Turkmens Tack on 2nd Gas Price Hike

Gazprom on Tuesday agreed to buy gas from Turkmenistan at much steeper prices next year and will pay even more in 2009. The deal could reignite tensions with Ukraine, the end consumer of the fuel.

Gazprom's chief executive, Alexei Miller, signed an addendum to the company's existing contract with the Turkmen government. Under the change, Gazprom will pay $130 for 1,000 cubic meters of gas in the first half of next year and $150 in the second half, the company said in a statement.

Turkmenistan currently charges $100 per 1,000 cubic meters.

Beginning in 2009, Turkmenistan will price its gas under a formula "based on market principles," the statement said. That formula will be effective through the end of Gazprom's contract with Turkmenistan in 2028, Miller said in the statement.

Turkmenistan insisted on a price hike because of a considerable increase in world gas prices and because of its growing expenses on production, including materials and services, the statement said. Gas prices have followed the sharp rise in oil prices, which are currently poised to break through the $100 per barrel barrier.

Gazprom, which will have charged its European customers in excess of $250 for 1,000 cubic meters of gas this year, expects the price to grow even further -- to $354 -- next year.

Last week, however, Miller said Turkmen officials had sought a price hike because U.S. and European Union officials had criticized the current price as too low compared with European standards.

In return for a higher price, Gazprom won another pledge from Turkmenistan to make good on its agreement to jointly build a new pipeline to carry Turkmen gas along the Caspian Sea to Russia. The pipeline, whose construction could start next year, is key to Gazprom's control of supplies from Central Asia.

"The parties have agreed to do their best to execute the project in the shortest terms," the statement said.

The Turkmen gas hike should not hurt Gazprom in the pocket because the company acts only as an intermediary transporting the fuel to Ukraine. But the prospect of a larger bill to pay could spark new frictions between Gazprom and Ukraine, as the two sides are still negotiating a price hike for next year. Ukraine had expected the price to rise from $130 to no more than $160.

RosUkrEnergo, a joint company between Gazprom and two Ukrainian businessmen that buys Turkmen gas from Gazprom to resell it to Ukraine, declined comment Tuesday. A spokesman for state-owned Naftogaz Ukrainy said it would issue a comment Wednesday.

"I don't rule out short-term tensions between Russia and Ukraine," said Konstantin Batunin, an analyst at Alfa Bank. "The price of gas is a very sensitive issue."

But he predicted that Ukraine would accept the new price with less conflict this time around. "Everybody remembers the lessons of the past," he said. "Ukraine understands perfectly well that Gazprom can take extreme measures because it has already done so."