Why Naftogaz demands 350 million dollars from the Cabinet?

Author : Leonid Unihovsky

Source : 112 Ukraine

The head of Naftogaz demands compensation from the Cabinet, worrying about the deterioration of the company's financial performance
18:30, 30 January 2018

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Naftogaz of Ukraine and Ukrhazvydovannia company appealed to the government to pay them compensation for expenses related to the fulfillment of special obligations: gas supply to the population, religious organizations and communal energy enterprises.

Of course, laws must be implemented. If they are accepted, then they must be met. The Law on the Natural Gas Market states that a special document should be developed and approved to compensate for the fulfillment of special obligations by the market entity. The Cabinet did not do this, although it was obliged. Naftogaz waited a long time for this to happen, but, without waiting, turned to the court that in a situation in which Ukraine now is, it is probably not entirely ethical. After all, Naftogaz should understand the situation in the country, what social burden lies on people. And it's not because of the upcoming elections, but due to the fact that most people cannot cope with the burden of utility payments.

I think Kobolev understands perfectly well that it is unrealistic to achieve the cancellation of special obligations at the moment. If they are canceled, the gas price for the population will jump by at least 15-20%. Chaos will begin. And the reason why the head of Naftogaz issued such a statement, I believe, is dictated by other motives. In my opinion, Kobolev feels that the financial position of Naftogaz can significantly deteriorate. After all, it is predicted that most of the transit fees after the end of unbundling will be transferred in 2018 to the new enterprise "Trunk gas pipelines of Ukraine." That is, this year the financial results of Naftogaz may change for the worse. Now the top manager acts on the lead, using the mentality of foreign members of the Supervisory Board, who, like him, think in terms of company, business, and not in terms of state.

During the week, Prime Minister Volodymyr Groysman held a meeting with representatives of Naftogaz's Supervisory Board. One of the main issues that was raised on it - is the question of the financial state of state company and conducting its detailed audit. Immediately after that, there was a statement by Naftogaz about the need to pay compensation plus a list of claims to the government. I think that these events are connected.

In my opinion, for top management of Naftogaz reputational risks are extremely important - they count on long and successful professional activity. Therefore, the management of a "loss-making" company is unacceptable for them.

Nevertheless, I can say that the possible worsening of the financial situation of Naftogaz can occur not only through their fault. Yes, they work, and they have positive results.

And I repeat, the current situation in Naftogaz cannot be considered as solely the responsibility of Kobolev and the team. Here we are talking about a whole series of issues related to the general market instability and the lack of a normal payment discipline. Look at heat and power: they consume gas, but do not pay. The communal energy enterprises understand perfectly well that in the winter they will have gas, otherwise cities and villages will freeze. They are persuaded, threatened, they have a fine, but they continue to consume gas without payment. Here, Naftogaz is right: there is a debt for the gas supplied, and the debt is substantial. Adoption of daily balancing here will not resolve the issue. Other solutions are needed.

There are factors of not always effective management of Naftogaz by the Cabinet. Periodically, Kobolev is told: "We need to pump 16-17 billion cubic meters into the storage to create an insurance stock for the successful heating season." He answers, for example: "14 billion cubic meters are enough". But they tell him that they need 17, they say, because we have calculated, there may be extreme cold and we will not have enough gas, we will fail the heating season. Sometimes Kobolev resists, sometimes agrees and buys gas. And he does not always buy it in summer, when the price is low. It happens that he buys in the autumn, and gas is already expensive. And then the heating season ends and it turns out: again another fail. There were no colds, no gas was consumed, and its amounts remain in the storage. But it is expensive and we cannot sell it at a low price in the summer months.

And here, as the head of the company, I understand Kobolev well. He cannot show losses, he must show the success of the company. He was appointed for this purpose. But it is necessary to pump gas volumes into the storages for safety. Another thing is that a special mechanism is needed for this. We need a special law on strategic reserves of natural gas. And there must be a special financial mechanism to ensure these stocks. So that the chairman of the board of Naftogaz does not have a headache from the fact that expensive gas is waiting in the storages, and he cannot sell it. There must be mechanisms for guaranteeing financial risks. But besides talking, in this direction nothing is really being done.

It is necessary to develop and adopt a draft law on strategic reserves of natural gas. This is the same law as exists in Europe on the minimum reserves of oil and oil products. The rule on strategic gas reserves operates in some EU countries, for example, in Hungary.

Now back to the beginning - to the demand of Naftogaz for compensation. The most interesting thing is that in this topic with compensation there can be a completely unexpected turn. It may happen that, rather than to get 110 billion UAH, that Naftogaz estimates its losses, state-owned company will be forced to return almost the same amount to the budget.

The fact that the former head of the Department of Planning and Economy pricing policy of Naftogaz  Yaroslav Dykovytsky in May 2017 filed a lawsuit in the District Administrative Court of Kyiv, and if it will be satisfied, Naftogaz will be forced to return to the budget 100 billion UAH. Dykovytsky proves in court that, to compensate the cash deficit of Naftogaz (the difference between revenue and expenditure of the company, provided in the financial plan), the government, contrary to the requirements of legislation, gave about $ 10 billion to the fund of the company in 2014-2015. Dykovytsky insists that under current legislation, non-returnable compensation from the state budget is only subject to the difference in price. Thus, Naftogaz could claim only to compensate for the difference in price, and not to reimburse the entire cash deficit. The essence of the claim is that the necessary amount of compensation for the difference in the price of UAH 100 billion is less than what was transferred to the statutory fund of the company.

According to Dykovytsky, defendants on this suit are the Ministry of Finance, the Ministry of Economic Development, the Ministry of Energy, which coordinated the financial plan of the state company with a cash deficit. He asks the court to oblige the parties to sign proving acts with respect to the amounts that had to be paid, and which in fact was paid to Naftogaz. On the basis of these acts, the court may oblige the Ministry of Finance, with the approval of Naftogaz's financial plans for the next years, to provide for the company to return 100 billion UAH to the state budget. The next court session on the suit is scheduled for April 26.

And now the conclusion: the actions of both the Cabinet of Ministers and the company are, unfortunately, far from the "standard level".

All opinions published on 112.International website reflect the views of the author. 112.International editors may not agree with the opinion of the author.

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