Gazprom finally reveals its "top secret gas formula"

It was once the oil equivalent of Coca Cola’s secret formula, but now Russian energy giant Gazprom has revealed how it charges for gas. The new-found transparency is likely to kill off talk of political motives behind price increases.

The news came as Gazprom and Ukraine announced they had reached an in principle deal over gas prices, although the exact price for 2008 has not been announced.

Gazprom's plan is for Ukraine to move gradually to market prices for gas. That means around $US 300 per thousand cubic meters – compared with the current price of $US 130.

So far, Gazprom suggested it would accept $US 160 per thousand cubic meters, if it agrees to pay market price by 2011.

Gazprom’s formula for calculating gas prices for non-CIS countries reveals a lot about the company’s priorities.

Firstly, it takes the volume of gas on the foreign market and calculates the price it sells at over a defined period. Then it applies the dollar exchange rate for the final day of the reference period.

What this means is the more gas the consumer countries use, the less they pay for it.

But the formula also protects Gazprom's future earnings: the more money it earned from gas sales in the reference period – the higher the tariff.

Finally, it accounts for exchange rates. If the rouble declines, the gas price goes up.

“Gazprom usually uses a pretty simple quotation which would include prices for crude oil and prices for fuel oil. They will mix it with specific coefficients to get and average,” said analyst Dmitry Lukashov.

Gazprom is in talks with European countries and will set the price for these customers in the first quarter of 2008.

Most CIS neighbours have already signed their contracts, with Gazprom expecting to wrap up talks with Ukraine well before the New Year.