Ukraine’s Naftogaz to pressure Russia on off-take points, Nord Stream 2 and raise output – CEO

LONDON (ICIS)–Ukraine’s gas incumbent Naftogaz will aim to offer gas to consumers at “economically reasoned prices” and use legal pressure against Russia’s Gazprom to change existing transit points, the company’s new CEO said in a press conference on 30 March.

Yuriy Vitrenko, appointed CEO following the dismissal of Andriy Kobolyev on 28 April, said the company would work “effectively for the future of [the Ukrainian] people.”

The policies that would be targeted under the new management would include stepping up pressure against Gazprom to change existing off-take points for gas deliveries to European companies, urging Russia to allow other companies, including those from Central Asia, to sell volumes to Europe and continuing to oppose the completion of Nord Stream 2.

Internally, Naftogaz, would be expecting to increase local gas production and sell natural gas at a price that can be paid by end consumers.

RUSSIA

Vitrenko, who was involved in the company’s legal battle against Gazprom in two arbitration cases, said Naftogaz would be looking to pressure Russia to move off-take points from Ukraine’s western borders with Hungary, Poland, Slovakia to the east on the border with Russia.

He said this would allow foreign companies to off-take volumes directly at the border and inject into local storages without incurring the additional cost of off-taking gas in the west and shipping it back into Ukrainian storages.

He insisted Naftogaz, which stopped off-taking Russian gas in 2015, would not buy resume off-takes from the country for its domestic needs.

He added it was important for Naftogaz to oppose the Russian spearheaded-Nord Stream 2, not only because it would divert transit flows and revenue away from Ukraine to Germany but also because some European companies associated with the project would get unfair market advantages, if it is completed.

“We are going to use all the pressure available, not just because Russia is an aggressor country [against Ukraine] and Gazprom is the national gas company but because it is in the interest of Ukrainian and European consumers [to do so],” he insisted.

PRODUCTION

On the domestic front, Vitrenko stressed the importance of raising production and working with the government and the regulator, NERC, to clear the debt of companies which had not been paying for gas deliveries.

Naftogaz produced 15.4 billion cubic metres in 2020, compared to 16.1bcm/year in 2019. Ukraine outlined ambitions to increase overall production to 35bcm/year by 2030.

The outgoing management of Naftogaz argued the drop in production as well as the financial loss of Ukraine hryvnia 19bn (€566million) it incurred in 2020 were linked to record low gas prices globally, plummeting demand caused by the coronavirus-related lockdown restrictions and the inability of consumers to pay for gas deliveries.

Naftogaz’ production costs are thought to be around UAH2,000/kscm. However, when adding the costs of capital and royalties this may exceed UAH6,700/kscm ($200/kscm, €18.90/MWh).

The combined debt of heating companies, suppliers and distribution companies currently stands at around UAH100bn. About half of the total debt may have been linked to the inability of these companies to pay for the gas because low tariffs set by the state did not allow them to recover the costs. The debt has been accumulating on a rolling basis over the last years.

PRICE

Naftogaz had previously taken a market approach, pushing for the full liberalisation of the gas market in line with commitments to international financial institutions.

However, Vitrenko said going forward the company would seek to position itself halfway between “centralised markets and the liberalised “wild west”, consolidating its position as a national champion.

“Because we have national tasks, because it is all connected to national security, because it is about counteracting and opposing the aggression of Russia, because we need the support of national security, that is why we need a national company,” he said.

As acting energy minister, Vitrenko proposed earlier this year to oblige Ukrgasvydobuvannya (UGV), the production subsidiary of Naftogaz, to sell gas for delivery to households at a price that was 44% below the market price earlier in the year. The reinstatement of regulated tariffs to household reversed a move taken by the government in August 2020, which effectively allowed for 8bcm/year of gas produced by Naftogaz to be sold to households on the free market.

Vitrenko said on Friday he would be expecting to sell gas at an “economically reasoned price” for households, although it is unclear what the new price would be.