You're reading: Verkhovna Rada plans to ban private gas at market price

The parliament is ready to force private gas companies to sell gas below the market, David Arakhamia, head of the governing 243-member Servant of the People faction, said on Oct. 13.

“To take all gas produced in Ukraine under control, we need to temporarily prohibit (private companies) from selling as they are now doing and force them to sell at cost with a minimal margin,” said Arakhamia during an interview with the Ukraine 24 TV channel.

Energy companies have already expressed their concern about the proposal. A spokesperson for oligarch Rinat Akhmetov’s DTEK energy company stated that the company supports the opinion of the Association of Gas Producers of Ukraine.

According to the association, artificial price controls will hurt the industry and lead to reduced gas production.

“Any attempts to use short-term, artificial and non-market methods will inevitably lead to negative consequences for the economy of Ukraine and the oil and gas industry in particular,” the statement read.

This decision would greatly impact the largest private gas companies in Ukraine – DTEK, ex-Ecology Minister Mykola Zlochevsky’s Burisma Holding, and companies controlled by oligarch Ihor Kolomoisky.

The Association of Gas Producers estimates that the move could potentially cost the private gas industry Hr 10 billion ($378 million) and would halt investment in the exploration and development of new gas wells.

State-owned Naftogaz currently controls the majority of the gas production market in Ukraine. By setting caps on the price of privately extracted gas, Arakhamia hopes to curb private sales at high prices during times of fuel scarcity.

According to ExPro consulting, only 24% of natural gas in Ukraine is currently extracted by private companies. In 2020, private gas companies extracted 4.9 billion cubic meters of gas.

However, in a 2019 report published by DTEK, private production was on the up, increasing by 4.5%. 

The prices of household gas from Naftogaz are kept below the market by the government amidst the ongoing coronavirus pandemic.

The move, proposed by Arakhamia, would mean further state encroachment into the market, something that has already been criticised by international organizations. In January, Ukraine’s finance minister Serhiy Marchenko stated that the IMF had expressed their concern over the proposal to set caps on household gas prices. 

According to Marchenko, the state’s involvement in the market, and the artificial manipulation of prices, is being viewed as contrary to the conditions stipulated for Ukraine to receive the second tranche of the IMF’s $5 billion loan programme.

“They are concerned that we are revising some of our earlier commitments,” Marchenko said. 

DTEK, the largest private domestic gas producer, has invested heavily in the production of gas for the private market. According to DTEK General Director Igor Shchurov in July, the company has invested over $372 million into the Ukrainian gas and oil extraction industry since 2013. 

In an op-ed published on Oct.15, Edward Chow, a senior associate in energy security and climate change at the Center for Strategic and International Studies, stated that such proposals by state officials were threatening investments in the Ukrainian economy.

“It is as if some Ukrainian politicians learned nothing from the failed Soviet economy and its legacy, which continues to plague Ukraine’s energy sector,” Chow wrote.

There had previously been hopes that increased private gas extraction would help alleviate some of the pressures caused by the spiralling cost of imports from Russia.

“Ensuring the energy independence of Ukraine requires joint efforts to increase gas production from both the private and public sectors. The gas industry is like a large cruise liner — you cannot abruptly change its course with a single turn of the steering wheel,” Shchurov wrote.