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ZERKALO NEDELI: GAS CUSHION
On 2 October 2008, thanks to long preparatory work, negotiations between Russian and Ukrainian prime ministers, Yuliya Tymoshenko and Vladimir Putin took place after all, and were fairly successful, at least in the gas sphere. The two heads of governments signed a so-called “gas memorandum”, which both regard as a blueprint for action and subsequent commercial contract between NJSC Naftogaz Ukrainy and OJSC Gazprom, without any intermediaries!
Direct contacts
Over the last few years natural gas has been getting to Ukraine in a roundabout way, even when it was physically transferred from one country to the other at the Russian-Ukrainian border. It so happened not because gas pipelines are not always straight but because intermediaries chose to make detours to, say, Hungary or Switzerland first. Clearly, they did it on paper only, stating in the respective contract that a gas trader (e.g. RosUkrEnergo) was authorized (by whom is still unknown) to supply all imported gas up to the Ukrainian border. If it opts to transport this gas via the Bermudas, well, so be it…
Sooner or later, either Ukraine or Russia (or someone with sufficient clout in either or both countries) should have got sick and tired of that. It seems that they have.
According to Yuliya Tymoshenko, the Ukrainian-Russian intergovernmental gas memorandum has seven clauses. The first and most important one reads that starting 1 January 2009, the NJSC Naftogaz Ukrainy and OJSC Gazprom will cooperate directly in supplying gas to Ukraine. The Russian party undertakes to supply enough gas to secure Ukraine’s gas balance (about 55 billion cubic meters of imported gas per year).
Prime Minister Tymoshenko described the second clause as an anti-surprise measure in respect to market gas prices for Ukrainian consumers.
Two days before the Ukrainian Prime Minister’s visit to Moscow, Gazprom CEO Alexey Miller fired a well-targeted warning shot saying: “In July, during our visit to Azerbaijan, we announced that, according to our projections, the European price of Russian natural gas could grow to USD 500 per 1000 cubic meters by the end of 2008. Today we see that the price rise dynamics has surpassed the Gazprom expectations, and the price of gas supplied by Gazprom to Europe has exceeded USD 500 in October”.
In this fashion, a signal was sent out for Ukrainians to get prepared for new price dynamics. It was too dramatic, even less than the cost of gas transiting through Ukraine (about USD 100 per cubic meter), especially given that the price used as a basis for the draft 2009 budget calculations was USD 250 per 1000 cubic meters (in 2008 it is USD 179.5 per 1000 cubic meters at the Ukrainian-Russian border). Russians must have known about this. That is why Yuliya Tymoshenko’s promise that there would be no gas price surprises was good news. The two prime ministers agreed on a gradual transition to market prices over the next three years. Only God knows what these prices will be like at that time.
Yuliya Tymoshenko underscored that over the next three years, as the gas prices rise, the tariffs for Russian gas transportation to Europe via Ukrainian territory would also increase. In other words, the process will be reciprocal.
The third clause of the gas memorandum declares the parties’ intention to make sure that Naftogaz Ukrainy restores its part of the domestic gas market starting 1 January 2009. Not only will the NJSC Naftogaz Ukrainy hold the exclusive contract for importing gas, but it will also be its chief seller within Ukraine.
Why not the only one? Not because of the corporation JSC UkrGas-Energo, though it is continuing to fight for its own interests. It looks like good times are over for the company.
The reason is that one of the players in Ukraine’s domestic market is Gazprom Sbyt Ukraina, Ltd - 100% subsidiary of Gazprom. The limited liability company was registered in Ukraine in late March (for details, see ZN #14 of 12 April 2008). To the best of my knowledge, its annual quota of gas sales in Ukraine’s industrial market is 7.5 billion cubic meters. Unlike in the case of the Private JSC UkrGas-Energo, the original agreement was for Gazprom Sbyt Ukraina, Ltd to buy gas from Naftogaz, and then sell it to industrial consumers. Rumour has it that this limited liability company was most reluctant to deal with “partners” and enterprises controlled or owned by Dmitry Firtash, major shareholder in the “Ukrainian” part of RosUkrEnergo (it still beats me why they call it the “Ukrainian part”). It is also rumoured that Naftogaz is ready to withdraw its 100% subsidiary from the Ukrainian market if its direct contracts with Naftogaz work effectively.
The next memorandum clause provides that if, during the spring-summer season, more gas is pumped into Ukrainian underground storage facilities than later consumed, during the heating period, Naftogaz and Gazprom will jointly export the remaining gas and divide revenues equally.
Of course, whether there will be any remaining gas is a toss-up; and the question of where and at what price it will be exported also arises.
As for the gas still kept by RosUkrEnergo in Ukrainian underground storage facilities, according to Tymoshenko, it will be used against the RosUkrEnergo debt to Gazprom, . Today the debt is estimated to be USD 2.2 billion, rather than USD 1.7 billion as previously announced. It will be a long process, I assume…
Under the gas memorandum, Ukraine committed to ensure an uninterrupted supply of Russian gas to Europe. This does not mean, though, that the transit and domestic Ukrainian supply contracts have been jumbled together again. As Tymoshenko explained, she discussed with Putin two pre-drafted contracts: (1) on volumes, terms and conditions of gas supplies to Ukraine, and (2) on volumes, terms and conditions of Russian gas transit via the Ukrainian territory.
Yuliya Tymoshenko says the contracts will be signed by the two gas companies’ CEOs for ten years. Yet it will not happen tomorrow, or in a week. When it does, the parties, hopefully, will agree on all of the above.
Operation “liquidation”
On October 1 the Kyiv Economic Court ruled to liquidate UkrGazEnergo. This was announced by First Deputy Justice Minister Yevhen Korniychuk.
As he specified, the court heard the case in March but then postponed it for six months in order to involve RosUkrEnergo as the defendant and Gazprom as a third party. Meanwhile, Gazprom was only watching the trial without making any substantial proposals or claims.
According to Korniychuk, the plaintiff in the case was the national company Naftogaz. The defendants were the close corporation UkrGazEnergo and the Shevchenkivska district administration of Kyiv which had registered the company. The third parties in the case were the Fuel and Energy Ministry, the Economy Ministry, the Finance Ministry, the Justice Ministry, and the Cabinet of Ministers. (Quite a bunch!)
“Naftogaz appealed to the Kyiv Economic Court and the proceedings started in late January. The resolution part of the ruling was announced on October 1,” Korniychuk said. (According to official sources, the lawsuit was submitted on January 25 and registered on January 29; the decision to start proceedings was made on January 30.)
The ZN inquired with the Kyiv Economic Court whether the ruling on the case “Naftogaz vs. UkrGazEnergo” was available in the written form. The court secretariat said it was not.
“In accordance with Clause 85 of the Economic Procedural Code of Ukraine, the ruling will take effect ten days after signing unless it is repealed. By agreement of the sides the judge may only announce the introductory and resolution parts of the ruling, and in that case the complete text must be signed within five days of the announcement of the introductory and resolution parts. Therefore, the ten-day term after which the ruling will take effect, will count from the day the complete text of the ruling is signed,” said Korniychuk.
Thus, the complete text of the ruling passed by the Kyiv Economic Court on the case “Naftogaz vs. UkrGazEnergo” is to be signed on October 6.
Obviously, Naftogaz finally decided to regain its monopoly on the national gas market. So what does the resolution part of the ruling say?
The court invalidated the resolution of February 2, 2006 adopted by the constituent assembly of UkrGazEnergo founders; as well as the UkrGazEnergo statute approved by the assembly of founders on February 2, 2006, the resolution of April 28, 2007 adopted by UkrGazEnergo stockholders, and the amendments to the UkrGazEnergo statute approved on April 28, 2007. The court also annulled the state registration of UkrGazEnergo.
The court decided to close down UkrGazEnergo by way of liquidation but declined the plaintiff’s petition for setting up a liquidation commission. As far as we know, Naftogaz wanted to liquidate its daughter company on its own. The law requires the establishment of a liquidation commission, so Naftogaz naturally intends to claim full participation in the commission. One thing is clear so far: the lawsuit really stung the owners of UkrGazEnergo to the quick.
It should be noted that not a single representative of Naftogaz was ever registered as a participant in the meetings held by UkrGazEnergo (except for the constituent one). Certainly, none of them could officially claim any dividends or make objections as regards the expediency of borrowings (if such were planned).
Officially, UkrGazEnergo was founded on February 2, 2006, following the government’s order #27-R to Naftogaz to found the company. Its founding stock was UAH 5,000,000 and was equally contributed by Naftogaz and RosUkrEnergo. As a result, the latter substantially increased its domination in Ukraine and beyond its western border and UkrGazEnergo got the most lucrative segment of the national gas market – the industrial segment.
Naftogaz (traditionally) remained holding the bag of liabilities for the debts incurred by heat suppliers and was ordered to sell natural gas to households at “privilege prices”. Eventually, Naftogaz found itself in the red and its debtors still refused to pay. Therefore, it had no recourse but to sue the debtors and demand the liquidation of UkrGazEnergo which had taken solvent customers away from it.
The court ruled in favor of Naftogaz, but UkrGazEnergo lawyers are no fools: they immediately stated their intention to challenge the ruling.
This game is really worthwhile (i.e. billions of cubic meters of natural gas and billions of dollars).
Alla YEREMENKO
“Zerkalo Nedeli”, Ukraine’s International Social Political Weekly, № 37 (716), 4 — 10 October 2008
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