Naftogas to be broken up?

The new Ukrainian authorities have begun fleshing out their economic reform programme. A first step is to restructure the only state gas and oil monopolist, Naftogas. The new authority believes that this procedure should be completed by 2014 and will help enable the country to attract investment in the energy sector from Russia and the European Union. But there is significant skepticism about whether these countries are even interested in investing in Ukraine’s energy sector.

Despite having a monopoly in such profitable spheres as gas and oil production and distribution, the Ukrainian state company Naftogas has been close to bankruptcy several times. There was a period when all the country waited at the beginning of each month to discover whether Naftogas was able to pay Russia’s Gasprom for the country’s gas supplies. The state owned company was given loans from state financial institutions to enable it to meet domestic gas demand.

It has been suggested to UBI by representatives of one major player in Ukraine’s gas market that all Ukrainian governments have used funds from Naftogas to pursue their own political agendas and projects, thus the economics of the company are not fundamentally flawed, but that it is the ability of politicians to redirect funds that is the cause of the company’s woes. Such claims cannot be substantiated. A further issue affecting the company’s economics is that the price at which the state company sells gas is a political issue. Many believe it is necessary to raise the gas price to market rates, but that has failed to happen due to politicians’ unwillingness to be seen as responsible for increasing gas prices, and thus potentially lose votes.

The Ukrainian authorities are thus seeking alternative ways to support the state company. As UBI has previously commented, prior to Viktor Yanukovich proposing restructure of Naftogas, there was discussion regarding the assets of Ukrtransgas (which controls the gas mains, subsurface gas storage facilities, gas-transfer stations and international transit pipes through Ukraine) and whether these might be allocated to another state company. It is planned that the gas-transportation system should be modernised by 2013. By 2014 oil and condensate extraction will be increased to 4.7 m tonnes and 23 billion cu m per year respectively. The Minister of Fuel and Energy, Yuriy Boyko, said that the Cabinet of Ministers of Ukraine had approved the bill ‘the gas market of Ukraine’. In this document the intention is to divide Naftogas into extracting, transport and selling companies. Also the state organisation would break up the monopoly in Ukrainia’s domestic gas market. The Prime-Minister of Ukraine, Nikolay Azarov, said that this bill will be sent to the Verkhovna Rada (the country’s highest legislative body) at the earliest opportunity. “It clears the way for negotiations with the European Union’, said Azarov.

Analysts say that the Ukrainian authority’s consent to divide Naftogas is related to its attempt to encourage interest from investors into the country’s gas-transport system. This could encourage the European Union and Russian Federation drop their plans for the ‘South stream’ project to by-pass Ukraine. It would entail a new gas pipeline being laid from Novorosiysk in Russia to the Bulgarian port of Varnu and then on to Italy and Austria. It would costs about E8.6 bn and was planned to be in operation by 2015 with a capacity of 63 bn cu m per year. If this project were to go ahead it would leave the Ukrainian gas transport system under-utilsed. Ukrainian President Viktor Yanukovich, during his visit to Sumy (the northern-eastern part of Ukraine), said that it is important to modernise the country’s national gas-transport system to order to improve its reliability.rnThe EU does not appear interested in investing money into Ukraine’s gas-transport system, as it is reducing its reliance on Russian and central Asian gas which transits the country, and has seen a drop in demand since the credit crunch.

The Russian Federation’s authorities have also made no secret of their wish to take control of the Ukrainian gas transport system. Such a decision is considered politically impossible to be taken ahead of the local elections which are due to be held on 31st of October because it would give ammunition to the opposition to attack their competitors in coalition. So the plans to break up Naftogas are not seen as vote winners as they are not viewed as making a significant contribution to the final outcome.