would buy from Turkmenistan, Uzbekistan and Kazakhstan.

And this represents a quantum leap for the Central Asian countries.

If we look back as recently as 2000

Turkmenistan for example, was selling gas to Russia for only $36 per thousand cubic meters.

IF we look at what may happen in 2009, based on assumptions about the level of European gas prices,

We could see a price to Turkmenistan of something closer to $270 or even $300 per thousand cubic meters.

So this is a huge increase for Turkmenistan.

And something that they, and the other Central Asian countries, have been trying to achieve for sometime.

Why have the Central Asian countries been able to negotiate higher prices?

It really comes at a time when the Eur-Asian gas balance is tightening,

and we see that as slower production growth in Russia

and we see increasing interest in gas from Russia and from the Central Asian countries

by new players.

Principally, Asian countries are now looking to Central Asia

as a source of gas supply, and so if you put together these to pieces

the tightening gas balance and the promise of alternative buyers,

we see that Russia does face competition for Central Asian volumes.

allowing Central Asian countries to negotiate for higher prices.

What ill be the impact of these price increases?

It's interesting to note that the impact of these price increases

will actually be felt more broadly then just in Russia.

Even though Russia is the principal purchaser of Central Asian volumes,

about 90% of those volumes are then resold to the Ukraine.

And so really it's Ukraine that will be paying the price, if you will,

for the higher purchase price of Central Asian gas.

And the question remains weather or not Ukraine will be able to absorb that higher price.

And if they can't, in other words, if Russia is not able to pass on the price to Ukraine,

Then Russia in a sense will have to choose if it itself can absorb this higher cost.

And so this is the question that remains then for the Central Asian countries.

It will be a price increase that will reverberate far beyond just Russia itself.

In CERA's view, is this a done deal?

We think there are still some points outstanding to be negotiated,

and as we see the winter months coming along, and the time rolling around for annual price negotiations,

we expect to see even more intense negotiations then we have in the past few years.

And that's partly because there's more at stake now with the higher prices.

But there are also some variables yet to be negotiated.

For example, Russia levees an export tax on gas sales outside of the customs union,

which means that sales to Ukraine will incur this customs tax.

This export tax.

Now, the Russian sellers may attempt to pass this tax back onto the Central Asian countries.

And of course the Central Asian countries are expected to resist that.

So this is one area where we are likely to see some negotiation.

And then of course from the Ukraine point of view,

We are likely to see Ukraine fighting back against these higher prices as well.

So we would say stay tuned as we get into the winter months,

to understand exactly how those negotiations will be conducted.

CERA