Ukraine wants to convey its gas transport system to European or U.S. companies. At this point, there are no takers for such an offer

Photo: Reuters

At the end of last week the Verkhovna Rada of Ukraine passed the law on reform of Ukraine’s gas transport system (GTS). Under the document, two companies will be created for the management of Ukraine’s GTS: one will manage the gas pipelines and the other will be responsible for the gas reservoirs. In these structures the controlling share package will remain with the state and the remaining stakes will be offered for acquisition by European or U.S. investors.

In this way, the Ukrainian parliament put an end to the attempts of Russia’s Gazprom that over the past several years has tried to gain control of the management of Ukraine’s GTS. Indeed, the Verkhovna Rada retained control over observance of this ban: companies contending for participation in Ukraine’s gas transport business must get the approval of the parliament and report to it every five years.

Good-bye Gazprom

In order to more reliably safeguard Ukraine’s GTS from possible encroachment of Russian monopolists, the members of the VR added clarification to the initial bill: companies contending for access to the GTS and the underground gas storage facilities (UGSF) should disclose full information about their beneficiaries (whether Gazprom or companies affiliated with it are not among them), while their substitution should be agreed to with the Ukrainian side.

Director of the Center of Energy Programs at the Razumkov Center Volodymyr Omelchenko noted that from the vantage point of mid- and long-term prospects the adoption of the law is positive. It factors in Ukraine’s obligations before the Energy Community regarding the division of the state gas business into separate functions, particularly in the extraction, transportation and sale of gas.

No more lines

The Ukrainian government hopes to kill two birds with one stone by passing this bill to attract European companies to the management of Ukraine’s gas business and their money for the modernization of the GTS. As a consequence, there are plans to lower the chances of the construction of South Stream through which Gazprom plans to increase the volume of gas transit bypassing Ukrainian territory.

By the way, the Cabinet of Ministers of Ukraine realizes the possible difficulties in attracting foreign companies. “It will not be easy to attract foreign investors, though this is a precept for beginning talks,” Premier Arseniy Yatsenyuk stated in the parliament during consideration of the bill. The press service of Naftogaz of Ukraine informed in its statement that the company soon plans to enter into talks with interested legal entities in the EU and the U.S. on their participation in management of Ukraine’s GTS.

However, experts that are close to the head of the government responded to questions posed by Capital that it is not worth expecting positive results any time soon. “It is worth noting that at the moment no serious investors are ready to invest in Ukraine’s GTS as it is too risky. This sector is not transparent enough. Moreover, regulation in the energy sector has much to be desired as it is riddled with a multitude of corruption schemes. For this reason, we should not expect that tomorrow a throng of investors will bite the bait,” Omelchenko believes.

He added that in order to create favorable conditions for attracting foreign companies to invest in Ukraine’s GTS it will be imperative that Naftogaz conducts reforms. “This company in its current state is a yoke on the neck of the entire national economy,” the expert presumes.

The poor financial state of Naftogaz of Ukraine became a parable and the government periodically makes financial injections into the company with the aim of keeping it afloat. In particular, in early August the Cabinet of Ministers assigned the Ministry of Finance to issue treasury bonds in the amount of UAH 63.3 bn. The proceeds from the sale of securities will be allocated to support Naftogaz. In addition to that, Omelchenko noted that the National Energy Regulation Commission needs to be improved as well, while the subsidization of separate categories of gas consumers should be cut.

In the opinion of Vice Chairman of the Energy Strategy Fund Dmytro Marunych, the government should also bring the legal base in correspondence with the new realities of the market. “I am not convinced that all the necessary documents have been brought in line with the format that would allow joint ventures to work in the foreseeable future,” he stated.

Expenses will rise

It is understood that European or U.S. companies will enter into Ukraine’s gas business to make money on the functioning of the GTS. This will lead to a raise in tariffs, experts are convinced. “If to look at the Ukrainian GTS as a business, tariffs for all services, namely the storage and transportation of gas, must be hiked. Tariffs in Ukraine are far too low, so they must be raised by several times. And who will pay for this? Clearly, the average consumer,” Marunych warns.

How much the hike in tariffs for the storage and transport of gas will cost the consumer is at this point difficult to say. At the moment, the tariff for the pumping of gas into the storage facilities and pumping it out costs UAH 32.9 for 1,000 cu m for every operation and UAH 46.2 respectively. “Seeing as the tariff for storage of gas is symbolic, in Europe the tariffs are on average US $25/1,000 cu m. But raising the tariff to the market rate for storage can lead to an increase in the tariff for consumers by 5-7%, according to the approximate estimates of experts. At the same time, the hike in tariffs with the aim of increasing the profits of Ukraine’s GTS may lower the desire of consumers to receive gas transited through Ukraine in favor of alternative routes of gas transport through the South Stream and the Nord Stream, Marunych assured.