A big chunk of Ukraine’s energy sector is being transformed. On June 12, the Cabinet of Ministers ordered that the vital and vast gas transportation system (GTS) be divested from the state-owned oil and gas monopoly Naftogaz in order to comply with the European Union’s 3rd Energy Package, of which Ukraine is a signatory. The bill to unbundle this most profitable unit of Naftogaz was submitted to parliament on June 19.
The ultimate goal of the so-called unbundling process is to eliminate
conflicts of interest at Naftogaz and separate the primary functions of gas
transit, trade and production. As a result, the system would become more
reliable, investment-worthy, and energy efficient.
Essentially, the two functions of Naftogaz subsidiary Ukrtransgas –
transit and storage – would be separated into two newly created companies, with
a simple majority owned by the state: Trunk Gas Pipelines of Ukraine and
Underground Gas Storages of Ukraine. Ukrtransgas would still be the operator of
the assets and have them on its balance sheet.
The remaining 49 percent of each newly-formed company would be owned by a
consortium of international investors from the U.S. and EU, Prime Minister
Arseniy Yatsenyuk told parliament on June 19.
This means that Gazprom would have to deal with an international player,
not Naftogaz, which would prevent the Russian gas giant from manipulating its
weak Ukrainian partner and making backroom deals.
“The Europeans have all the experience in properly managing such vital
systems,” explains Bogdan Sokolovsky, former presidential envoy on energy
security in 2008-2010. “We don’t.”
Andriy Chubik, analyst for Nomos energy consultancy, adds that the
current operators haven’t proven themselves to be especially capable, so having
a European group involved should improve management.
Naftogaz, whose unprofitable business model led to $1.5 billion net
losses last year, claims the reform will not have a negative impact on its balance
sheet and the company’s ability to service own debts. The company’s total debt
as of March 31 was $4.8 billion, according to its own financials.
Analysts expect the measure also will bring much-needed transparency and
order to the financial management of Naftogaz.
In parliament on June 19, Yatsenyuk argued that the creation of an
independent and Euro-compliant GTS will alter the geopolitical situation of the
region by obviating the need for Russia’s proposed South Stream pipeline and
selling Europe gas at the country’s eastern rather than western border.
The prime minister says that hiving off the GTS from Naftogaz should
“improve the internal market” and “help secure the financial stability of the
branch.” This would mean ensuring non-discriminatory access to the network by
suppliers, extractors and users, explains Sokolovsky, because as an extractor
and supplier, Naftogaz is in a conflict of interest. An improved market, then,
would generate more revenue and attract investment.
Ukraine’s GTS is one of the largest in the world. It has 39,800
kilometers of pipelines with a total working capacity of 32 billion cubic
meters, 12 underground storage facilities, and 367,000 kilometers of natural
gas distribution networks, according to Naftogaz’s website.
It mainly transits natural gas from Russia to 18 European countries via Ukraine.
However, the system is grossly underutilized since Ukraine absorbs no more than
30 billion cubic meters of Russian gas, as well as 21 billion cubic meters of
domestically extracted gas, whereas 80 billion cubic meters were transited to
the EU in 2013. It brings the government $3.5 billion in transit fees.
Reforming the oil and gas behemoth Naftogaz has been on the government’s
agenda since former President Viktor Yanukovych assumed power in 2010, but no
essential changes were ever completed. The current administration has not only
made its reform a priority, but on June 4 it announced that Naftogaz would be
split into three parts in order to comply with European standards, Prime Minister
Arseniy Yatseyuk said.
Moreover, the International Monetary Fund, which is Ukraine’s key
lender, has urged for Naftogaz to reduce its budget deficit.
The EU’s 3rd Energy Package, which entered into force in 2009, is an
arrangement to prevent monopolies from developing in the energy sector.
The creation of an independent GTS was also mandated when Ukraine became
a contracting party of the Energy Community in 2011. The Energy Community was
created in 2005 to create a stable regulatory and market framework to attract
investments. For Ukraine, a key advantage of membership to this club is stable
pricing.
New money
and good management
Independent management is also expected to lead to improved efficiency
of the GTS. Then, it will become attractive to foreign investors, since the GTS
needs $3-4 billion in upgrades, according to Energy & Coal Industry
Minister Yuriy Prodan. To this effect, the government has offered Europe and
the U.S. to jointly modernize and exploit the GTS, Yatsenyuk said at a June 16 government
meeting.
The European Bank for Reconstruction and Development is already
undertaking a $308 million special modernization program for the GTS.
Such a dramatic measure should also put Ukraine in a good light as a
reliable gas transporter. Chubik of Nomos argues that the gleam of massive
upgrades and responsible management should catch the eye of European gas
consumers, who have been bombarded with negative press about – and suffered
negative experience from – losing the gas stream via Ukraine.
Russia has several times over the years offered to jointly run Ukraine’s
GTS with just Ukraine or with the addition of a European partner. The Ukrainian
government has thrown this idea off the table.
Ukraine made an abortive attempt to sell 25 percent of Naftogaz in 2011,
but its massive debt burden, willingness to not change and estimated $5-6
billion price tag was too much for investors to become seriously interested.
According to Sokolovsky, the GTS is a strategic asset for the state and,
besides, it will be many years before it will be in good enough shape to be
privatized, should the government decide to sell it.
Ukraine’s GTS with gas storage facilities are worth $26-$29 billion
based on Baker Tilly’s assessments made in May 2013.
Kyiv Post
business journalist Evan Ostryzniuk can be reached at [email protected].
