Co-owner of murky gas trader RosUkrEnergo gives rare interview

By bne IntelliNews February 5, 2008

bne -

Tension over Ukraine's gas trade with Russia is rising. Ukrainian Prime Minister Tymoshenko will be in Moscow on February 21 and gas is sure to be high on the agenda.

In January, after years of inaction, Russia arrested Ukraine-born crime boss Semyon Mogilevich, who has been linked to the murky gas trader RosUkrEnergo. Then Tymoshenko announced February 2 that her government was going to axe gas trader RosUkrEnergo from its role as middleman handling the sale of Russian and Central Asian gas to the Ukrainian state.

The Swiss-registered RosUkrEnergo was set up by Russian and Ukrainian interests as part of the deal to resolve the 2006 gas dispute between the two countries, which saw Moscow cut off supplies to Ukraine over a dispute about prices. Under the current gas-delivery scheme, Russian gas giant Gazprom sells a mix of Russian and Central Asian gas to RosUkrEnergo, and then RosUkrEnergo resells this gas to UkrGazEnergo, a Ukrainian-registered joint venture between RosUkrEnergo and the state-owned gas monopoly Naftohaz Ukrayiny.

Gazprom owns just 50% of RosUkrEnergo, while the ownership of the remaining half was a closely guarded secret until April of 2006, when, amid news of a possible US Justice Department investigation, two mysterious businessmen, Dmitry Firtash and Ivan Fursin, came forward to claim their stakes of 40% and 10%, respectively. Firtash also reportedly owns part of Eural Transgas (RosUkrEnergo's predecessor) and has media interests in Ukraine.

A transcript of the interview with Firtash, broadcast by Ukraine's InterTV on February 3, follows:

InterTV: A lot of myths have arisen about RosUkrEnergo thanks to statements by politicians and the press. At the same time, this company is the supplier of gas to Ukraine. What is RosUkrEnergo?

Firtash: "What you said is really the truth. RosUkrEnergo is a normal gas trading company like, for example, Ruhrgas, Gaz de France, Eni. RosUkrEnergo's contractual base is effectively 75bn cubic metres per year (cm/y) of gas. It is a properly balanced company in its contractual relations. And this company has three things that are most important. We have purchase of gas, we have transit of gas, we have sales. We can plan our costs, we can plan our sales. It is a long-term contract to 2028. This makes it possible to plan seriously and specifically with regard to gas pricing policy."

InterTV: Over the last few years, world fuel prices and gas prices have been growing. RosUkrEnergo is the main supplier of gas to several European countries. In particular, the price for Poland is $330 dollars per 1,000 cm; for Hungary, $350; for Romania, $370. The price for Ukraine is $179.50. Tell us, how is it possible to maintain such a low price for gas for Ukraine?

Firtash: "It is necessary to understand that Ukraine is one of the main players on the European gas market. Because Europe receives gas after Ukraine receives it. Consequently, in order to bring gas to Europe and sell it, it is necessary first to provide for Ukraine. We also understand very well the situation that Ukraine, in principle, cannot pay a higher price for gas - not because it is worse than any other neighbouring country. But for one reason, because it has operated to date at low prices. Industry is not ready today to switch immediately to high prices. When we worked out our company's costs and devised our sales strategy, we took into account in advance the market situation - that Ukraine cannot pay normal rates for its gas, and it will be necessary to understand how to deal with this situation. What's the point in creating debts which will never be paid? So we understood in advance that the price of gas in Europe is growing. As you can understand, oil today costs $100 a barrel, so of course, the price of gas has increased very sharply. We knew this market situation. So we worked out in advance that the price would rise in Europe. In this way, we worked out our average gas sales package. We came up with a gas price for Ukraine. We considered that ours was realistic for Ukraine, that Ukraine could pay this money. We have a sufficient profit margin on our balance sheet to cover our costs, and to pay our gas suppliers and transit providers in different countries."

InterTV: What makes up the gas price for a country - for Ukraine, in particular? How is it formed?

Firtash: "You know that RosUkrEnergo mainly buys Central Asian gas. This is around 42bn cm of Turkmen gas, around 10bn cm of Uzbek gas, and 9.5bn cm of Kazakh gas. All the rest, we buy from Russia to make it up to 75bn cm. These are long-term contracts. They all have their price. For example, if we say that Turkmenistan has an average price of $140 this year, Uzbekistan today has an average price of $175-180, and Kazakhstan $180 too. Russia has $314 at the Russian-Ukrainian border."

InterTV: Today, Ukraine is a fully-fledged player in the European gas market thanks again to its gas transport system. Could the construction of alternative gas pipelines deprive Ukraine of this advantage? Could it turn out that nobody will need the Ukrainian pipeline?

Firtash: "I don't think that will happen. There is, of course, another sort of concern. In 2008, Ukraine really needs to determine seriously where it is heading. Why? While the average price of gas in Europe - that is, practically on our border - has grown to $350, Russia has obtained a unique situation. It can now determine for itself which routes it can use to diversify its gas deliveries. And considering that Ukraine today is more concerned with politics, the state should separate politics from business, and not scare [people] with each new government coming and saying that they will reconsider prices. They are themselves forcing Russia to think about whether Ukraine is a dependable partner for the delivery and transit of gas. Am I right or not? So there is one question. Russia is starting to think about how to build bypass pipelines. It simply wants to distribute its risks in different baskets, in order to be sure that it is not completely dependent. This is actually very bad for Ukraine. What was signed in Bulgaria [the agreement on the South Stream project on January 18] is a problem for Ukraine. It will restrict gas crossing Ukraine by around 30bn cm. Ukraine should think about this. Because it is one thing that we are transiting 120bn cm today. It is another that tomorrow we will transit only 60bn cm. And the cost of the transit will be the same. Then it will not be a question of how much we take for gas transit. It will be a question how much money we have at our disposal to pay for the costs that we have."

InterTV: Prime Minister Tymoshenko recently spoke of plans for building the White Stream gas pipeline. How realistic is this project?

Firtash: "I think that in order to build any pipeline it is first necessary to have a contractual base and to be sure that you really have the gas. Turkmenistan's contractual base is fairly clear. All the gas today has already been sold. The second issue that I think is problematic is the Caspian. There are five countries in the Caspian, and they still have not divided the Caspian up as a sea. So how are you going to build this pipeline? I'm asking you how you can put anything there? It's impossible."

InterTV: Apart from strengthening its transit potential, does Ukraine have prospects for drilling its own gas?

Firtash: "I think that Ukraine should emphasize two aspects. First, it should understand one thing - that there was a monopoly until a certain point in time. Now when we are discussing this in 2008, the country is losing the monopoly situation. We have to think about how to convince gas sellers to trust us and to place their orders with us, because this is our business. Transport is our business. If Gazprom sells gas, we sell transport. Gazprom earns money in Europe from gas. Ukraine earns it from transport. So we can't lose this. The second thing I think is this. Today it is no secret that there are specific proposals that need to be carried out. These are completing the construction - it is 600 kilometres - of the Bohorodchany-Uzhhorod pipeline, which will allow Ukraine to increase transit by about 30bn cm. In money terms, that's up to about $500m of revenue. If Ukraine's budget today receives $2bn for transit, this decision alone will increase it by around $500m. This contract for the completion of the pipeline can be carried out next year, in 2009. I think this is really the right sort of the project. As for extraction in Ukraine, I think that Ukraine today extracts 20bn cm of gas. Ukraine really needs to think about what to do next. Taking into account that it has the Black Sea, the shelf, and there is a company like Chornomornaftohaz [state-owned oil and gas company], these require attention. According to our estimates and Gazprom's estimates, we think that over five years, it will be possible to explore and start extracting another 10bn cm. That's a huge figure. That is practically an additional third of the gas that goes to the population of Ukraine."

InterTV: In the situation where there is a conflict over the topic of gas deliveries in Ukraine, can RosUkrEnergo today guarantee the stability of gas deliveries? And also gas to Europe?

Firtash: "Of course, I will answer this question very simply. If you remember January in 2006 [when Russia cut off gas to Ukraine], that was an indicative demonstration when politicians were unable to agree among themselves while business did the right thing. There was a decision and Ukraine received gas, and this did not affect any political statements. So it is necessary to divide this situation. It is necessary to understand that we are delivering gas as we delivered it in the past. We cannot fail to deliver, because we have contractual obligations and we bear responsibility for this."

InterTV: So you can reassure European countries?

Firtash: "European countries know us. I don't think that they are concerned. They do not pay any attention because we fulfil all our contractual obligations and have never violated them. The gas business is a very narrow segment. You can't deceive anyone. If you fail to do something just once, then you won't get a second chance."

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Co-owner of murky gas trader RosUkrEnergo gives rare interview

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