In the past few days gas has increasingly been a favorite subject of public gossip and statements by Ukrainian politicians. This topic is the subject of active speculations in order to earn election-campaign points, settle scores with political adversaries, or obtain influential friends abroad. It is also becoming a sensitive indicator of international relations: some countries make a point of positioning themselves as important fuel transit areas. In this connection Ukraine has essentially increased its foreign political activities. But there is one important warning here. Last Friday’s statement by President Aleksander Kwasniewski of Poland appears to be extremely meaningful in this sense. “Transit should help economies rather than be used in politics.” In general, it would be unwise to bring the oil and gas issue to the streets, as Russia’s Ambassador to Ukraine, Viktor Chernomyrdin, said the other day. It is equally unwise to exert pressure on negotiation partners. Incidentally, Ukraine regards as pressure the postponement of Russian premier Mikhail Fradkov’s visit to Kyiv for an indefinite term.
Oddly enough, all the blame was put on Oleksiy Ivchenko, chairman of Naftohaz Ukrainy. He had to give an answer to this and decided to give an account of his actions to the public, i.e., journalists and members of parliament. This was the kind of incident, where an official can no longer keep silent and has to give important information to the public. In Ivchenko’s view, “it is inadmissible that the state’s energy security is jeopardized as a result of political intrigues.” He noted, quite to the point, that domestic quarrels, uncoordinated attitudes, and groundless accusations not only create a negative informational background but also hinder the process of important international negotiations and establishing relations with foreign partners.
Partners also want to deal with well-established and financially sound counteragents. So Ivchenko showed the public all his cards, shedding light on the company’s financial state. In 2005 the government urged Naftohaz Ukrainy to steeply increase its state budget payments. Compared to the previous year, these payments rose more than twice, from UAH 4 billion to UAH 8.7 billion. (Incidentally, the money earned by Naftohaz Ukrainy accounts for 8.2 percent of Ukraine’s total revenues). The company has fully met these commitments.
Despite the virtual absence of government funding of geological surveys and its own cash deficit, Naftohaz still found a way to reinforce its raw-material base. In the first ten months of this year it drilled 148,600 meters of wildcat wells and 208,200 meters of production wells, fully equipped 115 wells, and fulfilled the oil, gas, and gas condensate production plan. Ukraine received 15.2 billion cu. m. of natural gas and about 3.3 million tons of oil and gas condensate. Compared to last year, the extraction of natural gas increased by 1 percent and oil and gas condensate by 2 percent, which Ivchenko claims is not so little. For example, Russia’s Gazprom raised the extraction of gas by a mere 0.44 percent in the first seven months of this year. While Gazprom is a business with huge resources, the majority of Ukrainian gas deposits have been largely exhausted, so it takes far greater efforts to maintain, let alone step up, production.
It has not been so easy for the company to achieve this. This year its profits have gone up by 13.2 percent, while the tax burden has jumped by a staggering 86 percent. Still, Naftohaz remained profitable. The consolidated earnings and the gross profit reached UAH 40,236,000,000 hryvnias, up 13.2 percent in 2004, and UAH 4,647,000,000 hryvnias, up 5.16 percent for the same period in 2004 in nine months.
Ivchenko emphasized, however, that the company has a problem that nobody wants to acknowledge: it sells natural gas at a loss, which is absolutely inadmissible. “The price of household gas in Ukraine is the lowest in Europe and even lower (by 26.3 percent) than in Russia. The same applies to industrial gas. Only Russian consumers pay for gas less than their Ukrainian counterparts do,” Ivchenko noted.
Passing the resolution that Naftohaz should increase budget payments, the Cabinet of Ministers hoped to receive an additional UAH 1,740,000,000 in earnings by raising gas prices for all categories of consumers to an economically justified level.
However, for a number of reasons prices were not raised according to the original ranges. As a result, the company is expected to receive only UAH 0.5 billion instead of UAH 1.7 billion by the end of the year. Ivchenko says that low- income strata of the population will not be affected by the gas price hike. Moreover, the state budget will obtain additional funds from Naftohaz for pensions and social payments.
The Naftohaz chief also raised current problems with gas suppliers. Early in the year Ukraine had difficulties making payments to Turkmenistan, but after the talks between Naftohaz Ukrainy and the Turkmen side, gas did not go up in price. “Moreover,” says Ivchenko, “we cut the price from 58 to 44 dollars per 1,000 cubic meters. We also decided to make all payments in money only, which could eliminate all the existing problems. It was also agreed to increase the supply of the ‘investment gas’ that Ukraine receives for the work it has done in Turkmenistan.” During the last talks in Turkmenistan the two sides agreed on ways to solve the problem of payment for the gas Ukraine received in the first six months of this year. Incidentally, this further proves the advantage of money-based payments. In the first six months we paid all the money on the dot and even pre-paid $30.1 million for the next six months.
Relations with Gazprom, another major partner of Naftohaz Ukrainy, are still complicated, Ivchenko noted. The Russian side insists that the current mechanism of payments for transit must be changed. According to the current formula, the payment for gas transit ($1.09 per 1,000 cu. m. of gas for 100 km) is adjusted to the price at which Ukraine receives gas as payment for transit services, i.e., $50 per 1,000 cu. m. These conditions are stipulated in the intergovernmental agreement, valid until 2013, and the supplementary protocols. According to Ivchenko, in the spring of 2005 Russia suggested that transit services be paid for with money rather than gas. Moreover, Ukraine will have to buy Russian gas for money, too. The conditions advanced by the Russian side are unacceptable to Ukraine at the moment. In this knotty situation, Naftohaz’s position is not as weak as some think. Our trump card is the agreement that is still in force and cannot be revised unilaterally. It should not be forgotten that over 120 billion cu. m. of Russian gas (about 80 percent of total Russian gas exports) are transported every year through the territory of Ukraine to Western countries. “Russia needs Ukraine’s transit facilities no less than we need Russian gas as payment for this transit,” says Ukraine’s chief “gas man” and points out another detail: Russia is seeking to defend its own economic interests and obtain favorable conditions for cooperation, which is quite natural. It is not at all natural, however, that instead of supporting actions aimed at defending our state’s economic interests, some government officials should resort to unwarranted criticism.
