Gas industry of Ukraine – interests of oligarchs lead to geopolitical defeats

The independent expert concerning power, the former press secretary of NJSC Naftogaz of Ukraine Valentin Valentinovich Zemlyansky told about the problems of creation of a gas and transport consortium, destiny of the Ukrainian GTS, the roundabout gas pipelines, the hidden motives of decision-making in the gas sphere and other subjects in the performance in a framework of “Courses of journalistic skill”, carried out by Institute of the CIS countries in Yalta.

The gas contract of 2009 – secrets of the base rate.

There were some steady myths round the gas relations between Ukraine and Russia. First of all, it concerns the Kharkov agreements of April 21, 2010. These arrangements, frankly speaking, are ambiguous. It was not possible to change the gas contracts cardinally despite all criticism of the present power concerning “orange” predecessors. Proceeding from these agreements, the mythical discount of 30 %, but no more than 100 dollars per 1 thousand cubic meters was received. One of the main myths is that it is the discount, but it is not so in reality. It is the cancellation of export duty of the gas delivered from the Russian Federation according to the contract of 2009 year.

According to this contract signed by Tymoshenko, the price is formed proceeding from quotations of a parade on oil products and gasoil on the Mediterranean coast on CIF terms. And these factors are multiplied by a base rate which makes 450 dollars per thousand cubic meters. The base rate is the gas price that was in Italy in August, 2008, the ceiling pre-crisis price. It was used by “Gazprom” as a base rate. Technologically the practice of signing of this sort of contracts says that the base rate is defined from the gas price for previous year of delivery. If we remember the previous year of delivery, and it was the period of activity of scandalous “RosUkrEnergo”, the price of gas which was delivered to Ukraine in 2007-2008 made 179, 5 dollars. Thus, the base price in a settlement formula should make not 450 dollars, but 179, 5. It is the main mistake made by the Ukrainian delegation at signing of these contracts. If to consider the contracts in more detail, there were also draconian penalties about which spoke a little and which “silently"” cancelled after Yanukovych's arrival. The monthly penalties at a rate of 6 % were provided for a shortage or excess of gas and there were sanctions for a shortage-excess during the summer and winter period – they made 150 % from the gas price in the winter and 300 % in the summer. Here is such “wonderful contract”.

The main problem which we face now is a principle “take or pay” which is also provided in this contract. That is, there is the minimum contract volume which we should choose – it is 80 % from volume provided by the contract. In this regard I will explain the statement of Boyko that Ukraine will take 27 billion cubic meters of gas. Who would ever have expected that figure? As Ukraine took 40 billion cubic meters a year in recent years, under the contract we can take the minimum volume minus 20 % - 33 billion cubic meters. Ukraine should buy such volume in 2012 in the Russian Federation. Thus our chemical industry became independent – Mr. Firtash buys the gas and also the Central Asian gas under the contracts from “Gazprom Export”. The price in this case practically doesn't differ from that on which “Naftogaz” conducts the purchase. But in gas balance, the volume of gas which should buy NJSC “Naftogaz” makes 27 billion cubic meters as we take away these 6 billion cubic metres from the minimum 33 billion cubic meters which go separately to the chemical industry. Here there was this figure of 27 billion cubic meters.

Firtash and his intermediary companies – how the Ukrainian billionaires appear.

Now Mr. Firtash is not so good, as was earlier at the moment of “RosUkrEnergo” activity. As a matter of fact, then we received the intermediary between “Naftogaz” and “Gazprom”. Then the myth about supply of Turkmen gas, about the so-called mix of cheap Turkmen and Russian gas was duplicated. I will open the secret – actually Ukraine never received Turkmen gas. But Turkmen gas always was present at contracts, whether there were “Itera”, or Simeon Mogilevich's “Eural TransGaz”, then “RosUkrEnergo”. Turkmen gas is a business on a feather tip, a way of registration of gas in a pipe. Here the super income, millionaires, additional profit are taken. Thus “RosUkrEnergo” had the right of gas re-export to the countries of Europe. I will remind that since 2005 according to the contract, it is forbidden to “Naftogaz” to re-export the gas volumes. Even if there will be an excess of gas in our gas balance suddenly, we have no right to re-export it out of borders of the country. Exception is the contract with Poland which was concluded in 2001. “Naftagaz” re-exports 9 million cubic meters of gas per year. It is connected with the technical reasons – not passing of the Russian gas to the south Poland, on the small territory.

Coming back to mister Firtash and chemistry – the gas price, existing at that time, was comparable to the gas price for the industry in Russia. It allowed the chemical industry to develop quietly and quietly to receive the excess profits. As “RosUkrEnergo” represented the office, table, chair and the bank account – this company had no assets.

Besides, the intermediary JSC UkrGazEnergo was entered on the market of the country which was engaged in realization of energy resources to industrial consumers of Ukraine. 50 % of this company belonged to “RosUkrEnergo”, 50 % - to “Naftogaz”. "Naftogaz" was penniless from activity of “UkrGazEnergo”. Later it was recognized by the court that this company was created illegally. “Naftogaz” didn't get any dividends and all profit from the activity of “UkrGazEnergo” went to “RosUkrEnergo” pocket, respectively, to Mr. Firtash.

At the expense of what, in 2007 “UkrGazEnergo” already completely supervised an industry segment, the most solvent segment? The chemistry got to Firtash's assets as he started to deliver the gas. There is very important point for Ukraine– the one who supervises domestic market of energy carriers, as a matter of fact supervises the economy because the economy is volatile, power expensive. Therefore the supplier in the domestic market will agree and supervise how it is favourable to him.

Contention consortium – how Ukraine quarreled with Germany because of Russia and with Russia because of Germany.

The second date about which it is necessary to say is that on June 9 it is10 years to Vladimir Putin's first impromptu of gas-transport consortium. It sounded in St. Petersburg at Putin, Kuchma and Schröder's meeting. Germany stated big interest in this project. Unfortunately, at that time there was no clear understanding for what the consortium is created. In itself it isn't any enterprise. The consortium is a merger of companies for commission of any actions. As a rule, the consortium in the oil and gas sphere is a development and production of hydrocarbons or their investigation. For example, oil in Azerbaijan extracts a consortium of the western companies where only 10 % belong to Azerbaijani SOCAR.

Due to the political situation this subject lasted long enough though the commission actively worked and in 2003 there was a hope that the project will reach realization. Though in 2001-2003 there was the peak of trading wars and anti-dumping investigations between Ukraine and Russia on the most different goods – from railway arrows to caramels. Russia in a certain degree, certainly, pushed Ukraine to creation of a gas-transport consortium. Ukraine rested in every way, though not clear for what reasons. According to my belief, both then and now the problem is not in shares, but who will exercise an operational administration of the Ukrainian GTS. Both today, and 20-30 years ago GTS management, the main gas pipelines which are in the territory of Ukraine carries out by “Gazprom” through “Mostransgaz”.

Every day all demands for gas supply to Europe move by the telephone message from there to dispatching management of “Ukrtransgaz” for distribution of volumes and the direction of movement of gas. Actually we have a situation in which Ukraine for all the time of the independence of the GTS disposed once in 2009 when there was the second gas crisis.
If to remember 2003, then there was a statement of Minister of Energy Yermilov that we don't exclude the accession of the Caspian states to a consortium. This statement isn't absolutely clear – at that time, for example, Azerbaijan didn't possess the extracted stocks of gas necessary for filling of GTS. Why they had to participate in a consortium remains a riddle in general …

At the end of 2003 it was told that creation of a gas-transport consortium is inexpedient on the eve of presidential election of 2004 and the subject was postponed. In 2005 there was an “orange” revolution, Mr. Yushchenko became a president, and “Naftogaz” was headed by Mr. Ivaschenko. I think that the border which occurred in the relations between Ukraine and Russia in the gas sphere falls on 2004-2005 when in Moscow the decision on construction of roundabout gas pipelines, Northern and Southern streams was made. And the second moment – when “Eural TransGaz” turned from the operator of Turkmen gas into “RosUkrEnergo”, registered in the Swiss canton of Zug and began supply of the Russian gas to Ukraine. Here that Rubicon after which Ukraine had no return way and it was impossible to agree about a tripartite consortium. In 2005 there was an interesting statement of the representative of German “E.ON Rurgas”. When he was asked, whether Germany is ready to continue negotiations on creation of the gas-transport consortium, he declared that the interest to this business disappeared and they interest more in the development of Southern Russian and Shtokman fields.

In the same 2005 Ukraine managed to make one more unreasonable action on a consortium subject – to offer Germany and Poland to create it for three without the supplier of a resource. Before, by the way, there were the arrangements between Kuchma and Putin about possibility of creation of a bilateral consortium without Germany. That is we managed to spoil the relations with Germany firstly, agreeing with Russia on a parity basis 50/50, then to spoil the relations with Russia, having tried to agree with Germany without participation of Russia.

One more obstacle for supply of gas to Ukraine was blitzkrieg which was carried out by Putin in 2002-2003 in Central Asia – all volume of extracted gas which went on export, was contracted by “Gazprom” for the period till 2028. Now, by the way, Russia refuses the fulfillment of these contracts though demands strict implementation of obligations from Ukraine. In this regard, Ukraine lost possibility of a direct contract with Turkmenistan, Kazakhstan and Uzbekistan.

Do the roundabout gas pipelines threaten Ukraine?

Events of 2006 and 2009 were absolutely predicted because the crises had especially artificial character. “Gazprom” prepared for these “wars”. For example, in Vladivostok the plot about overlapping of the crane left at 2 o'clock earlier on the first channel, than it was known in Ukraine. These events had no relation to unauthorized taking away of gas by Ukraine. If it was so, the information would appear much earlier because the gas measuring stations are in the territory of Russia. All this was carried out with one purpose – it was necessary to receive the consent of EU to financing of construction of Nord Stream and belief of need of creation of routes bypassing Ukraine.

It is necessary to note that “Nord Stream” is a joint project of Russia and Germany, connected with Southern Russian and Shtokman fields. The German “E.ON Rurgaz”, RWE and “Gazprom” participate in the development of Southern Russian gas field. Since 2011 the output of this field makes 25 billion cubic meters per year. The first line of Nord Stream makes 27 billion cubic meters that the loading just corresponds to this production. Mr. Kupriyanov declared the conclusion of contracts on 22 billion cubic meters on Nord Stream for 2012 which won't affect Ukraine. That is, any movements concerning transit reduction on the territory of Ukraine in 2012 have no relation to “Nord Stream” – they depend on a situation in Europe. Besides, the construction of “Nord Stream” was in a consortium with the German companies. It was given the transnational status and it is deduced from under action of the third power package demanding the division and the admission of the third parties. They “rested” against the third power package already in the territory of Germany where OPAL and NEL gas pipelines should be reserved under the third companies for 50 %.

When say that Ukraine dies without “Gazprom”, so it is a lie. I wouldn't start to say pejoratively what occurs at us. The problem of roundabout gas pipelines really exists. But “Nord Stream” is the commercial project of “Gazprom” and Germany, calculated on Southern- Russian and Shtokman fields. “South Stream” is the political project directed on the decision of several questions at once and Ukraine is not the prime reason in this case. It is certain “horror story” for Ukraine, the powerful lever at negotiations, but a priority of this project is not in transit implementation bypassing the Ukrainian territory at all.

Does Ukraine need the gas at the domestic price?

Nearly two years the requirements about granting the “fair” price for us sound. But there is no concept of unfair, not European, not the Ukrainian price. “Gazprom” agrees with each country separately, there are no cliche contracts and formulas because everything depends on policy which is led by Russia in relation to this country, or this country in relation to Russia. For example, at the beginning of a year, a number of the European countries received considerable discounts for the price for gas, these are the partners of “Gazprom”, generally the shareholders of “Northern and Southern” streams. There was an indicative situation with Turkey when it provided the economic zone for laying of South Stream and right there received the reduction of gas price and principle cancellation “take or pay”. After that Turkey reduced the gas consumption by 6 billion cubic meters. Therefore there is no universal formula and price for gas. We receive it how the politicians agree.

If the representatives of Ukraine go on negotiations with “Gazprom” and ask other price and in reply are refused, there are two variants. Or we will offer any concessions, or we should have alternative sources of gas supply. Certainly, “Gazprom” is interested in the Ukrainian market. 45 million of population even taking into account the crisis and falling of industrial production is rather large volume of the market. It is at least 40 billion of imported gas and 20 billion of own production. It is interesting to them. Therefore until Ukraine won't have possibility to oppose something to “Gazprom” or to receive protectorate though of the USA and Europe, China or India our opinion will mean nothing. Nobody takes into consideration the weak in world politics. And the matter is not about the military power, but about the economic. Now the multinational corporations grasp the countries much quicker and more effectively, than the nuclear warheads.

If to assume the consortium creation as a concession, so today there is not simply the ban on privatization of the Ukrainian pipe, but also on alienation of holding of shares in favour of the enterprises which have no 100 % of the Ukrainian property. If to tell about consortium creation on management of the Ukrainian GTS, so while it is impossible legally. If the negotiations go further in this direction, it will be necessary to make changes to standard and legal base, in particular, in article 7 of the law about pipeline transport.

In case of implementation of this project, what Russia can offer in exchange? It is the possibility of development of own fields and receiving the gas there. Though there are restrictions in the Russian legislation on gas pumping on its territory by the foreign companies. That is, even if we will extract the gas there, we should sell it to “Gazprom Export” and then buy already here, on the Russian-Ukrainian border.

Thus we understand, nobody will drive exactly this gas and we can receive the domestic price on it. But what is the domestic price today? In 2006 the decision on transition of the Russian consumers on the equal to the income prices was made. It means that the internal price in Russia for all categories of consumers should correspond to the export price from Russia minus 30 % of export duty and minus 10 % of the transport work on pumping. That is it is the price for gas, let us assume, in Germany minus these components. The Russian industry should pass to work on these conditions in 2014. The decision isn't accepted yet according to the population. Thus the price for gas for the population in Russia is comparable to such price in Ukraine and there is a decision that the price for gas in Russia annually should raise for 15 %. This year, possibly, the increase is planned at a rate of 10 % in honour of presidential election. Therefore it is necessary to understand - when Mr. Miller says that if we will have love and friendship, you will receive gas at the domestic prices, so all of them will equally increase and will come to the specified level of equal to the income. Therefore the benefits from such offer aren't so great as it is represented by the politicians.

The state protects the private interests of oligarchs. What the traders will help?

If to speak about the industry, there is very interesting situation. From the moment of independence finding, the Ukrainian government and presidents constantly go to agree about gas for the industry which is private very long time ago. Therefore the moment of reorganization of “Naftogaz” can lead us to a situation of 1997 when the companies -traders will operate on the market as UESU worked once. I can list three companies which can assume today the functions of traders on supply of the Russian gas for the industry. It is “Gazprom sbyt Ukraine” which, according to contracts of 2009, has the right to deliver the gas of 25 % of industrial sector, it is buried by nobody and living hitherto “UkrGazEnergo” and it is the DTEK Neftegaz company of Mr. Akhmetov. All of them have now possibility to leave on trading, having concluded the contract directly with “Gazprom”. Whether “Gazprom” will do it is a big question. In due time, the traders made very big debts.

But let’s imagine that there a situation of 1997 came when the industry independently buys the gas from “Gazprom”. Then at a present the price level for “Teplokommunenergo” “Naftogaz” becomes the planned and unprofitable company.

“Teplokomunenergo” receives gas on 135 dollars at its prime cost of 430 dollars on border, and the difference should be compensated from the budget. Thus, “Naftogaz” will bear the social responsibility – it will be already impossible to consider it as commercial structure. It will be the donor which is subsidized from the budget. Also there will be the traders who will supply the industry with gas. In this situation there will be no problems for the state - it is not necessary to go cap in hand to Moscow, to agree there about the low price for gas. As you want, so do. Then, maybe, the people will think of benefits of the Customs and Eurasian Unions, after all not only the accounts in the European banks and country houses define a state policy. Otherwise, while the state is engaged in a patronage in relation to oligarchs such as Akhmetov, Kolomoysky, Firtash, no motions will exist because big business feels rather comfortably and it is protected. And though the state carries out the protectionist function in relation to metallurgists, chemists, builders, it isn't reflected positively in the price of their production.

Regional gases, tenders and kickbacks.

The gas transport system consists of three types of pipelines. There are pipelines of a high pressure in diameter of 1 420 mm on which the gas goes to Europe - four main lines going through Ukraine. There are gas pipelines of average pressure, branch from the highway which can or come directly to the enterprise, or through gas-distributing points they go on gas pipelines of low pressure through which the gas moves in houses.

The mechanics of management is carried out by the regional gases being in all regions. They are engaged in gas trading directly on places. Once “Gas of Ukraine” was engaged in it, but now it is liquidated, its functions are transferred to “Naftogaz” which sells gas to regional gases, and they have the license for its realization on places. We know about features of their activity from scandalous news about gas sale to kindergartens on 800-900 dollars. This is the classical manifestation of corruption against which Andrey Petrovitch Klyuyev was going to fight. Besides, there is also a National commission on regulation of power which establishes the limiting price, even on a non controllable tariff above which it is not really to sell the gas. That is all these tenders and purchases when the price is twice overestimated is purely the kickback scheme at which the difference comes back to the seller or “divided” between the seller and the buyer. This is the direct violation of the law because nobody can sell above the prices of the National commission on regulation of power. Thus “Naftogaz” can't establish the price for gas realization within the country. It can only address with the offer to the National commission on regulation of power. When we speak about the price for gas in 416 dollars, we don't consider 20 % of the VAT, a target extra charge and transport work. As a result we have the price of 650-700 dollars on the enterprise.

GTS and geopolitical role of Ukraine.

We constantly go to Europe, we speak give us the money for GTS modernization. In reply Europe demands the implementation of the taken obligations. And we, it seems, start to carry out these obligations. But Europe won't give money for modernization until Ukraine won't receive the guarantee from “Gazprom” about the pumping of certain volumes of gas on the Ukrainian territory. It is not important will it be in the form of a consortium, contract or the protocol on intentions. The European Union won't give any kopeck without it – everything will remain at level of promises. Therefore the tripartite consortium solves this problem – Russia guarantees the volumes and EU provides financing.

Instead of it a certain fetish becomes from GTS and the matters aren't solved. It is necessary to make of it the business project which brings money. But it can't be started without the solution of a number of political issues - while Ukraine won't understand that it isn't the player of geopolitics, though takes the special place in it. It is a point of intersection of geopolitical interests – Russia, EU, the USA, China, Turkey. But thus independently Ukraine isn't capable to play geopolitical party on some courses forward.