You're reading: Vitrenko assesses Naftogaz’s transformation, challenges

For years, state-owned energy giant Naftogaz was a byword for corruption in Ukraine – its deficit topped 6 percent of the country’s gross domestic product in 2014.

Its rapid transformation – which saw the company bring in 10 percent of state budget revenue in 2016 – has impressed observers from abroad.

But its battle with Soviet-style corruption is far from over.

The company’s flagship asset, Ukrtransgaz, still has three senior officers connected to Russia-friendly oligarch Dmytro Firtash, although they may soon be reduced to two.

On Feb. 17, Ukrtransgaz’s president – a former employee of Firtash called Ihor Prokopiv – was suspended after auditors found “a number of irregularities” during a review of Ukrtransgaz’s accounts.

Naftogaz’s chief commercial officer, Yuriy Vitrenko, told the Kyiv Post in an interview that the company is currently investigating the findings and he could provide no more details.

“There is reasonable concern about mismanagement, and if these concerns are confirmed there will be a decision to fire, but if the concerns are not confirmed there will be another decision,” he said.

Meanwhile, Ukrtransgaz’s head of procurement, a former Firtash employee, and the head of its legal department, also connected to Firtash, remain at the company.

Vitrenko said that the investigation would also look into the activities of other employees “and there will be corresponding decisions. (But) we’re not going to fire people just because they worked for Firtash.”

Russian gas

Vitrenko says corruption at the company began to recede when Ukraine stopped buying gas from Russia and started importing it from Europe at market prices.

Ukraine stopped directly importing Russian gas just over a year ago. Now it makes up the gap in domestic supplies by buying it via a reverse flow scheme from Europe.

“Before, when there was no market price, it was a political contract … (and) there was always room for kickbacks or for bribes,” Vitrenko said.

He said that at one point gas prices for households were 15 times cheaper than for industrial use.

“You can take this gas that was destined for households but in fact sell it to industrial users, or use it yourself if you have a chemical plant. It created huge motivation for corrupt schemes.”

Vitrenko says that although it has been reduced, the misappropriation of gas is still a problem.

Despite its efforts to distance itself from Russia, Naftogaz can’t quite seem to shake off its dealings with the post-Soviet Russian gas giant Gazprom.

The Ukrainian company is currently battling out gas billing issues with Gazprom in the Stockholm arbitration courts, and the legal battles are partly responsible for delaying a key part of its reforms.

Unbundling delays

In July the government adopted a plan to restructure Naftogaz, breaking off Ukrtransgaz and splitting it into two separate companies – one to manage gas transit, and one to manage its storage.

But Vitrenko says that plan is already lagging behind schedule – in some areas by six months – and it’s putting the company’s chances of attracting a European partner to manage the assets at risk.

Vitrenko believes an international partner would be able win the trust of other European companies.“We understand there is a war in the east, and a lot of companies, even before, were afraid to get their gas … on the Ukraine-Russian border, because they would bear all the risk connected with gas transit through Ukraine,” he said.

And a European partner, Vitrenko says, will also mitigate the threat of Nord Stream 2.

The 1,200-kilometer pipeline, which is planned to run under the Baltic Sea alongside the existing Nord Stream 1, will bypass Ukraine, drastically reducing the country’s role as a gas transport route from Russia to the European Union.

Ukraine expects to lose out on an estimated $2 billion in transit fees if the pipeline comes on stream.

Vitrenko says as part of the plan to maintain its role as a transport route if Nord Stream 2 goes ahead, is to drop its recently raised transit prices after the new pipeline is built.

But a European partner would really go a long way to solving a range of problems.

“Even if you’re very cheap, if you scare everybody, no one will work with you,” Vitrenko said.

In September, a move to transfer control of Ukrtransgaz to the Ministry of Economic Development and Trade took Naftogaz by surprise.

The state-owned gas supplier, along with the company’s key lender, the EBRD, only learned about the decision from the media.

Naftogaz and its lenders rallied against the move and reversed the decision, which they say not only jeopardized a $500 million loan from the World Bank for gas and but also was not in compliance with the Third Energy Package.

Vitrenko said while the ministry labeled the move “unbundling,” it was actually an attempt to revert to Soviet practices.

He added that following the Stockholm arbitration there needs to be a lot of political will to bring about change and prevent further delays.

“Unfortunately in Ukraine, we have a history of delays. There are many reforms in Ukraine that have been delayed for 23 years – for the entire history of Ukrainian independence,” Vitrenko said. “So, unfortunately, a delay in Ukraine doesn’t mean that you will get it, but just a bit later. In Ukraine, unfortunately, a ‘delay’ means the same as ‘mañana’ (tomorrow) in Spanish – it may be never, basically.”