The week before last, Ukrhazvydobuvannia [Ukrainian Gas Extraction], a subsidiary of the Naftohaz Ukrayiny Inc., emerged for the first time as quite a powerful vertically- integrated facility performing the whole process of production — from prospecting for and extracting hydrocarbons to processing and selling oil products. Company manager Illia Rybchych is sure this is the best solution for Ukraine from the angle of both budget fulfillment and the acute necessity of rebuilding the essentially depleted resource base of gas and oil refineries.
The course towards vertical integration was announced in President Leonid Kuchma’s Verkhovna Rada message On the Internal and External Situation of Ukraine in 2001. The message says the President instructed the government to pass a resolution in 2002-2003 on restructuring (demonopolizing) the oil and gas complex and setting up vertically integrated oil and gas supply companies. This may have not only economic but also socio-political effect. For, according to the Constitution, Ukraine is a unitary state, with all its mineral resources being national property.
However, a course like this, naturally, runs counter to the interests of some regional elites which hanker for their own slice of the oil-and-gas pie, claiming that the oil lies in “their” soil and so the region has the right to possess a fair share of revenues. To this end, they pin all hopes on the prestige of major regional leaders. For example, the Kharkiv governor Yevhen Kushnariov carried out sort of a mental assault on the Cabinet of Ministers at the end of January. Even before meeting Prime Minister Viktor Yanukovych, he told the press that the forthcoming talks would primarily focus on the gas production complex. Naftohaz Ukrayiny’s rigidly centralized resource distribution and management system deprives the company’s regional branches of “economic incentives and development motivation,” said Mr. Kushnariov, clearly playing on the government head’s tacit approval of the regions’ attempts to secure wider powers.
Nevertheless, the prime minister seems to be drawing a line between the legitimate regional interests based on the factual contribution to the gross national product and the aspiration to divert and utilize national resources in the interests of a region. After the meeting, the Kharkiv governor essentially backpedaled on his gas claims, dropping the demand to abolish “rigid centralization” in Naftohaz. He told journalists about the ways of solving such really vital problems of his region as the crisis of farming machinery production and public utilities. “We must immediately improve the situation because the further aggravation of the payments crisis can lead to serious, not only social but also political, consequences. The public utilities problems must be tackled at the national level, for they have gone outside the local administrative bodies’ jurisdiction,” Mr. Kushnariov said. Then he enumerated other Kharkiv problems he had raised with the government, such as celebration of the 350th anniversary of the Pereyaslav Rada, subway construction, and reconstruction of a theater and Government House, and broached again the Naftohaz structure problem and his intention to return the status of legal entities to Kharkiv oblast’s gas production facilities. In all probability, the governor’s hopes for central government’s support in his dispute with gas producers are illusory. All that Mr. Kushnariov gained from this conversation can be perhaps summarized in his own words, “We reached an understanding in this matter, and I hope ministries will address this problem again in the nearest future.” Yet, the governor does not look downbeat. He stressed that the system of center-regions relations, now being introduced by the Cabinet and the premier, “inspires optimism because links with the regions was a one-side game earlier.”
However, Ukrainian gas producers still think that the spin-off of Shebelynkahazvydobuvannia and Kharkivhazvydobuvannia, to which Kharkiv lays claim, is economically unsound and dangerous. Volodymyr Maksymov, one of Ukraine’s most experienced gas experts, the builder of Shebelynka, and longtime manager of Ukrhazprom, told The Day the spin-off would turn these enterprises into “slivers easy to kick around.” Commenting on the Kharkiv authorities’ demands, Mr. Rybchych recalled that Kharkivhazvydobuvannia extracts hydrocarbons not only in Kharkiv but also Dnipropetrovsk and Poltava oblasts, while Shebelynkahazvydobuvannia does this in those of Donetsk, Luhansk, and Poltava. “Then all governors will raise the question of spin-off right tomorrow,” Mr. Rybchych said, emphasizing that in this case businesses will be unable to invest in the development of hydrocarbon extraction. To illustrate this, he pointed to Shebelynkahazvydobuvannia which extracts about 5.8 billion cu. m. of gas a year. “With due account of UAH 122 per 1,000 cu. m. as the price of gas for individual users (minus transportation), this will make up UAH 600 million, half of this being internal costs and the other half taxes, with no development funds left,” Mr. Rybchych noted. He believes additional funding is essential for Shebelynka. The point is that the current pressure in gas deposits is 12-14 atmospheres due to considerable exhaustion. To extract the gas today, workers have to use compressors designed for the minimal pressure of 12 atmospheres, too, Mr. Rybchych claims. He adds that unless a new compressor station is built (at a cost of UAH 200 million), Shebelynka, one of Ukraine’s largest deposits, will discontinue the production of gas. Many other gas fields, depleted by more than 80%, are facing a similar threat. This enterprise will require over UAH 300 million in subsidies this year. “And if it spins off, who will subsidize it?” he asked a rhetorical question. Will the Kharkiv oblast budget be able to find this amount? And if so, would it be better to find a better application for it because Ukrhazvydobuvannia has already envisaged these expenditures? Mr. Rybchych also announced that, after exploring the possibility of spinning off the two above-mentioned facilities, the Naftohaz Ukrayiny supervisory board concluded that it was economically unprofitable. Incidentally, gas producers display understanding of and tolerance toward the “centrifugal” tendencies. For instance, Mr. Rybchych said he could understand the aspiration of the politically and economically experienced Kharkiv leadership to improve some of its achievements. At the same time, he thinks all taxes paid by the gas-producing businesses “go to Kharkiv,” although gas is extracted from the bowels of another five oblasts.
What whets the regional appetites? Apparently, the first thing to do so is the Ukrhazvydobuvannia- run Shebelynka gas processing plant. This facility, whose capacity has gone up 20% in the past two years, put out 630,000 tons of light oil products last year. Besides, the oblast must clear at last the ever-rising gas debts, which it has so far failed to do in spite of extraordinary measures. If the gas installations were at the regions’ disposal, this problem would be solved very quickly and easily. Interestingly enough, Kharkiv has come up with a not so original but quite effective method of clearing its UAH 160-million gas debts for the previous years. Three new entities were set up on the basis of Kharkivteploenerho, once the best enterprise in this field. All the debts were written off to the debit of the “old one” which was in turn stripped of all its facilities and the possibility of returning anything. Yet, the “new” enterprise Kharkiv Thermal Networks has also run up a UAH 13- million debt, with a still outstanding last year’s UAH 17-billion debt. Incidentally, 80% of Kharkiv residents pay their electricity charges on time.
Meanwhile, Ukrhazvydobuvannia branches in Kharkiv oblast remain disciplined taxpayers. Last year, Kharkivhazvydobuvannia and Shebelynkahazvydobuvannia remitted about UAH 540 million to the budget, up 78 million on what was assessed on the basis of output. This became possible not in the least because of the company’s modern structure oriented to development, not only to meeting short-term interests.
