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Jul 13, 2012

Ukrnafta to supply Dniproazot

Energy in East Europe

Ukrnafta, Ukraine’s largest oil producer, will supply this year 0.6 billion cubic metres of gas to nitrogen fertilizer producer Dniproazot, whose assets it is currently leasing, according to a July 9 report by Interfax, despite being required as a state-controlled company to sell all its output to Naftogaz.

Ukrnafta, as a state-controlled oil and gas producer (50%+1 share), is formally required to sell all its gas output to Naftogaz Ukrainy at a regulated below-market price for further supply to households. But the company has refused to comply with this obligation since 2006, accumulating its gas in underground reservoirs instead, and has won several court rulings enabling it to sign gas supply contracts with industrial consumers at much higher prices. Currently the regulated gas price for Ukrnafta totals $57 per 1,000 cu m, whereas Naftogaz sells gas to industrial consumers at $438/1,000 cu m.

The announced volume of supplies to Dniproazot will account for about 30% of Ukrnafta’s estimated production this year, which Dragon Capital forecasts at 2 Bcm. “The latest deal with Dniproazot, coupled with reduced oil royalties (down 30% this year), further improves the financial outlook for Ukrnafta,” commented Dennis Sakva, an analyst at the Kiev-based brokerage.

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