Friday, January 11, 2008

Tymoshenko tackles gas

"Gazeta po Kievski' runs a story explaining how Tymoshenko intends to keep gas prices low for domestic consumers, while tackling the shady middlemen that supply gas to Ukraine.

Below are [loosely translated] portions:

Tymoshenko squeezes the Kremlin's arm - will cheap fuel for 'kommunalki' [municipal requirements] be obtained from the intermediary company "UkrGazEnerho's" reserves?

Today the first serious offensive by prime minister Yulia Tymoshenko directed against the gas mediators, connected directly with Moscow, took place. The national commission for the regulation of electric power (NKRE) declared, that on 8th January it has set the quotas for sale of gas for the monopolist "UkrGazEnerho" at 5 billion cu.m. per year. For the company, which had earlier sold 30-40 billion cu.m. p.a. to industrial enterprises - this will represent multimillion financial losses. Experts consider Tymoshenko can now provide cheap gas for a minimum of half a year to provide 'kommunalky' with cheap gas, obtained from the reserves "UkrGazEnerho", located in Ukrainian underground depositories.

Lustre of "UkrGazEnerho" [contrasts with] the poverty of "Naftohaz Ukrainy"

First a note about the mediator "UkrGazEnerho" itself. It was created as one of the conditions of the signing of agreement between Russia and Ukraine which put an end to the "gas war" of winter 2005/2006 when Russia closed off the gas valves.

"UkrGazEnerho" was founded by two companies - National Joint Stock Company "Naftohaz Ukrainy", and the [infamous] intermediary "RosUkrEnergo" (50% of which belongs to "Gazprom"). It was determined, that the company would concern itself [with the more lucrative] deliveries of gas to industrial users in the Ukraine. But how much gas it had the right to sell was not specified.

The ex-head of "Naftohaz Ukrainy" Aleksey Ivchenko, noted to 'Gazeta po Kievski', that in the spring of 2006, the NKRE issued a licence to "UkrGazEnerho" for the sale of 5 billion cu.m. of gas only. The remaining gas they had to sell to "Naftohaz Ukrainy".

However, elections took place soon after. Because of the [intractable] squabble between the "orange factions", Yanukovych's team came to power, and the Minstry of Fuel and Energy team changed. During August 2006 the same NKRE approved an increase of the gas quota that could be sold to "UkrGazEnerho" to 10 billion cu.m. This despite, as Ivchenko noted, in reality "UkrGazEnerho" was selling about 40 billion cu.m of gas to industrialists annually.

So we have the following picture: "Naftohaz Ukrainy" was selling expensive imported gas at reduced rates for municipal needs to provide hot water and heating for the population. And despite the fact that bills were being paid, money was disappearing to the intermediaries. As a result, debts of "Naftohaz Ukrainy" to "RosUkrEnergo" for the supplied Central-Asian gas were growing, as were the debts of the middleman to "Gazprom". The situation came to a head during the autumn last year when a "gas debt" of 2 billion dollars owed to Russia came to light. It was necessary to pay for this with our gas from Ukraine's underground storage facilities. During the summer "Naftohaz Ukrainy" had 8 billion cu.m. of gas stored. Now - this has 'gone', according to the new head of the National Stock comany Oleh Dubina.

[In contrast] the financial picture at "UkrGazEnerho" was excellent. Industrial consumers are forced to agree to buy gas at any declared price, considerably higher than the price for the population. And if bills were not paid in time, the principle "no payment - no gas", was applied. The company made multi-million profits, and as a result, the Russian "Gazprom" profited rather well too.

By giving approval to NKRE to "screw down "UkrGazEnerho", Tymoshenko solves several problems. First she provides 'recognition' to the businesses that supported her , and secondly there will be low tariffs for citizens' municipal services' gas consumption.

Firstly, the fundamantal portion of gas to industrialists will now be supplied by "Naftohaz Ukrainy", probably at prices lower than those proposed by "UkrGazEnerho". Furthermore, the industrialists will have an alternative, in contrast to the previous years.

Benefits from the innovations of lady Yu will be accrued e.g. by the Industrial Union of Donbass (ISD), headed by Vitaliy Hayduk. This is not for free - according to the information gained by "Gazeta po Kievski", they sponsored BYuT during last year's prematurely-called parliamentary elections. And Oleh Dubina, an associate of Hayduk, was appointed head of "Naftohaz Ukrainy".

Secondly, Tymoshenko has now, at the beginning of the year, started her campaign to displace intermediaries from gas deals between the Ukraine and Russia. This will ensure she will be better prepared for the complex talks with Russia on the price of gas for 2009.

Experts consider that lady Yu has acted correctly by tightening the screws on "UkrGazEnerho" gradually. But it does not deprive them of the license to sell gas, which could have caused an international scandal and heightened the desire of Russia to re-examine price for the current year. It is clear though that as a result of the quotas introduced, "Gazprom" will lose money, for which it will eventually present a bill to Tymoshenko.

Thirdly, Yulia Volodymyrivna has prepared a trap for "UkrGazEnerho" - the gas exists, but cannot be sold.

It's a simple scheme. There are approximately 30 bn cu.m. of gas in the Ukrainian underground depositories right now. If we believe the management of the National stock company, none of this belongs to Ukraine, i.e. the gas there is owned in essence by "RosUkrEnergo" and "UkrGazEnerho". Let's assume at least half - 15 billion cu.m. belongs to "UkrGazEnerho". But now they can sell only 5 billion cu.m. What can they now do with the remaining 10 billion?

An expert, Yelena Viter, notes export to Europe would be the most favoured version, but lady Yu can close off this path legislatively. Anyhow, transit pipes to the West are the property of the state.

The other option remains the sale of this gas to "Naftohaz Ukrainy" - at the low rates of 2006 as a fuel for municipal market. Everything is brilliant and simple. Not without reason has Yulia Voldymyrivna "froze" any increase in the price of the gas to the 'kommunal'shchikiv' for 2008, and also, therefore, tariffs to the population. Compensation from the budget will hardly cover any increase in the price of imported gas to 180 dollars per thousand cu.m.

While the authorities re-engineer their different gas schemes, which they themselves concocted, to us, to simple Ukrainians, only one matter is important - that the price of heating and hot water does not rise. What methods Tymoshenko acheives this by is of little interest."
The response from "UkrGasEnerho has been swift. An article from today's "Ekonomicheskiye Ivestia" entitled "NKRE has opened door to gas traders" provides details. Here are some portions:

The national commission for the regulation of electro-energy (NKRE) has decided to liquidate the monopoly of the joint enterprise "UkrGazEnerho" on the internal gas market by limiting the deliveries of fuel by the company at uncontrolled tariffs. Now instead of 32 billion cu.m of gas per year, UkrGazEnerho will only be able to supply its consumers with 5.04 billion cu. m.

Member of UkrGazEnerho supervisory council Andriy Halushchak considers that such limitations will lead to the destabilization of gas market, and that they are incorrect and could negatively affect the 'fulfillment of the gas balance'. At UkrGazEnerho they fear the decision of the NKRE means the terms of fulfillment of obligations on transit of Russian gas to the countries the European Union will be broken.

The NKRE justified the legality of their decision by the fact that UkrGazEnerho is a structure affiliated to "Naftohaz Ukrainy". According to Ukrainian legislation, the total share a business group possesses in the market for gas cannot exceed 35%. Taking into account the acting licences on the delivery of gas for other enterprises of "Naftohaz Ukrainy," the remaining volume of gas for UkrGazEnerho is 5,04 billion cu.m ".

The NKRE ruling implies that UkrGazEnerho will have spare gas, but the company will not will have the rights to deliver it to its consumers. According to the head of NKRE, Mr. Valeriy Kal'chenko, "The remaining volumes of gas UkrGazEnerho can be turned over to other suppliers at uncontrolled tariffs".

One expert considers the purpose of the actions of the NKRE is to create conditions that will stimulate revival of gas traders who will earn money on the resale of gas from the importer to end user. Because of this, its cost will grow.

LEvko says, as one door [or valve] closes, another one opens..

"All the rich people in Ukraine made their money on Russian Gas" - Ihor Bakai, 1998


Anonymous said...

for all her plans and noise I don't see how She's going to get round the basic problem and that is that Ukraine is still getting gas from Russia heavily subsidized. Only if Ukraine paid market prices and took market prices on transit then there would be a chance of stopping the corruption on the Russian/Ukrainian border - otherwise Ukraine remains ensnarled in the Russian corruption.

hans said...

Thanks for the coverage on this! Been trying to work on some of the angles myself, but nice to have some translations up as well.

elmer said...

Isn't one of the keys here that it is NOT all Russian gas?

Isn't a large portion of the gas coming from Turkmenistan?

And isn't it true that the "intermediaries" have prevented Ukraine from getting gas directly from Turkmenistan, and instead Ukraine is forced to use the "intermediaries" with respect to Turkmenistan gas also?

LEvko said...

It's true Ukraine is getting heavily subsidised gas from Central Asia and Russia. I am no expert in these matters, but as I understand it, unlike oil, there is no true market price for natural gas at any given time. Supplier and customer agree contracts for delivery at mutally acceptable prices. Everyone is aware that Ukraine will eventually have to pay 'the going rate', less transit fees for west-bound gas, in the future.

But the two-tier intermediary mechanism, RosUkrEnergo and UkrGasEnergo, was set up with certain aims in mind. Firstly to enable funds to be siphoned off by, shall we say, 'nachal'stvo' in more that one country, and secondly to bleed Naftohaz Ukrainy dry and force a debt-for-asset swap. Naftohaz are the owners of Ukraine's pipeline network and underground storage facilities, as well as significant domestic gas reserves.

Tymoshenko has had many months to prepare a strategy for achieving her goals in this matter. But it was new minister of defence Yuriy Yekhnurov, during his stint as PM, who helped set up UkrGasEnergo, and received much flak from Yulka T. at that time.

elmer said...

You are doing great work on covering this!

Here's an additional article about the gas "intermediary" situation.

Note also, Levko, the use of the word "fiery"...

Anonymous said...

I'm no expert either but it seems most other countries except Belerus were paying a much higher price than Ukraine - so why did Russia sell cheaper? The most plausible reason seems to enable them take over the pipelines eventually - that is Ukraine is trying to have it both ways - understandbly enough - to both keep the pipelines (by legislation for example) and pay less for gas. As for UkrGas Energo it therefore seems most plausbile that it was a Russian demand since they were in a position to dictate the conditions - although it also probalby suited some on the Ukrainian side but why Yekhunrov? Do you have information? As for Tym it's easy to give out flac in the oppostion but even her flax is totally inplausible - 50$ gas and no midddleman???? She is not a politician to face up to or get people to face up to grim reality - and that somehow by administrative measures you can get round the basic problem without damage.