You're reading: Vitrenko talks about challenges in doing business with Gazprom

One of Ukraine's biggest challenges is doing business with Russia's state-controlled Gazprom at a time when the Kremlin wages war against the nation.

Ukraine is highly dependent on Russia for energy sources, including gas and coal. And the pressure exerted by Gazprom on Ukraine has been likened by energy experts to economic blackmail, part of Russian President Vladimir Putin’s hybrid war that also includes brute military force and shameless propaganda.

Naftogaz managing director Yuriy Vitrenko, one of the new breed of reformers tasked with stopping the financial bleeding of the state monopoly and making it run as a business, spoke to the Kyiv Post about this and other challenges.

Naftogaz claims that Russia’s state-controlled Gazprom is not delivering gas on time and supplying only 40 percent of what Ukraine expects under agreements.

The two monopolies are suing each other in the Stockholm Arbitration Court over the price of gas supplies and use of the Ukrainian gas transportation system. A ruling is expected by the summer of 2016 at the earliest.

“We told Gazprom that we would like to have a price review of the contract. They refused,” says Vitrenko.

At this point, Ukraine’s energy giant Naftogaz, an employer of 14,000 people, pays Gazprom $329 per 1,000 cubic meters of gas, while at the end of the last year it was paying $378. The discount was made after the EU-facilitated negotiations in Brussels.

Gazprom’s branch in Kyiv did not reply to a Kyiv Post inquiry.

Last year, Gazprom was the source of 14 billion cubic meters of gas for Ukraine’s energy market, or 33 percent of the nation’s needs. Ukraine has tried to diversify its supplies with limited success.

Prime Minister Arseniy Yatsenyuk said he’s proud that Ukraine now is buying more gas from companies in the European Union, such as Norway’s Statoil and Germany’s RWE, than from Russia.

But Russia is resisting very actively. “They’ve been pressuring all the Eastern European countries not to let us get gas from the West,” Vitrenko says. “But we were able to overcome this pressure.”

A graduate of Insead business school and the son of anti-West populist politician Natalia Vitrenko, Yuriy Vitrenko is well-positioned to manage this economic war.

He says Ukraine can buy up to 20 billion cubic meters of gas from the West, almost half of the country’s annual needs.

Russia’s war against the eastern Donbas is, however, taking an economic toll on Naftogaz outside of the gas supplies. Last year, Naftogaz lost about $700 million due to Russia’s military aggression.

“They would ruin some pipeline, we would renew it, we would open a valve – they would close it,” Vitrenko says.

As an alternative for importing gas, Naftogaz wants to extract more gas domestically. Last year, it produced some 17.2 billion cubic meters, while the private companies added another 3.3 billion to the overall 20.5 billion cubic meters of domestic extraction. However, some of the government’s policies impede the process.

“The only bottleneck for us to increase production significantly is the very low (sale) price set by the Ukrainian regulator… even though we have rather substantial gas reserves we cannot produce profitably at such a price,” says Vitrenko. “People are used to this very dangerous belief that there is cheap Ukrainian gas. The government tells the company to buy at the market price and sell, like, 15 times lower. It’s no brainer why we are losing money.”

On the bright side, Ukraine’s conventional gas reserves-to-production ratio is 52 years, one of the highest in Europe, according to Vitrenko. The country can produce at least an additional 10 billion cubic meters yearly. Together with coal gasification, which is possible with China’s $3.6 billion credit, the Naftogaz executive has visions of Ukraine being a net exporter of gas in the next 3-5 years.


Yuriy Vitrenko of Naftogaz says Gazprom’s pricing policy is politically motivated.

However, this sounds rather optimistic, if not utopian, given the new 70 percent tax on gas production for state-owned companies makes the state giant’s financials even more complicated. Previously, the tax rate was 20 percent.

The new tax affects two state companies, including Ukrgazvydobuvannya, a daughter of Naftogaz, and a key national gas extractor. The management of Naftogaz plans to let local private investors buy this unit. Its shares could be placed on the local stock market, the stakes will first be limited to 10-15 percent.

Although given the low price of Ukraine-based assets at the moment, privatization will have to wait until the war is over. Still, better days are ahead, Vitrenko assures.

«As soon as we see that there is an efficient market there is no need in Naftogaz,» says Vitrenko.

Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected]. Kyiv Post staff writer Ilya Timtchenko can be reached at [email protected].


Ukraine consumed 42 billion meters of gas last year, while the domestic production stood at 20.5 billion. State-owned Naftogaz keeps dominating on the Ukraine market of gas extraction. (AFP)