The government talks about restructuring Naftogaz, yet on July 1, 2016, with Resolution No. 496, it effectively preserves Naftogaz's monopoly. Thus, it nullifies even the beginnings of creating a competitive gas market in Ukraine. Instead, it gives the green light to the covert privatization of the Ukrainian gas transportation system.
The government talks about restructuring Naftogaz, yet on July 1, 2016, with Resolution No. 496, it effectively preserves Naftogaz's monopoly. Thus, it nullifies even the beginnings of creating a competitive gas market in Ukraine. Instead, it gives the green light to the covert privatization of the Ukrainian gas transportation system.
If this is true, then why, and who benefits? ZN.UA continues to investigate, in particular, who the ultimate beneficiaries are. But what/who should we be looking for?
It was on July 1st that the number of "gas" lobbyists in the Verkhovna Rada became known. The head of the board of the National Joint-Stock Company Naftogaz of Ukraine, Andriy Kobolev, counted how many there are in the current parliament.Read more about it in the article Andrey Kobolev. An unnoticed "veteran" of the gas pipeline.)? Up to seventy? Kobolev spoke (without naming names) only of what he considers irrefutable evidence of the presence of "gas" lobbyists, of whom there are likely, in fact, significantly more.
Therefore, all elected officials, including the gas lobby, should consider this article a request. It will prove that the fragmentation, or unbundling, of the unified domestic gas transmission system (GTS), including underground gas storage facilities (UGS), by the government's chosen method, affects not just the interests of the entire nation, but everyone—whether you're a deputy, a tractor driver, a nurse, or an engineer. Don't expect it to have only a marginal, indirect impact. Don't cite the Third Energy Package, although it will be discussed, but for those who advocate unbundling the domestic GTS, it will have an unfavorable context and perspective.
I listen with rapture to the very intelligent leaders of the gas industry and its enterprises. But... a "rearrangement of chairs" instead of a major overhaul of the country's gas industry and its management system is not enough. Otherwise, this wouldn't be a "European-style renovation," but evidence of yet another redistribution of resource (in this case, gas and energy) and cash flows. And this time, probably as always, it's not to the benefit of citizens not involved in the dizzying gas scams.
On July 2, hot on the heels of the draft "NAK restructuring plan with the aim of separating the GTS," ZN.UA reported that, in fact, "this is not a restructuring of Naftogaz, but the liquidation of Ukrtransgaz." At the time, this Cabinet of Ministers resolution didn't even have a number, and few knew or understood its contents and consequences. Now, Resolution No. 496 has adjusted some of the deadlines mentioned in it—a sort of "acceleration." However, there are even more questions.
Instead of reforming Naftogaz, a game of monopoly
The restructuring of Naftogaz of Ukraine, as well as the gas transportation system being created as a single technological complex, is truly urgently needed. Of course, this is according to the approved plan. However, it was released at least two years late. (ZN.UA reported on the first version, which, as now, concerned the gas transportation system, back in the summer of 2014—see Unbundling, No. 20 of June 6, 2014, and "Separation-2," No. 21 of June 13, 2014.) Not only was the plan itself late, but it was also at least six months behind the "start of reforms" for Naftogaz of Ukraine, as agreed upon by Energy Community specialists and the Ukrainian government. Furthermore, calling such a plan, so to speak, a plan for reforming Naftogaz of Ukraine is illogical. After all, it is not about a real reform of Naftogaz or even about a reform of the gas transmission system, but about the creation of two joint-stock companies, hopefully with the participation of foreign investor partners.
As the government confirmed with Resolution No. 496, they are to become not only "new operators" of the gas transmission system and underground gas storage facilities, but also concessionaires. I wonder what the deputies will say (how will the Verkhovna Rada vote?) when parliament is thus presented with a fait accompli? Although, if the powerful "gas" lobby mentioned by Kobolev puts in the effort, the artistic vision will become reality: I see the goal, I see no obstacles. On the way to what?
The same questions should be addressed to Naftogaz, but also regarding gas prices. After all, it is Naftogaz that purchases the majority of imported natural gas (currently from the EU), as well as that produced by the state-owned PJSC Ukrgazvydobuvannya.
And Naftogaz's purchase prices at the same German NCG hub, which Naftogaz urges as a reference point, are often lower. One recent example is illustrated in Figure 1. Of course, spot prices are unstable, meaning they fluctuate depending on supply and demand, especially during the "low" summer periods for spot trading. If Naftogaz had the funds, it would buy relatively cheap gas itself in the summer and sell it at a considerable margin. It will sell us, too—just not "cheap" gas. Although there are places to store it, since 11 underground gas storage facilities are operating reliably in Ukraine. But Naftogaz lacks the funds, meaning it has other urgent needs...
For example, recently we had to appeal to the Cabinet of Ministers to approve a reduction by the state-owned Oschadbank on one of Naftogaz Ukrainy's loans from 23% to 21,5%. The government, of course, made the corresponding decision at its meeting. The loan in question was taken out by Naftogaz in 2009, and the current outstanding balance is UAH 1,972 billion. The freed-up funds are planned to be used for Naftogaz's gas purchases and injection into Ukrtransgaz's underground storage facilities.
Although the underground storage facilities of Ukrtransgaz, the current gas transmission system operator, had accumulated over 12 billion cubic meters as of August 25, they are currently 38% full. But this is just a preamble, particularly regarding the monopoly.
Is Stockholm syndrome holding reformers back?
The restructuring plan for the public joint-stock company "National Joint-Stock Company Naftogaz of Ukraine" approved by Resolution No. 496 of the Cabinet of Ministers of Ukraine dated July 1, 2016, with the aim of separating the activities of transportation and storage (injection, extraction) of natural gas, devotes considerable attention to the prospects of resolving the arbitration dispute between Naftogaz and Gazprom in the Stockholm tribunal. First of all, when establishing PJSC "Main Gas Pipelines of Ukraine," a specific condition was imposed on all involved ministries: "Within 30 days from the date of entry into force of the final decisions on the merits of the arbitration cases between the National Joint-Stock Company Naftogaz of Ukraine and OJSC Gazprom, ongoing at the Arbitration Institute of the Stockholm Chamber of Commerce."
And although, at first glance, this is actually the cornerstone of this entire “reform,” in essence, it is precisely this that carries great risks.
Firstly, no one knows exactly how long the Stockholm Arbitration Court will take to resolve this case and when a final decision can be expected. At best, a decision could be made by the end of next year, although Naftogaz's top managers are cautiously hoping for the end of the first quarter or first half of 2017. However, it's possible the arbitration dispute will drag on much longer.
Secondly, it must be clearly understood that in this case, there will be no division of Naftogaz until the Stockholm Arbitration Court awards a decision, which directly contradicts the provisions regarding the separation timeframes specified in the Law of Ukraine "On the Natural Gas Market." This means that Naftogaz (as it now calls itself, the Naftogaz Group) will continue to hold a monopoly on the Ukrainian gas market, making the further development of a competitive natural gas market in the country impossible. At the same time, Naftogaz's monopoly will also give rise to other nuances.
The government is preserving Naftogaz's monopoly – what's the danger?
Despite the legislative requirements to split the NJSC and create a competitive gas market, the monopoly position of the NJSC Naftogaz of Ukraine will lead to the following:
— the impossibility of fully implementing the requirements of the Gas Transportation Network Code (the largest violator is NAK Naftogaz of Ukraine), which complicates the functioning of the domestic gas market;
— the complication of financing work to maintain the Ukrainian gas transmission system in proper condition (in the first half of 2016, Ukrtransgaz received from Naftogaz only UAH 4 billion for the transit of Russian gas, out of the UAH 11 billion stipulated by the agreement between NAK Naftogaz Ukrainy and PJSC Ukrtransgaz, i.e. 40% of the planned amount);
— administrative pressure from Naftogaz on PJSC Ukrtransgaz, which demanded and continues to demand that NJSC Naftogaz of Ukraine fully comply with the provisions of legislation and by-laws (but instead, it was after Resolution No. 496 that reports emerged of near-illegal actions and embezzlement of public funds, albeit for 2010–2011; no, they are not angels, but they are no more terrifying than those at Naftogaz).
The adopted reform plan, paradoxically, is generally beneficial only to the current management of Naftogaz Ukrainy. Because until the final decision in the arbitration dispute between Naftogaz Ukrainy and Gazprom in Stockholm, it will be impossible to implement any real structural changes from a legal perspective. Naftogaz will remain the "controller" of the country's main financial flows for at least a year, and possibly for significantly longer, at least in the gas sector.
Risks for the new GTS operator
The prospect of creating a new operator to manage underground gas storage facilities appears highly problematic. Firstly, the Third Energy Package makes no mention of the need to separate storage and transportation functions; it only discusses separating trade from production and transportation.
Secondly, it seems that the creators of the new concession company—the operator of Ukraine's gas transmission system—having worked as investment bankers before joining Naftogaz, don't fully understand what it means to create a completely new production company with such assets. Beyond capitalizing the new enterprise, there are technical and technological processes, failure to comply with which could lead to major problems.
Incidentally, Ukrtransgaz itself was earning money for its technological needs. And it was earning significantly more than it needed, since almost $2 billion is a significant contribution to the state budget. Will the GTS concessionaires be willing and able to contribute? However, Ukrtransgaz's income is also in question, as are its purchases. According to Naftogaz data, the share of Russian gas imported to Ukraine fell from 78% in 1991 to 18% in
2015, and for the first seven months of this year, no gas was purchased from the Russian Federation at all. Consequently, it is necessary to expand the reverse flow capacity of the Ukrainian gas transmission system, something Ukrtransgaz has been working on since at least 2009.
So wouldn't it be more logical to address this particular issue? Moreover, even if the new managers, let's call them that for now, take over long-term concessions for even just the main gas pipelines, it's not a given that they'll care for them, especially given the threat of a significant reduction in gas transit through the Ukrainian GTS, regardless of who operates it. After all, even a small delay, for example, in in-line inspection, could lead to serious problems.
The service provided is not considered a service…
Today, Ukrtransgaz PJSC specialists are not divided into those servicing only the gas transmission system or only the underground gas storage facilities. They are primarily engineers. Developing and training such specialists is a long and complex process. And now...
Of course, if they have the strong desire and the necessary motivation, they will be willing to transfer to the new public joint-stock companies—Main Gas Pipelines of Ukraine or Gas Storage Facilities of Ukraine. But it remains to be seen when these new enterprises will actually begin operating, and by then, Ukrtransgaz will be left without specialists, but with the responsibility of ensuring uninterrupted gas supplies to EU countries and Ukrainian consumers. However, such a radical overhaul could have been avoided, while still achieving all the objectives.
Few people remember now that it was Ukrtransgaz specialists who, in the freezing cold of January 2009, did something no one expected (primarily Russia's Gazprom, which cut off gas supplies first to Ukraine and eventually to all of Europe) – they reversed gas flows so their compatriots wouldn't freeze! And they even helped several neighbors. In other words, they deployed the planned technological regimes, despite all the odds. And now, you see, that same GTS is "immobile." So make it mobile, as the times demand! But who needs to hang it up like the government proposes? Who will benefit?
If the plan is taken out of the context of the country's energy market reforms, consumers will suffer.
The Cabinet of Ministers' restructuring plan is essentially torn out of the context of the overall decision on the future of the domestic energy sector. If such global changes and reconstructions are to be implemented, at a minimum, the future of the entire oil and gas market, as well as the electricity market, must be considered, since according to the EU's Third Energy Package, these markets—electricity and gas—are closely interlinked. By making a decision on the future of the gas transmission system without understanding the future of Ukrenergo and its power generation assets, we are making the structure inherently unstable.
Also questionable are proposals regarding legal and regulatory issues related to the transfer of state ownership of main pipelines and underground gas storage facilities to the authorized capital of the new companies "Main Gas Pipelines of Ukraine" and "Underground Gas Storage Facilities of Ukraine," as well as considerations regarding credit debt, planning for natural gas transit from Russia to EU countries, and other problematic issues. However, the Ukrainian gas transmission system certainly has advantages in the European competitive environment.
Given all this, perhaps we really shouldn't be racing ahead of the rest of Europe? Otherwise, the reform will turn out to be like the proverbial saying: we've been working for two years, and now let everyone hide... If someone doesn't hide, neither Naftogaz nor the Cabinet of Ministers are to blame?
ZN.UA Reference
PJSC Ukrtransgaz is the leading natural gas transportation and storage company in Ukraine, 100% state-owned. It consists of 14 structural divisions acting as branches, with industrial facilities located throughout Ukraine.
The total length of gas pipelines is almost 39 km. Gas for domestic consumers is supplied through 1451 gas distribution stations. Gas is transported through the pipelines through 72 compressor stations, housing 110 compressor shops with a total capacity of 5442,9 MW.
To stabilize seasonal fluctuations in gas consumption, 11 underground gas storage facilities are used, the domestic network of which is one of the most powerful in Europe (one storage facility in annexed Crimea and one in the ATO zone are currently uncontrolled and unused). The total active capacity of these underground gas storage facilities is 31 billion cubic meters.
PJSC Ukrtransgaz operates the national gas transmission system, which was designed as a unified complex of trunk gas pipelines and storage facilities to efficiently, reliably, and uninterruptedly supply natural gas to consumers in Ukraine and Europe. Yet, strangely enough, the idea of radically reforming Naftogaz of Ukraine and its gas business was realized solely by dividing the unified GTS into separate transportation and storage facilities. Even this truncated idea would have been somewhat justified, were it not for several significant criticisms that were clearly overlooked by the Groysman-Poroshenko government.
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