Global natural gas prices have risen to rare heights, and they are likely to rise much more because of Iran’s bombing of Qatar’s liquefied natural gas (LNG) plant. However sad, this is a tremendous opportunity for Ukraine that it must not miss.
Ukraine has the second largest natural gas reserves in Europe. Norway boasts known commercially viable conventional reserves of 2 trillion cubic meters (m³) and Ukraine 1.1 trillion m³. Norway produced 124 billion m3 in 2024, but Ukraine – strangely and artificially – has produced around 20 billion m³ almost constantly per year since 1993. If Ukraine utilized its known conventional gas reserves as efficiently as Norway, it could produce about 70 billion m³ a year.
Once upon a time, Ukraine produced gas as efficiently as Norway. In 1975, its gas production peaked at 69 billion m³, but then the Soviet authorities decided to concentrate Soviet gas production to the newly developed fields in West Siberia.
Over the decades, I have participated in many projects arguing that Ukraine, with minimal investments, should expand its annual gas production from 20 billion m³ to at least 30 billion m³ in five years, but this has never happened. The explanations are Naftogaz’s state monopoly and poorly designed government regulations. Neither is insurmountable and now they must be broken. Ukraine can no longer afford this mismanagement.
It is easy to imagine what success would look like.
First of all, Naftogaz’s monopoly on about 80 percent of all gas production must be broken. Second, the private sector, which is currently fully owned by a few big Ukrainian businessmen, needs to expand and include big foreign companies. Chevron, Shell and Vitol have all tried serious investments in Ukraine, but they have withdrawn. Third, Ukraine needs to attract the big international service companies, Baker Hughes and Halliburton, which have honorably withdrawn from Russia because fracking and deep drilling require their technologies. (Their US competitor SLB, formerly Schlumberger, has disqualified itself through its continued war-profiteering in Russia.)
Naftogaz is both dysfunctional and harmful. It was founded in 1998 by President Leonid Kuchma and the then dominant gas trader Igor Bakai ruled it until 2000. All state-controlled oil and gas companies were integrated into this unwieldy state corporation with initially 175,00 employees, which have now been halved. Bakai – suspected of gross embezzlement – fled to Russia in 2004 after the Orange Revolution. He was a corrupt gas trader without interest in developing Ukraine’s gas production and his legacy prevailed until the Revolution of Dignity in 2014.
Since 2014, repeated attempts have been made to clean up the gas sector and quite a lot has been done. First of all, the corrupt gas trade with Russia has been stopped. Second, the corrupt domestic trade with subsidized gas and large arrears has been sharply reduced. Dmytro Firtash was its last master, while some enterprises have been broken out of Naftogaz, notably the trunk gas pipelines. Third, Ukraine’s gas consumption has fallen steadily from about 130 billion m3 in 1991 to currently less than 30 billion m³. Fourth, Naftogaz no longer needs or receives the previous annual multi-billion-dollar subsidies prompted by corruption, too low gas prices, waste and arrears. Yet far too many assets remain in Naftogaz.
The international community has tried to impose proper corporate governance on Naftogaz. Many eminent international businesspeople have served on Naftogaz’s supervisory board, but when the chips are down, the government has sacked the CEO they have elected on merits. As a consequence, Naftogaz has had four different chief executives in the last five years, and a new CEO never learns the job until he is replaced. This “opera buffa” must end!
Naftogaz must be broken up
As with many others, I advocated that in a book published in 2015. The focus should be the valuable gas production, which should be separated from the rest. A serious international consulting company should be asked for the exact design. Four leading ideas should be:
- Free gas production so it can finally develop
- Render it possible to invest and develop the newly independent gas producing companies
- Make sure that the new gas companies have an appropriate market environment involving free trading and gas pipeline companies
- Insist on good corporate governance in all the new companies
It would be natural to divide Naftogaz by the producing regional gas fields. The drilling and production company, Ukrgasvydobuvannya, should be broken out of Naftogaz and broken up into its maingas extraction divisions. PoltavaGasVydobuvannya, ShebelyndaGasVydobuvannya and LvivGasVydobuvannya should become independent companies.
Initially, these gas producing companies will still be state-owned, but each of them should be properly incorporated and given adequate corporate governance in line with OECD standards with a majority of well-paid, qualified, independent directors selected with participation of international donors. In the same way as former UK Prime Minister Margaret Thatcher prepared state-owned companies for privatization through rationalization, these companies should be rationalized and modernized and attract outside investors. These investors could be both domestic and international, both energy companies or financial investors.
To thrive, the newly independent gas producing companies need to enjoy a market environment with gas pipelines and private gas trading companies, which Firtash did much to discredit by pursuing monopoly and large arrears. When the new gas producing companies are ready, they should be privatized, which can be done in many ways, through Initial Public Offerings or direct purchase.
The government must stop interfering in gas prices. For too long, it has subsidized low prices for consumers and utilities, whilst demanding excessive gas prices for industry. Such price discrepancy only breeds corruption. Ukraine does not need another Firtash. Consumers should not be supported through artificially low gas prices, but through direct cash benefits.
The Ukrainian government also needs to streamline permits for exploring, drilling for and producing natural gas. Traditionally, Ukrainian permitting and licensing for natural gas has been encumbered by a bizarre bureaucracy of up to a dozen government agencies. The ministry of energy, the ministry of environment and regional authorities have all vetoed one another so that nothing could be done. Only Naftogaz and a few well-connected Ukrainian businessmen could break through these unnecessary barriers. Hopefully, the Ministry of Environment has become less of a problem after having been absorbed into the Ministry of Economy, but the prime minister must make sure that this finally works.
Officially, all the ministers involved are enthusiastic about privatization and foreign direct investment in gas, but understandably they find it difficult task to get it done. For the EU, this would be an outstanding benchmark.
Ukraine should become a major exporter of natural gas, helping Europe’s gas security.
Anders Åslund is a member of the Advisory Council of the private Ukrainian energy company DTEK.
The views expressed are the author’s and not necessarily of Kyiv Post.