Precious partners: Ukraine overpaid $172mn to Europe for winter gas

While preparing for this winter, Ukraine has bought a total of 7.2bn c m of gas from Europe and overpaid as much as $172mn for it. EADaily got the figures by comparing the imported gas price statistics of Ukraine’s Economic Development and Trade Ministry, Index Mundi’s data on Russian gas on the border price for European companies and Ukrtransgaz’s gas import reports for Apr-Oct 2017.

Ukraine starts preparing for winter in April, when its underground storage facilities begin to receive gas. The preparations generally finish in October, when the country starts using gas for heating purposes. According to the operator of Ukraine’s gas network, in Apr-Oct 2017, the country imported 7.26bn c m: as much as 64% through Slovakia, the rest through Hungary and Poland.

According to Ukraine’s Economic Development and Trade Ministry monthly reports, gas prices during the period ranged between $208 and $224 per 1,000 cubic meters. Index Mundi says that before Oct 2017, average Russian gas price for European consumers had been $195 and only in Oct 2017, it grew to $215. So, we see that during the period, Ukraine paid European traders $10-51 more than it could have paid Gazprom. In April, July and September, Naftogaz of Ukraine overpaid $51, $26.5 and $27 per 1,000 c m, respectively.

In Apr-Oct 2017, Ukraine paid $1.6bn for imported gas, wherein $172mn is the sum the European re-exporters have put into their pockets by reselling Russian gas to Ukraine. This is more than 1/3 of the $500mn the World Bank lent to Naftogaz, so it could buy gas for winter.

The major gas suppliers to Ukraine are Gazprom’s French and German partners. For example, Engie of France supplied 20% of Ukraine’s imported gas. The price that company pays to Gazprom for the gas is lower than the average price for European consumers because it is Gazprom’s partner under the Nord Stream 2 project and one of its biggest clients. So, you may see that some European companies earn a lot by reselling Russian gas to Ukraine.

According to senior analyst at the National Energy Security Fund Igor Yushkov, the price Ukraine pays for the re-exported Russian gas is not as high as it might be for any re-exported gas as that gas comes back from Slovakia the moment it leaves the Ukrainian territory. So, here we have minimum transportation costs. But once Nord Stream 2 is built, the greater part of Russian gas will go through Germany and Ukraine will have to pay a much higher price for its reverse supply.

That pipeline will also affect Naftogaz’s transit earnings. “The key reason why Ukraine has stored up so much gas this year is that it has made a lot of money on the growth of Russian gas transit to Europe,” says Dmitry Marunich, Co-Chair of the Energy Strategies Fund. According to Ukrtransgaz, in Jan-Nov 2017, it pumped 80.8bn c m of Russian gas – the highest level in seven years. Just to compare, last year the company pumped a total of 82bn c m against just 68.8bn c m a year before. As a result, in Jan-Nov 2017, Ukraine earned 24.9bn UAH or $930mn. “This is almost as much as we spent on education and 1.5 times more than we spent on health care, sport and environment protection,” says Naftogaz.

The company hopes that this year it will earn as much as $3bn.

According to Valentin Zemlyansky, head of energy programs at Ukraine’s World Economy and International Relations Center, Ukraine has two scenarios. “The first scenario is that Russia builds Nord Stream 2 and moves the greater part of the Ukrainian transit to Germany. As a result, Gazprom and its European partners will reap the cream, while Ukraine will be left with a transit of just 30bn c m a year, will earn $1.7bn less than today and will not be able to buy re-exported gas. The second scenarios is that Nord Stream 2 is banned and Gazprom will be forced to continue pumping gas via Ukraine,” Zemlyansky says.

Last week, Ukrainian Prime Minister Volodymyr Groysman said that in 2020, UkrGasVydobuvannya is supposed to extract as much 20bn c m (plus 8bn c m to be extracted by other companies) and this will make Ukraine energy independent. According to Marunich, even today, when Ukraine’s chemical industry is idle, the country consumes as much as 32bn c m. So, even if enlarged, Ukraine’s own gas production will not be able to meet all the needs. Last year, Ukraine extracted just 19.9bn c m. This year, UkrGasVydobuvannya is close to this level but private companies are already 15% behind and they admit that they will not be able to produce 8bn c m more in 2020. The key problem is the rent. Today, it is 29%, while private producers want it to be 12%. Groysman has promised to do it but experts are not sure that he will keep his promise. This is what Deputy Director of Psychea Scientific-Technical Center Gennady Ryabtsev said on Facebook, while commenting on Groysman’s promises and statement that all those who will try to hamper Ukraine’s energy independence policy will be regarded as enemies: “Too many promises. In Poltava (during Groysman’s meeting with UkrGasVydobuvannya employees) each one heard what he wanted to hear.”

Marunich doubts that Groysman will reduce the rent as it is one of the major sources of income for Ukraine’s budget, especially now that nobody wants to invest more in Ukraine.

Even Naftogaz doubts that the government actually wants to enlarge gas production. “Now that market regulations have become even tougher and that state-owned companies have been deprived of their licenses, UkrGasVydobuvannya will hardly be able to extract 20bn c m in 2020. Under existing circumstances, its current maximum is 17bn c m,” Naftogaz says.

“The plans to make Ukraine energy independent are falling apart. UkrGasVydobuvannya’s program to enlarge its output is not working. In this field, Ukraine is still using Soviet-time regulations, when for a company to start extracting anything, it needs to get 44 permits from 16 departments, with the whole process taking as long as 3.5 years,” Naftogas’s press service said on Facebook a few days ago.

UNIAN quotes the company as saying that over the last two years, in Poltava alone, UkrGasVydobuvannya has received 54 denials to its requests for extraction permits, that is, in 2016-2017, the company received no single permit in the country’s gas richest region.

A few days ago, the Kiev Administrative Court of Appeal deprived Naftogaz of licenses to develop three gas fields, where it has already invested 800mn UAH or 2bn RUR. The fields are estimated to have as much as 69bn c m of gas.

Naftogaz complains that some private companies have already prepared bids for the fields. The company admits that it developed the fields in 2012-2013 only but blames the government for this. “The government failed to approve our financial plans in time. As a result, we were not able to invest money in the fields,” the company says.

According to Marunich, the actual goal of the gas reform in Ukraine is to raise tariffs. “As for the rest, neither the Government nor Naftogaz of Ukraine are making any efforts to implement the production enlargement program. All they are doing is trying to find a scapegoat,” Marunich says.