You're reading: Gas transit system to remain in state hands, though still looking for investors

Parliament on Aug. 14 passed legislation that clears the way for detaching the nation’s strategically valuable natural gas transportation system (GTS) from state-owned oil and gas monopoly Naftogaz Ukrainy. 

Passed in the second reading, the bill allows
the state to retain a controlling stake in the GTS and lets it offer up to 49
percent of its operating arm to a U.S. or European investor. It also ensures
that the large gas storage network remains in state hands too.

The GTS, worth an estimated $25-35 billion, is
the more valuable asset of the state gas behemoth Naftogaz and is slated to be “unbundled”
from the parent company by the government of Prime Minister Arseniy Yatseniuk.
With an input capacity of 233 billion cubic meters and an output capacity to Europe
of 143 billion cubic meters per year, the GTS pumped just 86 billion cubic
meters in that direction, earning the state over $3 billion, and a further 28
billion cubic meters from Russia and Europe to Ukraine as the terminus.

According to Naftogaz, the GTS has 33,000
kilometers of pipelines. Also highly valuable are the monopoly’s 13 storage
facilities (including 1 in occupied Crimea) that have a capacity of 32 billion
cubic meters. 

Founded in 1998 during Leonid Kuchma’s fourth year
as president, Naftogaz is a massively indebted and corrupt company. It has a
$1.6 billion bond debt maturing in September alone and owes Russia’s Gazprom
$2.2 billion for delivered gas, according to Kyiv authorities. This latter debt
is in dispute in European courts. Meanwhile, utility companies and industrial
consumers owe Naftogaz Hr 19.8 billion ($1.5 billion) as of Aug 13, the company
reported.

The GTS is in need of urgent upgrades that
neither the state nor the company can afford. So, in order make it more
efficient and investment attractive, the government wants to break it up into
three independent entities: GTS, oil and gas extraction, gas storage.

“Today we have taken two historic steps,”
Yatseniuk declared at the bill’s final passage. “First –we actually took a step
towards energy independence by adopting a law on the modernization of the
Ukrainian gas transportation system operation with the participation of the EU
and U.S. Secondly – we have shown that the country is able to defend itself by
passing a law on sanctions.”

In order to attract (non-Russian) investment
and bring the GTS up to European standards, the new company must be brought in
line with the EU’s 3rd Energy Package by the beginning of next year. This means
that if the GTS is state-owned, its operator cannot be, and vice versa. The new
law anticipates a joint venture between the state and a private company with a
51-49 percent split in ownership.

The Ukrainian government has announced a public
competition to attract investors for the modernization and operation of the
GTS, and by law they can only belong to EU member states or the U.S. Also, for
the sake of transparency, during the competition a company that is a resident
of the EU or the U.S. is obliged to disclose all information about their assets
and show all the beneficiaries who are the owners of the company.

Energy experts believe that only a select few
investors would be interested in the GTS, whereas a wide pool of partners are ready
to bid for the storage facilities.

“If the company that wins the competition
decides to change its ownership structure, such a decision can be taken only if
the Ukrainian side agrees,” said Yatseniuk. “It could happen that an EU
resident company wins and then changes the ownership structure so that it
belongs to a country-aggressor (like Russia).”

But not everyone is convinced that this law
will offer much improvement by itself. “The economic value [of the gas
transportation system] depends on the shipment of gas from the direction of
Russia to Europe. Consequently it is critical to restore stability to the
transit business with Gazprom before Ukraine can capture full value for its assets,” argues
Edward Chow of the Energy and National Security Program at the Center for
Strategic and International Studies. “Until transparent operation is established within
Ukrtransgaz (operator of pipelines and storage facilities), it makes little
business sense to separate gas transportation from gas storage as the
value of each depends on the other.”

The prime minister added that the company that
manages the GTS must for five years report to parliament.

He also gave the moment a political spin, emphasizing
the need for Ukraine and Europe to be together on energy security. “For the EU
to be consistent, since together we signed the association agreement, this
means we help each other and not build the South Stream [Pipeline], which is
designed solely to be against Ukraine,” added Yatseniuk.

Naftogaz was founded to concentrate the
majority of the state’s oil and gas related companies into a single entity.
Until recently it was the monopoly for gas extraction and transit in Ukraine.
Scandal has dogged the company since its inception, as its murky structure and
lack of accountability have allegedly made it a target for theft and fraud.
Without substantial reforms to the company, international financial
organizations have made it clear that they will be reluctant to credit Ukraine.

Kyiv Post business journalist Evan
Ostryzniuk can be reached at
[email protected]