It could take years or decades for Ukraine to unlock enough fresh domestic sources of energy to break its dependence on increasingly expensive Russian natural gas imports.
But an immediate jolt of relief could be provided by boosting transparency in how the nation sells relatively large volumes of domestically-produced gas – an annual 20 billion cubic meters at billions of dollars.
Financial neglect gradually has led to a drop in domestic production with gas imports carrying high price tags partially filling the void. While corruption and non-transparency in the energy sector have played their part in exacerbating that nation’s dependency on Russian gas, populist subsidies have financially deprived the state of funds to boost production and upgrade gas facilities.
As a result, state-owned gas production, supply and distribution companies are in a financially unsustainable quagmire, as is Naftogaz, the nebulous state-owned gas and oil company.
At top, Naftogaz Ukraine shows the production and consumption of natural gas. However, some say that the actual consumption by household sand district heating is lower than the state monopoly is reporting. Some say that natural gas produced domestically is improperly diverted to businesses, when the law specifies households and district heating as the sole consumers. At right, Ukraine is heavily dependent on fossil fuels.
As shocking as it sounds, not all of the gas that state companies produce and sell at a highly-subsidized price may be going to households as prescribed by law. Energy experts at a recent roundtable in Kyiv charged that up to 4 billion cubic meters of gas a year is being improperly diverted to private interests, mostly to industrial companies or murky companies who consume it or resell at a big profit.
Energy Expert Yuriy Korolchuk of the Energy Studies Institute, said the lack of essential measurement tools enables gas redirection. Many apartments, buildings, distribution stations and other links along the gas supply chain don’t have gas and heat meters. Some 13.5 million apartments consume gas, according to Korolchuk, of which eight million, or 62 percent, only have gas meters.
Meanwhile, Ukrnafta, one of three state-owned gas producers and which partially belongs to billionaire Ihor Kolomoisky, has won court battles to sell gas to a chemical company instead of households – this despite clear-cut rules setting aside domestic gas for household needs and at lower prices.
Volodymyr Lartsev, former deputy chairman of the State Property Fund, said at the roundtable that households and government-occupied buildings don’t consume on average 18 billion cubic meters of gas yearly that the energy ministry reports. He said Ukrainian households supposedly have doubled gas consumption since 1991, despite the nation’s population dropping by 6 million people and in spite a 20 percent increase in housing space for the same period.
“What the government did was increase the gas consumption rate per person from 5.5 cubic meters a month to 9 cubic meters,” said Lartsev. He added that in this way, households actually end up partially subsidizing steel and chemical production who are believed to be recipients of the cheaper, domestically produced gas.
Ukraine’s parliamentary audit chamber confirmed these suspicions in a 2009 audit of Naftogaz. Covering the years 2007-2008, the audit said subsidiaries controlled by Naftogaz “supplied 11.2 billion cubic meters of domestically produced gas to other categories of consumers” that was according to law to go to households and government buildings.
As a result, households had to be subsidized with much more expensive imported gas at the expense of Naftogaz’s strained budget. The parliamentary audit chamber said that the state budget lost $340 million because of the diverted gas.
“The financial and economic activity of Naftogaz is closed and non-transparent. Information about its financial state and foreign economic relations is incongruous,” read the audit.
As painful as it sounds to the nation’s struggling households, gas subsidies must end, experts said. Ukraine’s main creditor, the International Monetary Fund has led the charge in demanding Ukraine raise prices for households to market levels to boost production and profits that could be re-invested into exploration and efficiency. Once accurate measurement meters are installed throughout the gas supply chain, siphoning gas to industry players will prove more difficult.
“Right now, nobody knows how much households are really consuming,” said ISE’s Korolchuk.
Moreover, if Ukraine ever clearly delineates the gas production, distribution and supply functions of Naftogaz, international lenders are ready to step in, said Andre Kuusvek, Ukraine director for the European Bank of Reconstruction and Development.
But until that happens, Naftogaz’s ultimate owners, the Ukrainian people, will continue losing out in the long run.
The Kyiv Post sent an emailed and faxed inquiry to the Energy Ministry on Feb. 17 whose receipt was confirmed but went unanswered before it went to press.
Kyiv Post staff writer Mark Rachkevych can be reached at [email protected].
