We are constantly convinced that for
Ukraine has sufficient domestically produced gas to meet its population's needs. Residents directly burn approximately 15 billion cubic meters annually. Gas production in the country is 20 billion cubic meters per year, with this gas costing the population $26 per thousand cubic meters. The Ministry of Finance maintains that the cost of production does not exceed $15.
Naftogaz Ukrainy sells its own gas to households at a fixed price and in hryvnia through a network of regional gas distribution companies (regional and city gas companies). Two companies de jure controlled by Naftogaz Ukrainy produce it: the state-owned Ukrgazvydobuvannya, with 15,1 billion cubic meters, and the semi-state-owned Ukrnafta, with 1,76 billion (in 2014).
Private companies extracted 3,6 billion cubic meters of gas from state-owned fields explored with public funds this year. Although this gas is domestic, it is not a state resource available to Naftogaz. Private gas owners were deeply offended by the government, which in November mandated that the largest and most solvent industrial gas consumers purchase their gas exclusively from Naftogaz. This meant that private gas owners lost their market.
State-owned companies, having given way to private producers, lost the right to produce the same 3,6 billion cubic meters of gas. Therefore, NAK is left with only 16,9 billion cubic meters of its own gas production to supply the population, rather than 20. In principle, this volume is sufficient for the population, which, according to projected gas supply and distribution balances, will use 15,4 billion cubic meters this year.
Most citizens pay their gas bills promptly. The government provides utility subsidies to low-income families. If a temporary payment imbalance does arise, it is minor and not the fault of the individual, because in today's climate, not paying for gas and utilities is costly.
So, we calculated that in order to meet the needs of the population, neither Naftogaz nor the government has to spend foreign currency on purchasing imported gas, which today costs up to $378 per thousand cubic meters (Gazprom’s price for NAK in December 2014).
Why then is the government raising gas prices for the population? After all, wages don't automatically increase. People are getting poorer and increasingly turning to subsidies.
It turns out that the government is forced to allocate all proceeds from the gas price increase not to energy conservation or even to the financial recovery of NAK or the development of hydrocarbon production, but to subsidies for the population. In other words, it's simply transferring almost the same amount from one government coffer to another.
Who needs such manipulation of budget funds? The government, to pull the wool over the eyes of the IMF and obtain loan funds? Which Naftogaz will immediately transfer to Gazprom for expensive imported gas, supposedly needed by the population? But we already know that domestically produced gas is sufficient for the immediate needs of the population. Why then does Naftogaz buy expensive imported gas, particularly from Gazprom?
Anthology of Naftogaz's Deficit
Naftogaz annually imports 20-25 billion cubic meters of gas, paying for it in hard currency. If this gas is destined for industry, then let the industrialists pay for it. Moreover, domestic industry is predominantly private. Almost all the plant owners are known, although they try to hide real profits from Ukrainian tax authorities in offshore accounts and profit from illegal VAT refund schemes. However, they are forced to pay for the gas. Even Naftogaz sells its own produced and imported gas to industrial consumers at market prices, albeit in hryvnia. Contracts include an inflation component, therefore, such supplies protect the gas supplier from losses. Even in the current crisis conditions, potential losses cannot be significant. Unless industrialists go bankrupt en masse.
For now, the population is paying, as is industry. But NAK's deficit is not only not decreasing, but is steadily growing. So rapidly, in fact, that the government is forced to seek a loan "to save NAK" from European financial institutions, the World Bank, and the IMF. The IMF says: no reforms, no loans. Prime Minister Yatsenyuk promises to complete structural reforms in 2017. First and foremost, he promises to reform the energy market, the gas market, and Naftogaz. He also declares an urgent need for $15 billion to finance fundamental structural reforms.
Reeling from such an unexpectedly large demand, the IMF, among other things, strongly advised the government: first, raise the price of gas for households; this will stimulate savings. The IMF is right in principle, but without reforms, the increase is meaningless. The reforms hadn't even begun, and yet prices had already been raised. They began saving, and gas consumption had fallen by 20% over the past year. True, this was mainly due to the industrial shutdown caused by the crisis and the war. But they did save. Not enough, the creditors say: raise the price of gas for households by another 40% next year. And the Yatsenyuk government almost agreed to this. And then came the financial crisis. Its first victim: Naftogaz. By late November, the IMF mission already identified the Naftogaz deficit as the Yatsenyuk government's most significant failure.
After all, even the crisis doesn't explain Naftogaz's UAH 128 billion deficit. Furthermore, data on Naftogaz's deficit varies widely, with different sources citing figures ranging from UAH 97 billion to UAH 128 billion. The current hryvnia exchange rate instability doesn't explain this discrepancy, but rather demonstrates that not all of Naftogaz's deficit items are accurately accounted for.
According to IMF calculations, the NAK deficit will reach 5,7% of Ukraine's GDP by the end of 2014, although the Fund forecast 4,3% of GDP in the summer. If Ukraine's GDP is UAH 1,7 trillion, then 5,7% of this amount equates to almost UAH 100 billion—more precisely, UAH 96,9 billion (see ZN.UA No. 47, December 12, 2014, "IMF's Homework for Kyiv").
This deficit has been accumulating for years, and Naftogaz's gas wasn't always $376; Turkmen gas was $20, and Gazprom's gas was almost $500. At today's official hryvnia-dollar exchange rate of 1:16, the dollar equivalent of Naftogaz's deficit is $6,25 billion.
NAK was established in late 1998. Consequently, roughly speaking, for 15 consecutive years, Naftogaz has been increasing its deficit by $416,7 million annually (6,25 billion : 15). The estimated value of Naftogaz itself is approximately $25-28 billion. This means NAK's deficit is one-quarter of its value (25 billion : 6,25 billion). This is probably why foreign creditors and holders of Naftogaz's Eurobonds have not yet declared technical default, i.e., bankruptcy, for this issuer, hoping, at the very least, not to lose the money invested in its securities. The problem is that almost all the top managers of this potentially profitable company, as it turns out, managed its funds ineptly and to no avail for NAK.
We continue to be told, for example, by Minister of Energy and Coal Industry V. Demchyshyn, that 40% of Naftogaz's deficit is due to a discrepancy between the market price of gas consumed by households and—attention!—by combined heat and power (CHP) companies that use gas to generate heat. In other words, the government spent 40% of Naftogaz's $6,25 billion deficit, or $2,5 billion, to compensate for the price difference between households and CHP companies. What is this discrepancy, why does it exist, and why is the government agreeing to cover it from our own pockets as taxpayers?
People are afraid to discuss Naftogaz's actual deficit, even after the IMF mission's "verdict." The same is true for the structure and dynamics of Naftogaz's debts and borrowings, an integral part of which is the mysterious price differential between gas for households and district heating. The question of debts is causing near-panic among Naftogaz managers, and anyone who asks about Naftogaz's financial state is considered practically a traitor to the state. One can only hope that Naftogaz itself and the government are aware of the company's financial situation.
Such knowledge alone is worthless without an understanding of the reasons behind the creation and growth of the deficit. And most importantly, without the desire and will to recognize and, most importantly, address these reasons. If nothing changes, even another multi-billion dollar, long-term loan won't save Naftogaz, other than perhaps slowing its rapid descent into debt. It's possible someone will profit from this. But certainly not Naftogaz or the state, which hasn't received even a token dividend since Naftogaz's creation.
Unfortunately, none of the above explains the reasons for the formation and growth of Naftogaz's deficit and does not justify raising gas prices for households. How do market prices for imported gas affect each of us? After all, we consume relatively affordable domestically produced gas. The country is still planning to establish a uniform gas price for all consumer categories—after the reform of the oil and gas industry and Naftogaz, which is expected to take place in a few years.
Why then has no one in the country even attempted to answer these logical questions? And, most importantly, why has no one attempted to address the uncontrolled accumulation of Naftogaz's gas debts, which have left Ukraine not only at Gazprom's mercy but also hostage to the Kremlin's military and political aggression? Is everyone really content with this situation?
“The truth is that I have no eyes, no heart.”
In the process of searching for answers to these pressing questions, ZN.UA discovered that there are experts concerned not only with the speedy sale of Naftogaz, but also with its resource—gas—and financial situation. According to documents available to ZN.UA, the Accounting Chamber of Ukraine conducted two audits of Naftogaz in 2014. (During the Bakulin-Boyko administration of Naftogaz, audits were pointless; they already knew everything about the company's resource flows because they managed them themselves.)
In 2014, auditors from the Accounts Chamber investigated the causes of Naftogaz's deficit and analyzed the effectiveness of state subsidies for the very same gas price differential for households. The Accounts Chamber notified Yatsenyuk's Cabinet, parliament, fiscal authorities, and law enforcement agencies of the audit findings and potential risks for Naftogaz, and consequently for the government as Naftogaz's founder and primary sponsor. Why weren't they heard? Don't say it was because of the elections and the war.
How Kolomoisky "multiplies by zero" state
2 billion cubic meters of gas
The Accounting Chamber's audit report, reviewed by ZN.UA, provides clear answers to the above question. It explains why, while Ukraine produces 20 billion cubic meters of gas, of which only 15 billion cubic meters are used for household needs at a fixed price, Naftogaz annually purchases at least 2 billion cubic meters of imported gas to fully meet the needs of the same population.
It turns out that the 2 billion cubic meters produced by the semi-state-owned Ukrnafta, controlled by Privat, have not been accounted for by Naftogaz as a state resource for meeting the needs of the population since 2011. These state-owned 2 billion cubic meters of gas, with a market value of $700 million, are supplied by Kolomoisky, the owner of the Privat Group, with the tacit consent of Naftogaz, the Ministry of Energy and Coal Industry, and the government, to Dnipropetrovsk-controlled Dniprozot and other non-state enterprises. And not at the market price, which averages $350 per thousand cubic meters annually, but at cost—$15, maximum $26.
If the state-owned company Naftogaz had sold these theoretically state-owned 2 billion cubic meters of gas, perhaps not to the public, but to Dnipropetrovsk-based Dnipropetrovsk-based company, according to Kolomoisky's scheme, it would have earned the same $700 million. And the government wouldn't have to annually reimburse Naftogaz an additional $700 million for... the purchase of the same volume of imported gas to meet the needs of the public.
For the state, such a scam involving 2 billion cubic meters of domestically produced gas is costly, because it would still have to finance from the budget, in foreign currency, the import of those same 2 billion cubic meters of gas by Naftogaz to meet the needs of the population. For Naftogaz, this is a pointless scam—it will earn nothing. But for the most patriotic governor of the Dnipropetrovsk region, the owner of the Privat Group, it's business as usual. Using state gas. Are they accusing Kolomoisky of selflessness?!
By supplying "his" Dnipropetrovsk State Oil Company (Dniproazot) with 2 billion cubic meters of state-owned gas at a price of just $26, Kolomoisky profits on every thousand cubic meters. Because if he were to purchase the same volume of gas at the average annual market price of $350, he would have to pay $700 million annually. By using 2 billion cubic meters of Ukrainian gas, the oligarch-governor saves a whopping $624 million annually. Moreover, Kolomoisky profits not only by ensuring Dnipropetrovsk's fertilizer production costs are kept to a minimum by using cheap domestic gas, but also by selling these fertilizers at market prices, often in dollars.
This raises a simple question: why is Kolomoisky allowed to use 2 billion cubic meters of gas annually, produced de jure by Ukrnafta, a state-owned joint-stock company (NAK) controlled by him, at his own discretion? Moreover, as ZN.UA has repeatedly emphasized, since the emergence of its Privat management, Ukrnafta has reduced gas production from 3,2 billion cubic meters in 2008 to 1,9 billion in 2013 (see ZN.UA of March 1, 2014, "Time to Return the Oil and Gas Industry to Ukraine"; ZN.UA of June 28, 2014, "Gas Independence: To What Extent and by Whom is it Ensured in Ukraine"). Furthermore, Privat's management still holds approximately 2 billion hryvnias in undistributed dividends from recent years. Of this, the state, as the owner of 50% plus one share of Ukrnafta, owns half of this sum. But it's unclear when it will receive it...
The 2 billion cubic meters not accounted for by Naftogaz as a state resource represent a significant portion of the gas volume required by Naftogaz to meet not only the population's gas needs but also the production of thermal energy by heat and power utilities.
The arithmetic is simple. As we know, the population directly requires approximately 15 billion cubic meters annually. This is enough gas for even one state-owned gas producer, Ukrgazvydobuvannya (15,1 billion cubic meters in 2014). However, district heating companies, which generate heat for the population, use 8-10 billion cubic meters annually. This is where the 2 billion cubic meters of gas produced annually by Ukrnafta would be needed. This is a quarter of the gas needs of district heating companies. But, remember, the enterprising governor of Dnipropetrovsk Oblast has already sold this amount to Dnipropetrovsk. Consequently, Naftogaz must purchase not 6, but 8 billion cubic meters of imported gas at $350 per thousand cubic meters. And the state must annually compensate for the difference in price between imported gas and gas supplied to households, since thermal energy is also supplied to households at a fixed state price. If Ukrnafta's 2 billion cubic meters had been state-owned, rather than "zeroed" by Kolomoisky, Naftogaz would have saved $700 million annually.
"I don't see anyone,
I don't hear anything, I don't tell anyone anything
I won't tell"
it won't pass anymore
Photocopies and copies of documents in ZN.UA's possession demonstrate how Ukrnafta commercialized state-owned gas to the detriment of the state. First and foremost, an official letter from the head of the Accounting Chamber of Ukraine, dated November 27, 2014, addressed to Volodymyr Groysman, the pro-presidential speaker of the Verkhovna Rada. The document was duly registered by the Verkhovna Rada Secretariat on November 28 (see ZN.UA's website). It contains information "On the results of the audit of the effectiveness of the use of state budget funds to compensate NJSC Naftogaz of Ukraine for the difference between the prices of imported natural gas and its sales prices for the production of heat for households."
You can read the letter by following the link.
The Accounts Chamber's audit report finally offers hope that this time the story of the accounting and use of state gas resources will not simply be publicized. I hope that parliament will finally address this matter and put a stop to the illegal use of state gas.
The Accounting Chamber's findings also served as the basis for substantiated parliamentary inquiries by Viktoria Voitsitska, a member of parliament of the 8th convocation of the Verkhovna Rada of Ukraine and Secretary of the Verkhovna Rada Committee on Fuel and Energy, Nuclear Policy, and Nuclear Safety, regarding the management effectiveness of Naftogaz Ukrainy. It's surprising, however, that Mykola Martynenko, the head of the influential parliamentary Fuel and Energy Committee for many convocations of the Verkhovna Rada, hadn't previously made such logical inquiries to the relevant officials and bodies. Didn't see the basis? Didn't want to see it?
On December 17, V. Voitsitska sent her parliamentary inquiries to the head of the Accounting Chamber of Ukraine, R. Maguta; the head of the State Financial Inspectorate of Ukraine, M. Gordiyenko; the Minister of Energy and Coal Industry, V. Demchyshyn; the Prime Minister, A. Yatsenyuk; and the Prosecutor General, V. Yarema. I hope that the Speaker of Parliament, the Prime Minister, and all the aforementioned senior government officials responsible for overseeing the activities of Naftogaz of Ukraine will genuinely inquire into the reasons for the current state of what is arguably the most problematic state-owned holding company today. They will also finally clarify how, why, and at whose hands Naftogaz's debts have accumulated to this day. Why does the Cabinet of Ministers annually withdraw hundreds of millions of hryvnias from the state budget, that is, from taxpayers' pockets, to subsidize the National Atomic Energy Corporation (NAC), which the government should actually be using to provide targeted assistance to hundreds of thousands of citizens for whom rising gas prices and the heat generated from them have become a pressing issue, almost a matter of survival? Authorized senior officials will have to figure out why Privat is able to profit from gas, which the state is forced to subsidize. And not only figure it out, but, more importantly, stop and make impossible this practice. Once and for all. Otherwise, questions will arise not only about their competence but also about their lack of motivation.
The Accounts Chamber briefed the relevant parliamentary committee on Naftogaz's existing problems. What will be the outcome?
Now, let's look at the audit report in more detail. The Board of the Accounting Chamber of Ukraine found that "the allocation of UAH 3,9 billion from the state budget to Naftogaz of Ukraine in 2012 to compensate for the difference between the purchase prices of imported natural gas and its sale to economic entities for the production of heat energy consumed by the population did not resolve the problem of improving the efficiency of Naftogaz of Ukraine and balancing its financial position. Since 2012, the company's financial position has been deteriorating. At the end of 2012, Naftogaz of Ukraine's losses amounted to UAH 9,3 billion."
The Accounts Chamber notes: "Current legislation does not define the sources of gas resources for economic entities to generate heat for the population, nor does it provide for specific compensation. Furthermore, in 2012, planning for compensation expenses was carried out in conditions where legislation did not define sources of revenue for the state budget to implement it... Since July 2010, the Law of Ukraine "On the Principles of Functioning of the Natural Gas Market" has created the grounds... but the Cabinet of Ministers has still not brought its own decisions into line with this law regarding sources of gas supplies to thermal power companies for the production of heat for the population, the developers of the annual gas balance, or the determination of the bodies responsible for overseeing the implementation of the gas balance after its approval by the government.
The practice of regulating relations between Naftogaz and thermal power companies solely by government acts is not consistent with the Law of Ukraine “On Oil and Gas,” since it limits the government’s powers to the implementation of state policy in the oil and gas industry and the exercise of its management.”
I note that this is not the first time the Accounts Chamber has strongly recommended that the Cabinet of Ministers, the Ministry of Energy and Coal Industry (Ministry of Fuel and Energy), and Naftogaz itself address the violations identified by auditors, which "have become persistent and systemic." The result of this inaction, in particular, was that "as of June 1, 2014, the company's audit commission and its supervisory board did not review Naftogaz's annual reports at their meetings."
Moreover, even the appointment of a new post-Maidan government in February and the subsequent appointment of new Naftogaz management by the Yatsenyuk government did not change the situation and the vicious practice of non-collegial decision-making that is fundamental to the activities of NAK.
I'm not distorting facts or adjusting dates—this is precisely what the Accounting Chamber states, and in precisely this order: "As a result, 2,0 billion cubic meters of domestically produced gas in 2012 were not included in the resources of Naftogaz of Ukraine and were not taken into account when determining the amount of compensation for the difference between the purchase prices of imported gas and the prices at which it was sold to thermal power companies for the production of heat for households. This volume of gas was used not for household needs, but for other consumers. PJSC Ukrnafta sold this gas not at state-regulated prices, but at commercial prices."
The Ministry of Energy and Coal Industry and the National Joint Stock Company Naftogaz of Ukraine do not ensure effective and reliable planning of gas volumes for the needs of thermal power plants and control over its use."
A blunt question: does this conclusion by the Accounts Chamber mean that since 2010, not only all previous governments and Naftogaz top managers, but also the current ones, through their apparent inaction, have been encouraging the uncontrolled (!) use of gas produced by Ukrnafta, not for the production of heat for the population at a fixed price subsidized by the state budget, but at a commercial price and not at all for meeting the population's heat needs? Isn't this why we most often hear Naftogaz screaming about the billion-dollar debts of its largest gas consumers—thermal energy companies—that both Naftogaz and the government, which continues to practically "manually" manage Naftogaz's commodity and gas flows, benefit from this situation of uncertainty? As the popular saying goes, he whose cap is on fire shouts the loudest about theft...
There's no doubt that this uncertainty suits the beneficiary of Ukrnafta's Privat management, which has worked for years to benefit its minority shareholder, the Privat Group. Documentary evidence that gas produced by Ukrnafta, not only in 2012, was sold, contrary to government regulations, to Naftogaz, the responsible supplier of gas for households and district heating and power utilities, is also provided by the case materials recently heard by the Kyiv District Administrative Court. Specifically, the case in question involved a petition filed by PJSC Dniproazot. Unlike most enterprises in Ukraine's chemical industry, which were privatized at dumping prices by Dmytro Firtash through his Ostchem holding, Dniproazot is controlled by Kolomoisky.
On December 5, 2014, the court denied Dniproazot's motion to temporarily suspend consideration of the case brought by seven private gas companies against the Cabinet of Ministers over Resolutions No. 596 and No. 599, which obligated 90, and then 150 industrial gas consumers, including Dniproazot, to purchase gas exclusively from Naftogaz. Although the private plaintiffs' arguments were substantiated in the substance of the claim, given current legislation regulating the gas market, and on December 16, the court ruled to overturn the aforementioned government resolutions (although the Cabinet of Ministers disagreed with this decision, and the IMF mission, on the contrary, advised repealing Resolution No. 596), this does not mean that the court automatically allowed Dniproazot to purchase gas from Ukrnafta. This doesn't mean that Ukrnafta, a controlling stake of which (50% plus one share) is state-owned and managed by Naftogaz, can sell gas produced in Ukraine to Dnipropetrovsk Gas Pipeline. Or does it?
On December 1, the Kyiv Administrative Court of Appeal upheld the appeal of PJSC Ukrnafta and invalidated NERC Resolution No. 1177 of September 13, 2012, "On Approval of the Procedure for Forming, Calculating, and Setting Natural Gas Prices for Economic Entities Producing It." This resolution obligated the semi-state-owned Ukrnafta to supply natural gas at a regulated tariff specifically to meet the needs of households and budgetary organizations. Privat, which owns 42% of Ukrnafta's shares, had avoided this requirement for several years, failed to comply with government decrees and orders, and filed lawsuits. Privat wanted to cash in on its own gas production. The Kyiv Administrative Court of Appeal gave Kolomoisky a free hand. Although, his hand wasn't exactly tied, given that for the past three years, Ukrnafta has been selling natural gas to its "inner circles." Now the gas-heavy governor will be free to sell gas at his own discretion. Unless, of course, the government and parliament respond to the warnings from the Accounting Chamber of Ukraine.
A more significant lever would be the adoption of legislative amendments to the law on joint-stock companies in which the state holds a 50% plus one share stake. This directly affects Ukrnafta. Currently, the Privat Group, which owns 42% of PJSC Ukrnafta, has the legal ability to disrupt the general meeting of shareholders of the PJSC, appoint its top managers, and exercise operational management of the company. Naftogaz, which is de jure authorized to manage Ukrnafta's state shares, remains a de facto bystander. Meanwhile, Privat uses both the gas and the billions of undistributed dividends as it pleases. Several bills have already been registered in parliament that would allow government representatives to seize the initiative. The adoption of such amendments promises to be both exciting and very expensive.
P.S. Naftogaz must repay Gazprom the debt accumulated for previously used and unpaid Russian gas urgently—by the end of 2014 (Naftogaz already transferred the first tranche of $1,45 billion to Gazprom on November 4). If Gazprom does not receive the $1,65 billion second tranche to repay Naftogaz's three-billion-dollar debt (one of the mandatory conditions of the temporary tripartite Brussels agreements of October 31, 2014), the Russian gas holding company will have every reason to refuse Naftogaz supplies of both the 2 billion cubic meters of gas paid for in December, worth $756 million, and the volume that Naftogaz is still planning to order from Gazprom for the first quarter of 2015.
Seven weeks ago, the Brussels "winter package" envisaged the possibility of Naftogaz purchasing 5 billion cubic meters of Gazprom gas on a prepayment basis. Today, the government is frantically searching for foreign currency to purchase at least another 2 billion cubic meters of gas. Ukrnafta's unaccounted gas reserves could come in handy!
The projected price of Russian gas starting in January is $340. It would only be possible to make an advance payment. But that's another story.
Alla Eremenko, Zerkalo Nedeli, Ukraine
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