Will Ukraine's gas transportation system stay under Naftogaz?

Author : Olena Holubyeva

Source : 112 Ukraine

Ukraine’s Cabinet of Ministers is considering the possibility of transferring the shares of the "Main gas pipelines of Ukraine" to Naftogaz
10:30, 23 July 2018

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Ukraine’s Cabinet of Ministers is considering the possibility of transferring the shares of the "Main gas pipelines of Ukraine" (MGPU company was created as an independent operator for managing the gas transportation system) to Naftogaz. This means that in the near future the real unbundling would not take place. Little time ago, Prime Minister Groysman has been leading a backstage struggle with Naftogaz leadership, however, now he makes concessions and refuses to influence gas transit. There are some reasons for it.

The issue of unbundling (transferring the function of gas transportation from Naftogaz to an independent operator) has been topical for several years. Europe insists on separating the gas transport system (GTS) from Naftogaz since the separation of the functions of sales and transportation of gas is stipulated by the requirements of the Third Energy Package. According to the Resolution of the Cabinet of Ministers No. 496, the assets used in the transportation of natural gas in the framework of unbundling should be transferred to an independent company within 30 days after the final decisions in two cases, considered by the Stockholm Arbitration. All the terms provided by this document are already delayed. The last decision in Stockholm was made on February 28.

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European Commission, the World Bank, and the Energy Community have sent a letter to Prime Minister Groysman, stressing that they expect Ukraine to conduct full-scale unbundling, create a full-fledged system operator of the gas transportation system, which would be separated from the parent company (in accordance with requirements of the Third Energy Package).

The Cabinet planned to transfer the managing functions of the gas transportation system to MPGU, created in 2016 and subordinated to the Ministry of Energy. Naftogaz was against it. In 2017, Naftogaz Ukraine established a branch of the GTS Operator of Ukraine to "work out all business processes and ensure uninterrupted gas transportation to customers after the separation of the transportation direction." Deputy Prime Minister of Ukraine Volodymyr Kistion called it "sabotage." Igor Prokopiv, Deputy Minister of Energy and Coal Industry said that the creation of a new branch in the Ukrtransgaz’s structure could delay the unbundling process for 2-2.5 years.

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Judging by the latest events, this scenario is quite realistic. Naftogaz would retain the function of gas transit, and unbundling would not take place in the near future. The Cabinet seems to have changed its mind and is ready to transfer MGPU under Naftogaz’s control.

February 27, Igor Prokopiv was dismissed from the post of deputy minister. The next day, February 28, the Minister of Energy and Coal Igor Nasalyk appointed six members of MGPU Supervisory Board. July 20, information appeared on the dismissal of three representatives of MGPU top management – acting president Valeriy Nozdrin, Technical Director Igor Burak, and Legal Affairs Director Oleksiy Lanio.

The relations between Igor Burak, Oleksiy Lanio, Valeriy Nozdrin and Andriy Kobolev were really tensed during their stay at Ukrtransgaz, said the director of Naftogazbudinformatyka Leonid Unigovskiy. According to him, if there is Cabinet’s decision on the temporary transfer of MGPU to Naftogaz, it cannot be ruled out that the dismissal of these people is one of the conditions of Andriy Kobolev (the governing body of the Naftogaz of Ukraine).

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Valeriy Nozdrin noted that the issue of transferring of MGPU to Naftogaz has been standing on the agenda. "On March 29, the meeting of the Coordination Council for Energy Reforms headed by Groysman was attended by representatives of all European partners, the World Bank, the Minister of Energy, the Minister of Finance, and the Deputy Prime Minister Volodymyr Kistion. Taking into consideration the decision made by the Stockholm Arbitration, they were negotiating on the possibility of transferring the corporate rights of MPGU to Naftogaz until the expiration of the transit contract. This is one of the options among many others," said MPGU representative.

According to Nozdrin, representatives of European institutions strongly opposed the transfer of MPGU to Naftogaz: "They believe that MPGU just cannot be transferred to the Naftogaz. Their proposal was to leave MPGU under the Ministry of Energy, to prepare for the reception of assets, and to carry out the certification process (before the contract with Gazprom ends). Now all these scenarios are under discussion."

One of the arguments of Naftogaz in favor of maintaining control over the GTS is the decision of the Stockholm Arbitration, which has not allowed changing the side of the transit contract, Kobal notes. According to him, taking this into account, the transfer of the GTS to MPGU would be fraught with high risks.

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According to experts, the events indicate that at least until the end of 2019 the situation will be frozen. A foreign partner will not be engaged in managing GTS. It seems that the government decided to transfer solving the problems to the new ministers, who would come after the elections.

“It all looks like the government has critically looked at the entire situation, evaluating all pros and cons. They have understood that the model of 2016 would not be realized. The idea with MPGU looks quite correct. The Cabinet of Ministers decided not to do anything... The transfer of MPGU under control of Naftogaz will become a confirmation of this fact. In the end of 2019, when the contract with Gazprom ends, it is possible that Ukraine will have another government, and after the elections, these issues will be to solved by different people,” Kobal claims.

Related: Gazprom wants to get rid of gas transit through Ukraine; it has to pay for it

“All this parrying with the GTS is not beneficial for the country. The more the solution of the issue with unbundling is delayed, the more we lose the opportunity to actually attract a foreign partner (for negotiations with Gazprom on transit after 2019). Time is running out, and there is no real action. Timeline for appointing a foreign partner is missed already,” Leonid Unigovsky notes.

Manipulation with unbundling can finally undermine the trust of international partners to Ukraine, which will remove any obstacles to the construction of the Nord Stream – 2, a Russian gas pipeline bypassing Ukraine, Volodymyr Omelchenko, director of Razumkov Center energy programs, assures.

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