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ZERKALO NEDELI: MASTERCLASS FOR UKRAINE
It seemed that the talks about gas relations between Russia and Ukraine and between Gazprom and Naftagaz Ukraine were taking their normal course. The Russian-Ukrainian negotiations were going on; the Ukrainian side was planning to agree to the price of USD 150-160 for 1000 cubic meters of Russian gas. On November 21, the Cabinet of Ministers of Ukraine provided for USD 160 for 1000 cubic meters of gas in the state budget-2008 as first vice-minister Mykola Azarov said that there was no time to wait until the end of the negotiations. He said that the Ukrainian economy would be able to sustain this price of gas. Immediately after that, the Presidential Secretariat announced that it was possible to agree on a lower gas price… This way, there was a perception of a normal process of gas negotiations. Perhaps everything was actually like that … before November 22.
The Toys
On November 22, Ukrainian Prime Minister Viktor Yanukovych and the head of the Fuel and Energy Ministry of Ukraine, Yuriy Boyko, were at the NIS summit in Ashgabat. V. Yanukovych announced that the direct Turkmen gas supplies to Ukraine were out of the question. The Ukrainian delegation offered to take part in Caspian oil pipe-line construction together with the Russian Federation, Turkmenistan and other interested countries and companies. (However, we remember that before that, Ukraine spoke in favor of Trans-Caspian oil pipe-line construction, which was supposed to be without Russia and had to go round Russian territory). Additionally, the Ukrainian Prime Minister said that Ukraine was going to reach all agreements on gas supplies by the end of the year. (However, we remember that Ukrainian President Viktor Yushchenko and Prime Minister Viktor Yanukovych had ordered the head of the Fuel and Energy Ministry, Yuriy Boyko, to solve all gas problems with Russia and Gazprom during the following ten days.)
Meanwhile in Kyiv, a press release issued by Naftagaz announced: “The delegation of the government-owned company Naftagaz Ukraine headed by its board’s chairman Yevhen Bakulin has to stop the talks with PLC Gazprom on gas supplies to Ukraine for 2008-2010. Yevhen Bakulin has been urgently called back to Kyiv because of the threat of Ukrainian tax inspection blocking the work of the company… Naftagaz has been informed about possible capture of the company’s administrative building by tax inspection’s bodies. The tax officers are intending to arrest the company’s activities due to Naftagaz’s unpaid 89 million Hryvna debt to the state budget, which was formed at the end of the first quarter of 2006.”
“Ukrainian State Tax Administration’s unacceptable attitude towards Haftagaz during such important negotiations for the country damages the business relations of Naftagaz with its partners and hurts Ukraine’s image in the international arena”, the press release stated. “We would like to note that starting in 2005 the company’s tax burden has been growing: from 5.7 billion Hryvna in 2004 to 20 billion Hryvna in 2007. This hampers the development of the oil and gas industry in our country.”
I have a question concerning the above statement: if Naftagaz paid billions of Hryvna in taxes last year and its tax liabilities are 20 billion Hryvna this year, then why didn’t it pay some 89 million Hryvna in 2006? It is not a substantial sum of money for Naftagaz.
It is well-known that the government-owed company (GOC) Naftagaz Ukraine incorporates the largest oil-producing enterprises in the country; it is a monopolist in gas transit, underground gas storage and oil pipeline transportation.
ZN tried to contact the head of State Tax Administration of Ukraine. But the head of the Administration was on sick leave and none of his deputies ventured to give us official comments on the accusations of Naftogaz’s press release. Off the record, they explained that Naftagaz was exaggerating the situation, but the tax officials did have some claims against Naftagaz. However, everything wasn’t as terrible as Naftagaz’s press release had described it.
On the following day Viktor Kasapchuk, the head of the public relations department of State Tax Administration of Ukraine, said to Interfax Ukraine agency that State Tax Administration of Ukraine considered Naftogaz’s statement about excessive tax burden to be “public misinformation.”
According to Viktor Kasapchuk, Naftagaz has tax preferences which other metallurgical, chemical and even coal enterprises don’t. During recent years the Verkhovana Rada and the government have been supporting Naftagaz in all possible ways: they have canceled 2.5 billion Hryvna and restructured another 1.8 billion Hryvna of the company’s tax debts; the company’s rent payments have been subsidized and granted; gas sales to the municipal heating enterprises have also been granted by the state.
Viktor Kasapchuk added: “Naftagaz’s financial indices are improving: the company’s profit for the first nine months of 2007 was 1.5 billion Hryvna, the company has covered more than USD 600 million of credits and has decreased the consumers’ debt. Besides, the government-owned company Naftagaz Ukraine is the owner of 50% of the profitable company Ukrgaz-Energo, which sells gas to industrial consumers.” (By the way, the last year’s profit hasn’t been divided yet).
He also noted that State Tax Administration of Ukraine was going to make Naftagaz pay its tax liabilities and was intending to demonstrate the possibilities of the company to cope with its tax burden through conducting a tax audit. He disproved the information about possible arresting of the company’s property or accounts, saying that such a decision could be made by the court only.
It looks like Naftagaz is trying to avoid responsibility for the almost fouled-up negotiations with Gazprom.
The Games
Let’s remember that before 2002 the rate on services in gas injection, gas storage and gas withdrawal, provided by Naftagaz to Gazprom, was USD 8.5 for 1000 cubic meters.
In 2002 this rate on the same services (with the help of Yuriy Boyko) was lowered to USD 6 per 1000 cubic meters of gas.
In 2004 GOC Naftagaz and RosUkrEnegro (which was the successor of a former gas intermediary YeuralsTransGaz created by Yuriy Boyko, the then head of GOC Naftagaz) signed the following contracts for the period up to 2030:
— the rate on gas underground storage (with the help of Yuriy Boyko again) was set at USD 2.25 for 1000 meters of gas;
— the rate on gas transit services through Ukrainian territory was defined as USD 1.09375 per 1000 cubic meters of gas for 100 kilometers of gas pipeline.
The above contracts included a possibility to change the rates two times during the following 25 years.
And now let’s compare some figures: the rate on gas storage in the Hungarian underground gas storage facility is around USD 25; in Great Britain – USD 29; in the states of the EU – USD 32. So, you can see “the economical and market validity” of the rate policy of GOC Naftagaz for yourself.
Perhaps ZN readers remember the scandalous agreement between GOC Naftagaz, PLC Gazprom and gas operator RosUkrEnegro signed in 2006. As a result of this agreement, the joint company Ukrgaz-Energo was created. It was headed by Ihor Voronin, deputy chairman of the Naftagaz’s board.
According to the contract between RosUkrEnergo and Ukrgaz-Energo (signed by Voronin), the price of imported gas was defined as USD 95 per 1000 cubic meters of gas for the period up to 2010 and the rate on gas transit – USD 1.6 for the same period of time.
In summer 2006 National Heating and Energy Committee increased the rate on underground gas storage for the transport enterprise Ukrtransgaz (daughter enterprise of GOC Naftagaz) to USD 7.84. It was a comparatively economically grounded rate.
However, the rate on underground gas storage for gas operator RosUkrEnergo remained as it had been previously – USD 2.25
Now, I would like to point out once again that according to the contract between RosUkrEnergo and Naftagaz, the rate on underground gas storage is USD 2.25, and according to the contract between Naftagaz and its own daughter enterprise Ukrtransgaz, the rate on the same service is USD 7.84!
Let’s analyze the recent events
In the first half of 2006, Ukrtransgaz was buying fuel gas for USD 97 per 1000 cubic meters. However, the gas purchase of Ukrtransgaz in June-July of 2006 was registered only in 2007 according to the price of USD 143 per 1000 cubic meters. During only these two months the losses of GOC Naftagaz were USD 42 million.
The events that followed were even worse. According to the contract of 2007 between Ukrgaz-Energo and RosUkrEnergo (signed by the same Voronin), the price of gas increased to USD 130. It was just a formal price on the Russian-Ukrainian border. And the price of gas for Ukrainian consumers went up to USD 139 per 1000 cubic meters of gas.
However, neither GOC Naftagaz nor supervising board of Ukrgaz-Energo have officially authorized Voronin to change the price of gas.
It is notable that the rate on gas transit for Gazprom and UkrRosEnergo was and stayed at the previous level of USD 1.6.
As a result of this “flexible” rate policy, the losses of Ukrtransgaz are USD 220 million per year.
We should also remember that in 2007 Ukrgaz-Energo was authorized to establish direct contracts with Ukrtransgaz. And the minister Yuriy Boyko has been assisting this process very actively. This means that the payments of Gazprom for gas transit are transferred directly to GOC Naftagaz and Ukrtransgaz doesn’t have its own resources to pay for the fuel oil. Thus, the heads of the Fuel and Energy Ministry of Ukraine and GOC Naftagaz silently provoked formation of the indebtedness of Ukrtransgaz to Ukrgaz-Energo in the amount of 2.8 billion Hryvna (as of August 2007). Ukrtransgaz’s debts to Ukrgaz-Energo may increase to 5 billion Hryvna by the end of the current year.
Furthermore, because of Urktransgaz’s indebtedness to Ukrgaz-Energo, 10 billion Hryvna deficit of balance of payment and USD 2.3 billion international debts, GOC Naftagaz is not able to finish the audit and financial statement for 2006 in compliance with international standards.
The term for presenting financial statements on credit contracts expired on August 1 2007. It was a prolonged term and it was violated again. The last agreement with lenders has defined a new deadline for presenting financial statements – December 31, 2007 plus one month for formal procedures.
Actually, GOC Naftogaz is in technical default now. According to the State Tax Administration’s unconfirmed information, the domestic and international debts of this company are around 22 billion Hryvna or 66% of its gross revenue.
Such games are taking place in the gas sphere in our country!
Big Games
Some more words about underground gas storage: RosUkrEnergo has injected into underground gas storage an amount of gas which is 2 billion cubic meters more than it was approved in the balance. (I should note that this is the gas intended for domestic consumers, mostly municipal heating enterprises; so, this is the amount of gas which Ukrainian consumers won’t receive this winter). These changes in the balance have been legalized by the government’s decree from October 17, 2007.
Furthermore, there won’t be any gas of domestic production in the underground storage this fall-winter season: according to the resolution of the Cabinet of Ministers # 1729, 2.2 billion cubic meters of gas, produced in Ukraine, should be sold to budget organizations, municipal heating enterprises and Ukrtransgaz in the third quarter of 2007, notwithstanding the fact that these needs have to be covered by the imported gas. The above resolution contradicts the Law on the State Budget of Ukraine and changes the established mechanism of gas supplies to Ukrainian consumers.
Naftagaz will have to buy the necessary amounts of gas from Ukrgaz-Energo for USD 147.5 or for USD 160 for 1000 cubic meters of gas on a backdate basis. These manipulations with the date of purchase registration will lead GOC Naftagaz to additional losses in the amount of USD 88 million.
Thus, Ukrgaz-Energo destabilizes the situation with gas supplies to Ukrainian consumers.
And now I would like to say a few words about the negotiations with Gazprom.
As we have been informed, the contracts between GOC Naftagaz and Gazprom and between GOC Naftagaz and RosUkrEnergo will be amended: the rate on gas transit will be defined as USD 1.6 for 2008-2009; USD 1.8 for 2010 and USD 2.2 for 1011.
I should note that first of all, these rates are not economically effective. And secondly, they are not connected to the growing prices of gas.
The economically effective rate on gas transit is USD 5.4 for 1000 cubic meters of gas per 100 kilometers. This rate has been calculated according to the methods used by the countries-participants of Energetic Charter. This figure has been proposed by the experts from GOC Naftagaz and it is also known to the specialists in Gazprom.
However, the price of gas for Ukraine hasn’t been discussed yet.
Experts consider that USD 5.4 rate on gas transit would let Ukraine buy 50 billion cubic meters of gas for USD 230 for 1000 cubic meters without any intermediaries and regulate the prices on gas for different categories of consumers (citizens, budget organizations, heating enterprises, industrial enterprises).
Concerning the Russian side, the Russians and Gazprom are waiting to find out who is going to be the Prime-Minister, the head of the Fuel and Energy Ministry and the head of the government-owned company Naftagaz in Ukraine. They don’t see any sense in signing the treaties with the people that might “leave” soon.
Alla YEREMENKO
"Zerkalo Nedeli", Ukraine’s International Social Political Weekly, 24 – 30 November 2007
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