The government is replacing an alternative source of gas imports with an alternative trader
In April, Gazprom signed a memorandum of intent to launch two new gas pipelines bypassing Ukraine. One is for the third branch of Nord Stream with Gasunie, a Dutch company; and the other is for the second branch of Yamal-Europe running through Belarus and Poland with Polish Evropol Gas. Both projects appear to be tools for blackmail, yet the mere fact of the initiatives coming up against zero progress in gas talks between Russia and Ukraine indicates a stalemate. The postponement of President Yanukovych’s meeting with leaders of Customs Union member states to the end of May is another sign of this stunted progress. The Kremlin’s demands have no chance of being passed by the current parliament, while Putin and Gazprom are not ready to concede to Ukraine for psychological reasons. Therefore, a solution through official arrangements between Naftogaz and Gazprom or Ukraine’s and Russia’s leaders is highly unlikely.
Meanwhile, an alternative scenario is emerging that may satisfy the personal interests of some powerful people while adversely affecting the prospect of Ukraine’s energy independence from Russia, despite hopes that the long-standing gas conflict would lead to progress in this arena. The developments in the first quarter of 2013 confirmed our earlier projections: Naftogaz may be removed from the market while the price of gas imported under its contracts with Gazprom remains high. In December 2012, Naftogaz CEO Yevhen Bakulin, who has close ties to Dmytro Firtash, said that corporate consumers should buy gas from alternative traders because that could be less expensive for them, while Naftogaz should supply gas only to individual consumers, public and community owned enterprises. This means that private traders would get the profitable segment of the gas business (corporate customers normally pay the market), while the state would end up with the subsidized segment.
THE REARRANGEMENT OF VARIABLES DOESN’T CHANGE THE SUM
Implementation of the idea began in February-March of this year, and it continues given Energy Minister Eduard Stavytsky’s statements that Naftogaz was barely buying any gas from Gazprom in April. In January, Naftogaz bought 2.4bn cubic metres worth USD 1bn from Gazprom. In February, the amount dropped to 0.4bn cu m, the Ministry of Energy reported. This cut public and international reserves spending to USD 0.16bn, followed by another USD 0.08bn saved as Naftogaz bought only 0.2bn cu m of gas in March. Meanwhile, data from the State Customs Service suggests that Ukraine actually imported USD 3.6bn worth of Russian gas in the first quarter of 2013. This is almost the average monthly amount of Russian gas imports in the previous year. Dmytro Firtash’s Ostchem Holding took over more than half of all gas imports from Russia in the first quarter (over 80%, i.e. 1.8bn cu m in February), while Naftogaz cut back on its share of gas imports from Gazprom exactly when settlements were due. This barely received any media coverage, while Vadym Chuprun, Deputy CEO of Naftogaz, explained it as “technical inaccuracy” on February 26. Naftogaz subsequently reduced imports to a minimum, while its capacity to pay for gas remains an open question—in 2012, Naftogaz reported UAH 10.3bn of net loss compared to UAH 7.8bn of net income in 2011.
In the end of February, Dmytro Firtash said that Naftogaz executives had asked him to supply gas to corporate consumers – they buy it at prices much higher than the population does. In addition to Firtash’s entities replacing Naftogaz on the market, all commercial consumers in the regions, including those working with different gas traders, are now being switched to Firtash’s companies.
What is the motivation behind the government’s campaign to hand over all trade in Russian gas to Dmytro Firtash’s businesses? There may be more than one.
Perhaps this is an attempt to play for time until Ukraine and Russia come to an agreement and the necessary amount of gas is less expensive for Ukraine than it is now, although this scenario is unlikely. Another off-site parliamentary session – like the one the Party of Regions and Communist MPs held in April – might approve the surrender of Ukraine’s gas transit system needed by Yanukovych. However, its decision will become illegitimate as soon as the government changes in Ukraine – and the Kremlin must be well aware of that. In fact, Russia essentially quit gas negotiations in early April as the parliamentary crisis in Ukraine peaked. It will hardly need Ukraine’s gas transit system in a year or two anyway – it is already pumping little gas through. Without an off-site session, the current parliament is very unlikely to approve Kharkiv Deal #2. And those in power are equally unlikely to arrange a new parliament by the end of the year, even if everything plays into their hands.
Under another scenario, the government may be hoping to bridge the gap between the amount of Gazprom gas it buys now and what it actually needs by purchasing gas from European companies during warm seasons when spot prices are significantly lower. Government officials are already discussing changes to the limits on gas purchased and transited from Western neighbours, although they have so far been delivering insignificant amounts. For instance, Ukraine bought less than 0.05bn cu m per month from Germany over the entire period of reverse gas supply.
The most likely scenario is a quiet surrender of the gas market whereby Naftogaz buys up to 5-10bn cu m of Russian gas by the end of the year just to cover the amount individual consumers, public institutions and utility companies need. Private traders – particularly those of Dmytro Firtash, and probably those close to the Family – will sell most of the gas commercial consumers need. This seems like a win-win situation: the government ends up with an image-boosting illusion of “independence from expensive Russian gas” as the share bought by Naftogaz may indeed drop to 25-30%, while the prolific segment of gas supplied to commercial consumers will end up once again in friendly private hands. Ultimately, though, this will not decrease the amount of gas Ukraine buys annually as private traders will buy up what Naftogaz doesn’t. That would help Russia save face, too: it will look like Moscow has not conceded to Naftogaz or the stubborn Ukraine, kept the amount of gas it sells at the present level and avoided losing its biggest market.
EXPORTS TO REPLACE IMPORT SUBSTITUTION
On April 12, Eduard Stavytsky, Minister of Energy and Coal Mining, announced that investors would be able to start exporting Ukrainian gas to Europe in four to five years, and “Ukraine may become a net exporter by the middle of the next decade”. This suggests that the regime is expecting domestically produced gas exports to exceed the import of Russian gas rather than to replace Russian gas with Ukraine’s own. This seems reasonable, as the pursuit for political dividends would force the government to sell Ukrainian gas well below market price domestically while exports would bring good profits to the government and allow private traders to continue their equally profitable import business.
Still, Ukraine will not benefit from the prospect of becoming a net exporter. This role does not protect it from possible political influence, especially if the superficially liberalized market is taken over by entities close to Gazprom that will use their dominant position to exert pressure on other players. Ukraine’s gas business will still be closely tied to Russia’s state monopolist – hence to the Kremlin. This will aggravate the risk of Ukraine being dragged into the Russo-centric integration project – or make it more difficult for Ukraine to break free from Moscow’s sphere of influence.
Although there’s been a sharp reduction in trade and commercial ties with Russia and in Ukraine’s dependence on its neighbor, some key sectors still show levels of interaction that pose a threat to national security