Naftohaz Ukrainy’s new head faces 8 Gm3 deficit in 2005
Following the election of a new president in the Ukraine, changes have also been made at the head of the Ukrainian state oil and gas company, Naftohaz Ukrainy (NAK). The previous c.e.o. of NAK, Yuri Boyko, was replaced on 3rd March by Aleksei Ivchenko, formerly a member of the Ukrainian parliament. Ivchenko has begun with a bang, signing a credit line for Euro 2 billion with Deutsche Bank – a first for the Ukraine (see EGM 12.03.1)
The credit line was denominated as multicurrency and NAK could nominate any currency for a given tranche. The first would be worth around $350 million and he hoped it would be available in the first 10 days of April. It would be used for “the optimisation of technological processes, the modernisation of the oil and gas production sector. In this way we want to work on development of our own hudrocarbon production. That’s the first target. The next is the modernisation of the gas transport system.”
Ivchenko made the unexpected revelation to Zerkalo Nedeli that the Ukrainian gas balance would be 8 Gm3 in deficit this year unless extra gas was purchased. This year’s gas supply would comprise 20.1 Gm3 from domestic production, 36 Gm3 Turkmen gas plus 23 Gm3 gas supplied by Gazprom in payment for gas transit. That was where the problem lay: “the previous (Ukrainian) government and the administration of Naftohaz for some reason decided to pay Russian gas debt - restructured for a 10 year period - in half that time. Because of this 5 Gm3 gas annually was taken from the transit payment received from the Russians and used by NAK for debt repayment, together with $250 million. But these conditions are uneconomic for the company, because the Russian side delivers gas at a price of $50/ th cu me, while we have to pay significantly more – in cash – to buy in extra gas.
Furthermore at the end of last year NAK took 3 Gm3 from the transit gas flow (let’s say it took it in advance), which now has to be returned. Altogether this means a deficit in the Ukraine’s gas balance of 8 Gm3 for the year”.
An important proposal currently being examined was to eliminate VAT on gas imports, which Ivchenko believed would have little or no effect on the Ukrainian budget but which would considerably improve NAK’s financial flows and reduce the amount of borrowing necessary. NAK was paying VAT on gas imports priced, say, at $80/th cu me but was selling gas at a regulated price of $29 to domestic users.
(EGM understand from NAK that of a total gas consumption of 75 Gm3/yr, 17 Gm3 was sold to domestic users, with a further 15 Gm3/yr sold at relatively low prices to heat and power generators and communal users. Full prices paid by industrial users were limited to 31 Gm3 of consumption.) Ivchenko said that once domestic users were able to pay prices reflecting the full cost of gas, the problem with recouping VAT would disappear and it could be reintroduced.
Asked how real was the participation of the German side in the Russian/Ukrainian gas transport consortium, Ivchenko said it was absolutely necessary to include not only the gas supplier (Russian federation) and transitor (Ukraine) but also the interests of the gas purchaser. This was why Ruhrgas had been invited to join. Ivchenko added “We need to take into account all the risks, in particular, the probability of collusion between two of the three participants in the consortium, which could harm the interests of the third party.
One does not want to talk out loud about this but neither should such a development of the situation be excluded. Because of this we want to maximally expand the circle of participants in the gas transport consortium, taking into account the geopolitics of this project, in particular producer countries other than Russia.” He went on to question why his country should tie itself exclusively to one gas producer given the presence of Turkmenistan and Kazakhstan, where hydrocarbon production was significantly increasing. Just constructing 240 km of gas pipelines on Ukrainian territory and saying that’s that, the consortium is ready, is short-term thinking and not part of NAK’s strategy”.
NAK, he said, wanted to involve other European consumer countries in order to create a global gas blance and protect all participants from possible risks, not only the consortium but a transnational alliance of gas market participants.
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