Graham Stack in Kyiv -
Ukrainian Prime Minister Yulia Tymoshenko touted January's deal between Russia's Gazprom and the state-owned Naftogaz Ukraine as the means to create transparency in the sector by eliminating the murky gas intermediary Rosukrenergo. But while Rosukrenergo has definitely exited, the Ukrainian gas market is still far from being transparent - and Naftogaz is far from being the only provider of gas to industry.
"Naftogaz has cut off our gas since May 5, the plant has completely stopped working," a source close to the management of Rivneazot, West Ukraine's largest nitrogen fertilizer producer, told bne. "And the reason is the prime minister's personal feud against Dmitry Firtash. We have no debts to Naftogaz."
As co-owner of Swiss-registered gas trader Rosukrenergo, Dmitry Firtash was the man who, until January 2008, appeared to hold all the strings in Ukraine's notoriously opaque gas industry. For this reason, he was the personal bete noir of the firebrand PM.
In 2008, Tymoshenko declared it her mission to eliminate Rosukrenergo, and all intermediaries in general, from the gas trade. She claimed to have achieved this in the gas agreement finally signed between Naftogaz and Gazprom in January, ending a standoff between the two countries that saw gas supplies to Europe interrupted yet again. The agreement stipulated that Gazprom would in future sell gas directly to Naftogaz, with Naftogaz granted the status of monopolist gas importer for Ukraine.
Yet in May, the conflict took another twist when Naftogaz cut gas supplies to three chemical companies owned by Firtash - Rivneazot, Crimean Soda Plant and Crimean Titan. Supplies to the Crimean plants were later restored - but not to Rivneazot. Naftogaz claimed the companies had run up debts for gas supplies, while the companies argued they were consuming gas they had purchased earlier.
Naftogaz's decision to restore supplies to Firtash's Crimean companies led to the dismissal from the company of deputy CEO Vladmir Trikolich on May 25, according to media reports. "Tymoshenko demanded his head for the decision," the source close to the management of Rivneazot said.
As clear as mud
The episode with Firtash's companies goes to show that the elimination of Rosukrenergo may have increased government control over the gas sector in Ukraine, but hasn't created the hoped-for transparency. In fact, the move may have done exactly the opposite, thanks to the ongoing collapse in Ukrainian industry.
Supplying gas to industrial customers is the only profitable part of Ukraine's gas sector, with supplies to households and utilities tightly regulated by the state. So when Tymoshenko vowed to remove the intermediaries, part of the idea was to improve Naftogaz's hitherto disastrous financial position by giving the company a dominant position on the market for industrial customers. According to Ukraine's Centre of Energy Studies, industrial companies' (excluding utilities) payment discipline is at 86.1%, with total debts of $2bn.
So while Firtash's chemical companies had their gas switched off for alleged debts of less than $1m, other oligarchs are running up substantially larger debts with apparent impunity, as seems to be the case with metallurgical giant Industrial Union of the Donbass (IUD), owned by the tycoons Sergei Taruta and Vitaly Gaiduk. A letter leaked to business daily Kommersant-Ukraine on June 10 showed that Naftogaz's deputy head, Igor Didenko, had directly ordered supplies to be continued to IUD plants, despite the conglomerate having run up nearly $51m in debts. Vitaly Gaiduk also happens to be head of Tymoshenko's advisory service, and Naftogaz head Oleg Dubinin was CEO of IUD-owned Dzherzinsky Metallurgical Combine until moving to Naftogaz in December 2007. IUD is one of the most heavily indebted industrial groups, with an estimated $3bn total debt, of which $500m is due in 2009.
Privat Group, part owned by billionaire Ihor Kolomoyskiy, is another oligarchal structure that Tymoshenko is said to have a soft spot for. She backed Privat in its attempt to take over Nikopol Ferroalloy Plant from Ukraine's richest man Viktor Pinchuk in a scandal that led to her first exit from government in 2005.
Privat is also, via the country's largest oil and gas producer Ukrnafta, owner of a large stockpile of gas held in underground storage estimated to be 3bn-10bn cubic metres (cm). While the state in fact holds a 51% stake in Ukrnafta, Privat, with a 42% stake, exercises operational control over the company via management appointments. Ukrnafta, as a state-owned company, is by law allowed only to sell its gas to households at prices around 11 times lower than those charged to industrial customers. Privat has for this reason since 2007 blocked any sale of Ukrnafta's gas, which is the reason behind the stockpile.
But when in late February, deputy chairman of Ukrnafta, Valentin Franchuk, linked to Privat Group, moved to become deputy chairman of state-controlled Naftogaz, analysts reckoned it would be only a question of time before Ukrnafta's gas seeped through to industrial consumers. Sure enough, at the end of May, the first sketchy reports provided by trading insiders surfaced of Ukrnafta gas finding its way to industry, unhindered by the government.
Analysts agree that Ukrnafta has been selling its oil at artificially low prices to Privat-affiliated companies. Since the Privat Group comprises gas-guzzling metallurgical and chemical plants, it would not be far-fetched to think that the same scheme is going on with its gas, although this hasn't been confirmed.
The biggest winner from Tymoshenko's elimination of Rosukrenergo has been Gazprom itself, either though its fully-owned Ukrainian subsidiary Gazprom-Sbyt Ukraine or as a potential direct supplier of gas to Ukraine's chemical sector.
According to January's gas agreements, Gazprom Sbyt gained the right to purchase up to 25% of gas imports, reselling a maximum of 7.5bn cm to industrial customers. According to Gazprom Sbyt's CEO Anatoly Podmyshalskyi, the company aims to sell 4bn-5bn cm in 2009. "It's a myth that Tymoshenko got rid of intermediaries," Bogad Sokolovsky, adviser to President Viktor Yushchenko on energy issues, tells bne. "What is Gazprom Sbyt if not an intermediary and indeed one that surpasses all that went before. And explain to me how it is that Gazprom Sbyt Ukraine is managing to conclude contracts with the most solvent companies in the country?"
Gazprom Sbyt cannot undercut Naftogaz in price, since it buys its gas back from Naftogaz at the import price, and has to earn a margin on this. However, in crisis times, thanks to its parent company it has the resources to offer considerably more flexible payment conditions and also more supply security than cash-strapped Naftogaz. This means it is likely to attract solvent future-oriented companies who can afford to pay the mark-up to get added payment flexibility, whereas Naftogaz demands prepayment from industrial customers. This will then leave Naftogaz with the dross that are struggling to pay their bills.
However, it's not just Gazprom Sbyt that's filling the void left by Firtash and Rosukrenergo - big brother Gazprom itself is starting to loom as a potential direct supplier of Ukrainian industry, with Ukraine's crisis-stricken chemicals plants serving as a bridgehead.
Ukrainian Industry Minister Volodymyr Novitsky announced on June 3 that six nitrogen fertilizer producers would be allowed to purchase gas directly from foreign companies. "Nitrogen fertilizer producers are in a very special position," a source at Ukraine's Union of Chemical Producers, which was involved in lobbying for the resolution, tells bne. "Gas for them is not just a source of energy, but their key raw material, comprising around 70% of costs."
"The suppliers could be famous Russian companies," the source explains. "This would be a step towards de-monopolisation of the gas market. After all, what is Naftogaz Ukraine if not a giant intermediary itself?"
But the move has prompted concerns that any company supplying cheaper gas directly to these companies would then be in a prime position to acquire or privatize them. President Yushchenko has been bitterly resisting the government's attempts hitherto to privatize Odesa Portside Plant, Ukraine's most strategic chemical asset and one of the companies on the privatisation list. Russia's largest petrochemicals holding, Sibur, is a Gazprom affiliate. "The whole thing seems unclean," Sokolovsky says, referring to the government announcement. "It in fact directly contradicts the gas agreement between Gazprom and Naftogaz that stipulates Naftogaz as monopoly importer. How will it then be possible?"
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