Everyone will have to reduce natural gas consumption this winter, none more so than oligarch Dmytro Firtash’s empire of chemical and gas distribution companies.
The government has devised a savings plan for winter with the assumption that Russia will not turn on the tap anytime soon. According to Andriy Kobolev, the head of state-owned oil and gas holding Naftogaz, the nation must reduce consumption by 20 percent from November 2013 to March 2014 to 26 billion cubic meters. Already, gas for heating will be reduced by 30 percent and for the general public by 10 percent. For the first six months of this year, the state-run energy monopoly said that Ukraine had used 5 billion cubic meters less over the same period in 2013. Ukraine has been without gas from Russia, its main supplier, since June 16.
The sacrifices in industry will be selective. Chemical factories will take the biggest hit. They are under almost total control by Firtash, who is under arrest in Austria and awaiting extradition to the U.S., having been indicted on racketeering charges on April 2. The Cabinet on Sept. 29 ordered that no gas other than the technical minimum be sold to chemical producers until the spring. “If they want gas, they will have to buy it somewhere outside Ukraine,” said Prime Minister Arseniy Yatsenyuk.
Group DF, the holding owned by Firtash, is suing. Group DF managing director Borys Krasnyansky said in an Oct. 8 interview with the news website RBC Ukraine that the Cabinet resolution is “illegal and unconstitutional,” and that the 4 billion cubic meters the company has in storage for supplying the chemical factories has been paid for.
Global prices for ammonia-based fertilizers are down around 20 percent and factories were not running at full capacity last year, yet consuming an estimated 5 billion cubic meters, according to energyua.com.ua.
Energy expert Andriy Chubyk does not believe specific oligarchs are being targeted. “The chemical industry is suffering from instability, since two of the largest enterprises – Stirol and Serverdonetsk Azot – lie in the warzone and are not working,” he told the Kyiv Post. “Also, the chemical fertilizers Ukraine makes are produced in the spring and autumn, so they don’t really need as much gas during winter.”
Ostchem, the chemical division of Group DF, confirmed this on Aug. 11 with an announcement that Stirol had suspended operations in July “because it is at the epicenter of intensive military activity.” Stirol is located in Horlivka, a frontline strongpoint of the Russian-backed insurgents. Severodonetsk Azot stopped working in May, but on Sept. 26 Ostchem declared that it was ready to start up again, even though “the entire logistical infrastructure is ruined.”
It is still a huge cutback. The chemical industry is by far the most gas-intensive branch of the economy. Steel and chemicals contributed $24 billion and $10 billion, respectively, to Ukraine’s $177 billion economy last year, according to the Ukrainian State Statistics Committee. So, it appears more cost-effective to turn off the chemical industry’s 5 billion cubic meters than the steel industry’s 3 billion cubic meters.
However, the industry can buy gas illegally and unnoticed from Russia, Chubyk explains, because of the lack of meters at the border, but it would have to be out of Firtash’s pocket, he implied.
Steelmaking, will have to do with less as well, but the impact will be smaller. A few steel plants are in the warzone, including Alchevsk Steel Mill and the Kuibyshev Steel Combine at Kramatorsk, both owned by Industrial Union of Donbas, and are working at low capacity, but most are located in the peaceful Dnipropetrovsk and Zaporizhzhia oblasts. Also, this industry has undertaken serious energy efficiency measures in recent years, especially by switching blast furnaces that use natural gas to pulverized coal dust. Gas consumption in steelmaking went from 5.2 billion cubic meters in 2011 to just 3.05 billion in 2013, while maintaining an even level of output, according to energyua.com.ua.
Closing price gaps in distribution
The other blow to Firtash will come in gas distribution, since some allegedly corrupt schemes will be closed when the amount of gas slated for households and heating is reduced. Yatsenyuk said on Oct. 1 that instead of the accepted 10 cubic meters per person consumption, the true figure is closer to 6 cubic meters. “This norm was established 20 years ago,” he said. “The excess was being sold to industry and others at commercial prices, which is considerably higher than the price the public pays.”
Firtash is the dominant player in this business, controlling 24 of 39 regional gas distribution companies that are oblast monopolies, according to The Insider research. “Because of the lack of measuring devices throughout the system,” Chubyk explains, it’s difficult to calculate consumption volumes in many places. Instead, the government simply reduced what Naftogaz will supply.
And there was a lot of money to be made and sent off shore. On May 1 the household price for gas was hiked 40 percent to around Hr 1,300 per thousand cubic meters, depending on volume, which is still less than half the $360 Naftogaz is paying for European Union gas piped in via Slovakia. Industry subsidizes households, which the International Monetary Fund wants to stop. So, if 40 percent of the 17 billion cubic meters of household gas was being siphoned off for resale to factories, and the pre-May 1 difference between industry and household prices is around Hr 2,300 per thousand cubic meters, regional gas distribution companies were skimming over $1 billion from subsidized gas per year.
The government believes that it can cover the needed 26 billion cubic meters with existing resources, considering it already has 17 billion in storage. The key will be if the 30 percent heating reduction holds. Kobolev noted that in the past 10 years, while industry has been able to reduce gas consumption by 40 percent, heating and household use has remained unchanged. According to heating engineer Volodymyr Vlokh, the ambient room temperature in Ukraine is a balmy 24 degrees Celsius. “A one degree reduction in temperature should lead to a five percent drop in heating costs,” he said.
Not everyone is convinced this will be enough.
“We indeed could need more than 26 billion cubic meters,” speculates energy expert Chubyk. “The number is just an initial assumption.”
Kyiv Post business journalist Evan Ostryzniuk can be reached at [email protected].
