You're reading: Ukraine’s Parliament moves to break up Naftogaz

Ukrainian Prime Minister Arseniy Yatsenyuk calls it no less than the de-oligarchization and the de-monopolization of Ukraine's heavily subsidized yet corrupt energy market.

Yatsenyuk was referring to a sector spring cleaning that got a big boost after Ukraine’s Parliament passed legislation on April 9 to bust up monopolies and open up the natural gas market to competition.

Adopted by 290 lawmakers, the bill intends to financially separate the main business lines of state-owned energy conglomerate Naftogaz: gas transmission, storage and sales. It also enables non-Russian foreign companies to form joint ventures with the energy holding’s units to lure crucial investments and upgrade the nation’s vast Soviet-era pipeline and underground gas storage network.

“We couldn’t for 10 years, and finally today, we de-oligarchized and de-monopolized the natural gas market in the country,” Yatsenyuk said after the vote.

But don’t expect results quickly, despite the grand rhetoric.

Legislatively, Ukraine’s gas market is in line now with the European Union’s Third Energy Package, which aims to eliminate conflict of interests on the market, increase transparency and boost competition, Dmytro Marunych, co-chairman of the Energy Strategies Fund in Kyiv, said by phone.

However, much secondary legislation is still needed to make the process work, like drafting separate codes on storage and transportation, the energy expert said.

Additionally, Ukraine’s energy regulator, known by its acronym NERC, has more authority now to “effectively conduct regulatory oversight…thus its independence is enhanced” by the legislation, Marunych said.

Another outcome of the bill is that government will aim to stay out of the wholesale gas market and only interfere when issues concern the “common interest,” Naftogaz said in a statement published on its website.

In particular, to “ensure the smooth flow of natural gas to consumers in Ukraine, diversification of revenue sources…and do this in a non-discriminatory and transparent manner,” Naftogaz said.

Gas wholesalers won’t need licenses, and regional gas distribution monopolies – known as oblenergos –may have to start paying rent or enter into concession agreements with the state to use the gas transportation system.

The drawback, according to Marunych, is that the oblenergos will simply pass the additional cost to consumers.

By opening up the market to traders, supply and demand should determine the price of gas on the retail and wholesale markets in the long term.

In turn, consumers will get “optimal prices, and on the other hand, the domestic extraction market will be stimulated,” Naftogaz business development director Yuriy Vitrenko said in a statement.

The measures are key conditions of last month’s $17.5 billion rescue package by the International Monetary Fund, according to lawmaker Ostap Semerak, who is in the prime minister’s People’s Front party.

This process, known as “unbundling,” should diminish the convoluted nature of Naftogaz and its myriad different activities, which have made it difficult to monitor costs and performance.

Thanks to subsidies, households in the past paid around 20 percent of the full import price of gas, and because of the existence of different subsidies, they were an invitation for fraud because distributors would buy government-allotted gas at low prices intended for households and resell it at far higher prices to businesses.

Energy expert Marunych said depending on how much the nation consumed, up to 2 billion cubic meters a year had been lost to theft. “Ukraine is consuming much less this and last year so I would say that less than 1 billion is being siphoned,” he said.

On April 1, NERC raised gas prices for households by 285 percent on average in a bid to reach full import parity by 2017.

The price of gas domestically produced – by Naftogaz’s subsidiary Ukrgazvydobuvannia – will eventually increase by 355 percent, according to Ukraine’s Feb. 27 letter of intent to the IMF.

Due to existing subsidies, Naftogaz’s deficit was 5.7 percent of gross domestic product last year, and is slated to dip to 3.1 percent of gross domestic product this year. The deficit will be eliminated by 2017 once gas and heating prices rise to cost recovery levels based on the restructuring.

The energy holding must repay $500 million in foreign, state-guaranteed debt by 2018. It had a net loss of Hr 18 billion in 2013, and it finished 2012 with Hr 31.5 billion in red, according to data provided by the company’s website.

Kyiv Post editor-at-large Mark Rachkevych can be reached at [email protected].