The Cabinet expanded the list of companies obligated to buy gas from Naftogaz

Photo: Reuters

The government continues to drive private gas suppliers out of the market. Last week, the Cabinet of Ministers of Ukraine significantly expanded the list of large industrial enterprises obligated to buy gas exclusively from Naftogaz of Ukraine this winter. While the previous measures for the monopolization of the gas market gave certain private gas producers room for maneuver, now some are prepared to leave the market.

System breakdown

On November 7, the Cabinet of Ministers approved the list of companies obligated to buy gas exclusively from Naftogaz of Ukraine over the winter period starting from December 1. Five days later on November 12 another government regulation was published, according to which industrial enterprises on the list were obligated to begin cooperating with Naftogaz not on December 1, but immediately. This naturally infuriated representatives of private gas companies.

Last Friday, the government published its latest ruling No. 647 On the Procedure of Procurement of Natural Gas by Industrial, Power and Heat Generating Companies. The document contains a new amended and expanded list of companies required to buy gas exclusively from Naftogaz from December 1, 2014 to February 28, 2015, this time the list consists of 168 enterprises, instead of 90. However, it should be noted that some companies, in particular, Doncement, MykolayivCement and Enerhiya, were fortunate enough to be stricken from the black list.

Total control

Market players note that expansion of the list of industrial enterprises obligated to buy gas exclusively from one company will further monopolize the market. While earlier some private gas production companies and their customers had room for maneuvering, now all relatively solvent companies are obligated to buy gas exclusively from Naftogaz. “Instead of creating a favorable market environment (including for investors), the Cabinet has taken control of the gas market in its own hands. This will lead to a situation where the increase in domestic gas production, which at one time was the main task of the country, will lose its investment attractiveness for many years,” says Director of the Regional Gas Company (RGC) Oleksandr Prytyka.

The government’s actions are destroying tested projects, putting up obstacles to businesses achieving their plans and opportunities for continuing production activities, said Chief Financial Officer of JV Poltava Petroleum Company Yevhen Palenka. “In fact, the state will void all contracts concluded between consumers on the list and private gas producers. The latter will either have to produce gas for further pumping into storage tanks or totally suspend production,” complains Palenka. As a financial expert, I recommend the owners of such companies to stop production”.

Not only the gas suppliers, but also their customers, will face certain problems. In late November Naftogaz put together a balance sheet for December: this is a plan for distribution and supply of gas from suppliers and gas production companies to consumers. In order to draw up the balance sheet all suppliers had to submit to Naftogaz documents about their clients and the amounts of supplied gas for the next month. But some of the data was lost (or was deliberately removed from the balance sheet). A representative of a gas company said on condition of anonymity that his company submitted documents about its consumers and the amounts of gas to be supplied in December, but oblast gas companies did not receive such information, which means the company’s customers will not receive their gas.

Out of control

With its actions the government is monopolizing the market and violating a number of laws, experts say. Commenting on the government’s decision, Acting President of the All-Ukrainian NGO Union of Members of Liberalization of the Gas Market Oleh Bakulin said such actions violate the Constitution of Ukraine, the Law On Operation of the Natural Gas Market and do not comply with the Third Energy Package and agreement on Ukraine’s membership in the Energy Community. He also noted that not only producers, but also consumers will suffer from such a decision. After all, the prices that Naftogaz charges are higher than those of private companies. Bakulin reminded that 95% of consumers that will now be obligated to buy gas from Naftogaz used to work with independent suppliers purchasing domestically produced gas. “What is the point of buying gas from Russia, if it is produced in Ukraine, particularly taking into account the fact that Naftogaz gives no guarantee that it will be able to supply fuel to consumers?” he asks.

Prytyka believes that in this way the Ukrainian authorities are trying to raise money from the solvent sector of the economy in order to salvage Naftogaz, which should have been declared bankrupt long ago. As for the chances of private gas producers to defend their rights in the courts, Prytyka said: “Filing lawsuits or submitting claims are an exercise in futility. Indeed, there is no instrument to fight the government”.

Who loses?

Bakulin says most consumers already have contracted volumes of gas and they will have to pay fines in case they fail to accept them. In some contracts the forfeit reaches 100% of the cost of residual gas. In particular, the Odesa Port Plant (OPP), which has a contract for the reverse supply of gas with the German concern E.ON, will have to resolve such problems. So far, the company’s management does not know how to do so.

ArcelorMittal Kryviy Rih is also facing certain problems. Acting General Director of the enterprise Paramjit Kahlon said the plant will fulfill the government decree and switch to the purchase of natural gas from Naftogaz, though he reminded that up until now the company has been buying 65 mn cubic m of gas from private domestic producers and since October 1 it has been purchasing gas in Slovakia.

In some cases the burden of losses will fall on gas producers and suppliers. Palenka says that a number of clients of his company have already declared force majeure, which means they are safeguarded from responsibility for payment for gas and the gas extracting company will have to assume all financial risks.

Rising prices

In addition to monopolization of gas supplies by Naftogaz, the government staggered consumers with another surprise, namely, the State Energy and Public Utilities Regulatory Commission hiked marginal gas prices for industrial consumers from UAH 5,100 to UAH 5,900 per 1,000 cubic m. It is worth recalling that the 20% VAT, 2% surcharge and the tariff for transportation and distribution of gas shall be tacked on to this amount. As a result, the average price of gas from Naftogaz will be UAH 7,564 per 1,000 cubic m.