Historically, Russia partially supplied Ukraine via Natural Gas offered as payment in-kind for transiting Russias gas onwards to Europe, and partially through annual sales contracts. In the past few years, Turkmenistan has become Ukraines largest source of natural gas imports through long-term contracts. In May 2001, Ukraine and Turkmenistan signed an agreement calling for Turkmenistan to supply Ukraine with 8.8 Tcf/year of natural gas between 2002 and 2006. Leaders of Turkmenistan and Ukraine pledged to increase levels to around 14 Tcf/year for 2007-2032.
Ukraine holds 1.1 Tcf of natural gas in storage, and in January 2006 Prime Minister Yekhanurov announced a plan to increase the capacity at existing storage facilities to 1.2 Tcf by 2009. The six major facilities are located in the provinces of Lvov, Kiev, and Chernigov.
Ukraine plays a significant role to world energy markets as an intermediary connecting Russia, the worlds largest natural gas producer, with growing European markets. Also, as gas exports from the Caspian to Europe and Russia grow, Ukraine serves as the largest market for this natural gas. Roughly 93 percent of Ukraines natural gas imports are re-exported to world markets. Preliminary estimates for 2005 show that approximately 3.9 Tcf of Russian natural gas transited Ukraine en route to Europe. This represented roughly 29 percent of OECD Europes natural gas imports and 78 percent of Russias natural gas exports. The Ukrainian natural gas company, Naftogaz Ukrainy, also re-exports some of its contracted gas to the rest of Europe. During the first half of 2005, the company re-exported 78 Bcf and aimed to exports 177 Bcf for the entire year.
Europes dependency on natural gas exports from Russia drew worldwide attention in January 2006 when a longstanding dispute over price and payment mechanisms in the in-kind agreements caused Gazprom to shut off gas supplies to Ukraine. Supplies to Europe were also affected. Even though Russia has used the threat of a cutoff to demand higher natural gas prices in recent years, this was the first time that a supply disruption affected flows to Europe. Eventually, Russias natural gas company agreed to a sell its natural gas to RosUkrEnergo, a Zurich-based trading company 50 percent-owned by Gazprom at the market price of $6.51/mcf ($230 per thousand cubic meters). RosUkrEnergy will acquire some of the natural gas from Kazakhstan and Turkmenistan.
On January 4, 2006, Ukraine signed a five-year agreement to buy 580 Bcf of natural gas from RosUkrEnergo at $2.69/mcf (comprised of less expensive natural gas from Central Asia). In 2005, Ukraine contracted to buy 812 Bcf at $1.41/mcf. In turn, Russia agreed to pay Ukraine natural gas transit fees of 7.3 cents per thousand cubic feet per 100 miles, a 47 percent price increase from 2005. The contracts are also subject to review each year and may be adjusted to new market prices.