The Cabinet is demanding the right to expropriate and distribute gas in the event of force majeure circumstances

Photo: Reuters

Yesterday, the government registered Bill No. 5166 in the Verkhovna Rada On the Introduction of Amendments to Certain Laws of Ukraine Ensuring Discipline of Gas Supply during Periods of Limitation and/or Cessation of Gas Supplies to Ukraine. In this document the Cabinet of Ministers is proposing that it be granted the right to take emergency measures for one or two months in the event of shortage of gas supplies to prevent the malfunction of the domestic gas market.

In such a situation the Cabinet will set special conditions for the purchase and sale of natural gas, specify the requirements to gas for market players for the transportation and delivery, limit market prices, introduce special conditions for export and import of gas and limit or cut the supply of gas to consumers.

In addition, the government will have the authority to compile a list of companies that will be required to sell gas to Naftogaz of Ukraine and gas producers will be obliged to take measures to preserve the volumes of production.

The existing contracts for the supply, purchase and sale of gas will be terminated in case of emergency measures and within two weeks companies will have to sign new agreements in accordance with the requirements of the Cabinet of Ministers.

Protect or harm

Representatives of the Ministry of Energy and Coal Industry believe that the bill will keep the market in stable condition in case of force majeure circumstances. Such measures are necessary as the country has an extremely limited amount of gas and these resources should be properly disposed to prevent the aggravation of the situation with country’s gas transport system, said Minister of Energy and Coal Industry Yuriy Prodan. He said that in case of emergency it is most important to supply gas to consumers that perform vital functions of the state.

Answering the question whether manual control could have a negative impact on the gas market Prodan said: “All this is done in order to support functioning of the domestic gas transport system. If it does not function, market players will not be able to deliver gas. A similar provision versus the possibility of force majeure circumstances also applies to the electricity market”.

Acting President of the All-Ukrainian NGO Union of Members of Liberalization of the Gas Market Oleh Bakulin says the bill proposed by the government contradicts the Third Energy Package (EU legislation in the energy sector) and the Law of Ukraine On the Principles of Operation of the Gas Market. “These documents ensure freedom of gas trading and equal access to the unified gas transport system, while the Cabinet’s bill is aimed at creating a monopoly of Naftogaz of Ukraine, strictly to improve the company’s financial situation,” says Bakulin.

Collapse of the system

Market players responded to the government’s initiatives rather anxiously. Chairman of the Board of Kryvorizhgaz Ivan Vakulenko said after the adoption of the bill the gas industry should be prepared for a stringent reduction of the volumes of transported gas. He believes the further decline in gas transportation and reduction in revenues from its sale threatens the financial situation of the company. If the government wants to attract investments into the oil and gas sector and is trying to ensure that the companies actively import gas to the Ukrainian market, property rights should be inviolable, said First Deputy CEO of Ostchem Oleh Kikta. “Nobody will supply gas to a market on which somebody can take away something that does not belong to him with the stroke of a pen. The ideology of such bills is “taka away and divide”. This is pure populism,” says Kikta.

Bakulin believes this law threatens private gas companies with forced expropriation of gas in favor of Naftogaz of Ukraine. This means it will be much more profitable for them to suspend production in order to not sell gas at low prices. Chairman of the Board of Chernivtsigaz Viktor Horda said in a conversation with Capital: “The financial repercussions of the adoption of the law will be negative: the gas market will be transferred into manual control and it will deter the motivation of companies to produce gas that could be potentially taken away from them. The same applies to suppliers and importers – it is very risky to purchase gas in an environment in which the government has the power to expropriate it”.

Nothing good is expected

Lawyers agree with the views of market players. Partner at the CMS Cameron McKenna law firm Vitaliy Radchenko believes that obtaining such powers will give the Cabinet of Ministers the opportunity to set its own gas price: “Unfortunately, the procedure for setting gas prices is not outlined in the bill. However, given the budget deficit there is little hope that an economically substantiated price will be set. Furthermore, payment could be delayed as the bill gives the Cabinet the power set special terms of purchase-sale agreements”.

The lawyer says the bill will serve as a tool for abuse and redistribution of power on the gas market. “This will drive another nail into the coffin of the gas industry in Ukraine,” he said.

Horda added that the only cure for the shortage of gas in Ukraine may be the creation of the most convenient market conditions, while the Cabinet of Ministers is creating conditions that will scare away private investors from working in a monopolized state market. Kikta believes that administrative attempts to regulate the gas market in violation of fundamental constitutional rights only reduce the attractiveness of gas supplies to Ukraine.