Ukraine gas transit in question after removal of GTSOU CEO by supervisory board

LONDON (ICIS)–The future of the Ukrainian gas transit hangs in the balance after a decision to terminate the responsibilities of the existing gas grid operator CEO on 16 September.

The supervisory board of MGU, the shell company which had been set up to oversee GTSOU, removed Sergiy Makogon from his job despite ongoing discussions to disband MGU first and overhaul the corporate structure of GTSOU in line with corporate governance principles.

European gas traders and policymakers interviewed by ICIS said latest developments could have an impact on the transit of Russian gas to Europe and should worry western partners.

“Sergiy did a great job managing GTSOU,” said Walter Boltz, a former chair of MGU and ex CEO of the Austrian energy regulator.

“Having someone who is a reliable partner for the transport of gas which is now put in danger by this unwarranted action without due process and leaving a company without proper management is irresponsible. Western partners should be worried.

“Despite all the bombing and shelling by Russia, Makogon kept the transit going,” he said.

GOVERNMENT PRESSURE

Sources interviewed by ICIS said there are two concerns.

Firstly, that the MGU is under political influence and therefore may not guarantee its much-needed independence upon which its certification and ultimately the Russian gas transit depend.

Secondly, there are concerns about corporate government reform process at the company, which, sources say, is not properly followed through and which could also have a negative impact on the certification.

On the first point, several sources quoted instances where MGU had come under political influence.

Recently, the ministry of energy, as the sole shareholder of MGU, had on two occasions sought the appointment of the deputy minister of energy as CEO of GTSOU even before Makogon was removed. The proposal was questioned by one of the anti-corruption agencies, who noted a conflict of interest and rejected it.

Speaking to ICIS, Farid Safarov, one of the deputy energy ministers responsible for corporate governance reform, insisted MGU was completely independent and added the company rejected to interview the person that had been proposed by the ministry.

Nevertheless, several sources close to discussion said there was a clear intention from the ministry of energy to remove Makogon and replace him with a new candidate. MGU’s decision to terminate his responsibilities would facilitate that goal, sources say.

On the other hand, Walter Boltz, who was dismissed from MGU amid political pressure in 2020, said there were concerns about the independence of the MGU supervisory board members, noting there were strong political interests to keep GTSOU under political control because it is a profitable company.

“Current members of MGU might ask whether they should act independently or be more flexible in working with the government particularly in current conditions where Ukraine is fighting a war, he said. Boltz said.

“Even when I was at the MGU, I had to fight off attempts by the government to force GTSOU to buy Ukrainian government bonds,” Boltz said.

Safarov said he had no knowledge of such practice by the government.

ENERGY COMMUNITY RESPONSE

In an interview with ICIS, Dirk Buschle, deputy director of the Energy Community, an EU-affiliated institution which has been helping Ukraine pursue market reform, had an eye on the certification of GTSOU.

He said the government had prepared a roadmap for the overhaul of the current structure and was committed to “make it happen very soon.” He repeatedly referred to the roadmap but did not elaborate what the steps included in the draft were.

When asked to give a guarantee that the certification of the operator would not be affected by the latest decisions, he did not respond.

REFORM CONCERNS

A second concern flagged by stakeholders was the process pursued by MGU in removing Makogon.

The Energy Community along with the World Bank, as a major donor to Ukraine, had proposed the establishment of a new supervisory board at GTSOU, the selection of new management at the company and the liquidation of MGU and the current supervisory board.

This meant the termination of Makogon’s responsibilities would have happened after this procedure had been followed through.

Nevertheless, the supervisory board, chaired by Huberte Bettonville, took the decision to terminate Makogon’s responsibilities before the due process was in place.

Shortly after this removal a number of political proposals were made to transfer rather than liquidate MGU and the supervisory board to GTSOU.

She said MGU was in favour of corporate governance reform but did not explain whether the reform should be carried out in a way that would entail the liquidation of MGU and the supervisory board or its transfer to GTSOU.

Market sources say the liquidation of MGU is necessary amid allegations of corruption.

Boltz pointed out there was the temptation for MGU members to appoint their friends as staff members, quoting the example of Viktor Pynzenyk, one of the Ukrainian MGU board members. Pynzenyk appointed a close friend to a senior financial position within MGU even though this person had no financial background, according to several sources.

Pynzenyk did not reply.