Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)
Ukraine’s Prime Minister Yulia Tymoshenko touted January’s gas agreements between Russia’s Gazprom and Ukraine’s main energy company Naftogaz Ukraine as creating transparency in the sector by eliminating the gas trader Rosukrenergo. But while Rosukrenergo has definitely exited, the Ukrainian gas market is a far as ever from transparency – and Naftogaz Ukraine is far from being the only provider of gas to industry.
“Naftogaz has cut off our gas since May 5th, the plant has completely stopped working,” a source close to management of Rivneazot, West Ukraine’s largest nitrogen fertilizer producer, told bne. “And the reason is the Prime Minister [Yulia Tymoshenko]’s personal feud against Dmitry Firtash. We have no debts to Naftogaz.”
Dmitry Firtash was the man who until January 2008, as co-owner of Swiss-registered gas trade Rosukrenergo, appeared to hold all the strings in Ukraine’s notoriously opaque gas industry. For this reason he was the personal bete noir of firebrand Prime minister Yulia Tymoshenko.
In 2008, she declared it her mission to eliminate Rosukrenergo, and all intermediaries in general, from the gas trade. She claimed to have achieved this in the gas agreement finally signed between Ukraine’s domestic energy operator Naftogaz and Gazprom in January 2009, ending a stand-off between Russia and Ukraine that saw gas supplies to Europe interrupted. The agreement stipulated that Gazprom would in the future sell gas directly to Naftogaz, with Naftogaz granted the status of monopolist gas importer for Ukraine.
In May, the conflict then took another twist, when Naftogaz cut gas supplies to three chemical companies owned by Firtash – Rivneazot, Crimean Soda Plant, and Crimean Titan. Supplies to the Crimean plants, but not to Rivneazot, were later restored. Naftogaz claimed the companies had run up debts for gas supplies, while the companies argued they were consuming gas they has purchased earlier.
Demonstrating how politicized Ukraine’s gas market has become, Naftogaz’ decision to restore supplies to Firtash’ Crimean companies led to the dismissal from the company of deputy CEO Vladmir Trikolich on May 25, according to media reports that were confirmed by Rivneazot. “Tymoshenko demanded his head for the decision,” said bne’s source.
The episode with Firtash’ companies goes to show that the elimination of Rosukrenergo may have increased government control over the gas sector in Ukraine, but it has not created the hoped-for transparency.
In fact, the move may have done exactly the opposite, thanks to the ongoing collapse in Ukrainian industry. Supplying gas to industrial customers is the only profitable part of Ukraine’s gas sector, with gas supplies to households and utilities tightly regulated by the state. So when Tymoshenko vowed to remove intermediaries, part of the idea was to improve Naftogaz’s hitherto disastrous financial position by giving the company a dominant position on the market for industrial customers.
But in times of crisis, having a state-run and budget-subsidized company supply energy to cash-strapped industrial customers has one huge disadvantage: any decision to cut off gas to a major industrial plant, because of debts, becomes a political decision taken at highest level, opening the door to populism, cronyism and corruption and cronyism. Government officials ultimately decide the fate of tens of thousands of workers, and of their oligarch employers.
According to Ukraine’s Centre of Energy Studies, industrial companies’, excluding utilities, payment discipline is at 86.1%, with total debts of $2bn.
So while Firtash’ chemical companies had their gas switched off for (alleged) debts of less than $1m, other oligarchs can run up substantially larger debts with apparent impunity, as seems to be the case with metallurgical giant Industrial Union of the Donbass (IUD), owned by oligarch’s Sergei Taruta and Vitaly Gaiduk. A letter leaked to business daily Kommersant-Ukraine June 10 showed that Naftogas’s deputy head Igor Didenko had directly ordered supplies to be continued to IUD plants, despite IUD having run up nearly $51m in debts.
N.B: Vitaly Gaiduk also just happens to be head of Tymoshenko’s advisory service, and Naftogaz head Oleg Dubinin, until moving to Naftogaz Ukraine in December 2007, was CEO of IUD-owned Dzherzinsky Metallurgical Combine. IUD is one of the most heavily indebted industrial groups, with an estimated $3bn total debt, of which $500m is still due in 2009.
Privat Group’s private gas supply
Privat Group, co-owned by billionaire Ihor Kolomoyskiy, is another oligarch structure for which Tymoshenko is said to have a soft spot for. In 20005, since she backed Privat in its attempt to take Nikopol Ferroalloy Plant from Viktor Pinchuk in scandal that led to her first exit from government.
Privat is also, via Ukrnafta, Ukraine’s largest oil and gas producer, owner of a large stockpile of gas estimated at being from 3bn to 10bn cubic meteres held in underground storage. Ukrnafta. While the state in fact holds a 51% stake in Ukrnafta, Privat group, with a 42% stake exercises operational control over the company via management appointments.
Ukrnafta, as a state-owned company, is by law allowed only to sell its gas to households at prices around 11 timed lower than those charged to industrial customers. Privat has for this reason since 2007 blocked any sale of Ukrnafta’s gas, which is where the stockpile comes from.
But when in late February 2009, deputy chairman of Ukrnafta, Valentin Franchuk, linked to Privat Group, moved to become deputy chairman of state-controlled Naftogaz, analysts held it only a question of time before Ukrnafta’a gas seeped through to industrial consumers. Sure enough, at the end of May, the first sketchy reports provided by trading structure insiders surfaced of Ukrnafta gas finding its way to industry, unhindered by the government.
Analysts agree that Ukrnafta has been selling its oil for artificially low prices to Privat-affiliated companies. Since the Privat group comprises gas-guzzling metallurgical and chemical plants, it would not be far-fetched to think that the same scheme is going on with its gas, although this has not been confirmed.
Gazprom Sbyt of the action
The biggest winner from Tymoshenko’s elimination of Rosukrenergo as intermediary is, potentially however, Gazprom itself, in the form of its fully-owned Ukrainian subsidiary, Gazprom-Sbyt Ukraine, as well as a possible direct supplier of Ukraine’s chemical sector itself.
According to the gas agreements signed between Naftogaz Ukraine and Gazprom, Gazprom Sbyt gained the right to purchase up to 25% of gas imports, reselling a maximum of 7.5bn cubic meters to industrial customers. According to Gazprom Sbyt’s CEO Anatoly Podmishalk’skii, the company aims to sell 4-5bn cubic meters in 2009,
“It’s a myth that Tymoshenko got rid of intermediaries,” Bogad Sokolovsky, adviser to President Yushchenko on energy issues, told bne. “What is Gazprom Sbyt, if not an intermediary and indeed one that surpasses all that went before. And explain to me how it is that Gazprom Sbyt Ukraine is managing to conclude contracts with the most solvent companies in the country?”
Gazprom Sbyt cannot undercut Naftogaz in price, since it buys its gas back from Naftogaz at the import price, and has to earn a margin on this. However, in crisis times, it crucially has the resources to offer considerable more flexible payment conditions and also more supply security than cash-strapped Naftogaz. This means it is likely to attract the more solvent companies that can afford to pay the mark-up to get the added payment flexibility, where Naftogaz demands prepayment from industrial customers. This will then leave Naftogaz with the dross who are struggling to pay their bills.
It is however not just Gazprom Sbyt that is filling the void left by Firtash. Big brother Gazprom itself is starting to loom as a potential direct supplier of Ukrainian industry – with the Ukraine’s crisis-stricken chemicals plants serving as a bridgehead.
Ukraine’s industry minister Volodymyr Novitsky announced June 3 that six nitrogen fertilizer producers would be allowed to purchase gas directly from foreign companies. “Nitrogen fertilizer producers are in a very special position,” a source in Ukraine’s Union of Chemical Producers, which was involved in lobbying the resolution, told bne. “Gas for them is not just a source of energy, but their key raw material, comprising around 70% of costs”.
“The suppliers could be famous Russian companies,” the source explained. “This would be a step towards demonopolisation of the gas market. After all, what is Naftogaz Ukraine if not a giant intermediary itself?”
But the move has prompted apprehensions that any company supplying cheaper gas directly to these companies would then be in a prime position to acquire or privatize them. President Yushchenko has been bitterly resisting the government’s attempts hitherto to privatize Odesa Portside Plant, Ukraine’s most strategic chemical asset, and one of the companies on the list. Russia’s largest petrochemicals holding, Sibur, is a Gazprom affiliate.
“The whole thing seems unclean,” Bogdan Sokolovsky says, referring to the government announcement. “It in fact directly contradicts the gas agreement between Gazprom and Naftogaz that stipulates Naftogas as monopoly importer. How will it then be possible?”
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