Russian gas giant Gazprom may have inadvertently saved the Ukrainian gas market, namely Naftogaz. What doesn't kill you makes you stronger.
For years, Naftogaz’s top leadership has been grappling with corrupt government officials, trying to explain to them the benefits of becoming a more modern, open market energy system in line with EU standards for the oil and gas trade.
So while Naftogaz CEO Andriy Kobolyev may very well be the unsung hero in all this, battling for nearly six years against one of Russia’s most important and powerful state-controlled companies, it was Vladimir Putin’s insistence that Gazprom’s return to Ukraine being dependent on Ukraine getting its act together in line with European norms for the energy market that may have changed everything.
That’s what Janez Kopac, Director of the Energy Community, an EU body that designs the regulatory framework for local energy markets involving non-EU players, said in Davos on January 23.
Kopac spent years trying to get the Ukraine state-run gas firms, of which Naftogaz is a part, to unbundle its dysfunctional transmission business, among other things. Kopac’s Energy Community served as “advisor, a policeman”, and mediator in numerous gas market reform discussions in Ukraine since 2014, he said.
“It was not easy. There were a lot of dirty stories behind the scenes, but it’s over,” he said, without explaining further.
“In the last month, the biggest push for European oriented gas market reforms in Ukraine came from Gazprom because Putin said that if Ukraine would comply fully with European rules they will sign a transit contract,” Kopac said. “Ukrainian authorities adopted all those measures; measures that were not done for years.”
Back in 2014, corruption and an overbearing Russian influence came together to upend Ukrainian politics.
It was “ground zero” corruption — some have called it — that blew up the government of Viktor Yanukovych and tore Ukraine from Russia’s age-old sphere of influence.
It has been orbiting lost ever since, not quite with Russia anymore, and not quite in Europe’s either. In Washington, it’s like a one-hit-wonder: good for military sales and sources of foreign intrigue, but that’s about it. U.S. companies might be invested more in Kazakhstan than in Ukraine.
Their fight has been an ugly and bloody one. Much of its origins can be traced to Gazprom and Naftogaz as Putin offered Yanukovych a subsidized gas deal if he rejected a broader economic deal with Europe. That seems to be one of the bigger sparks that set off the revolt against the Yanukovych government some seven years ago. Ukraine is still reeling from that crisis, as is Russia.
In an odd way, the rift between Russia and Ukraine made European policy makers pay more attention to Ukraine and to reconsider its dependence on Russian natural gas.
There was a sense that Russia could use natural gas supplies as a “weapon” against Europe, which it never did nor threatened. Gazprom has, however, withheld deliveries to Ukraine on numerous occasions, something the Russian state-owned energy giant has blamed on Kyiv incompetence, corruption and contract breaches.
Russia then moved to partner with Turkey and Germany to build two new pipelines; pipelines Ukraine and Washington’s Eurasia diplomatic corp and think tank fellows all considered to be anti-Ukraine projects. Sanctions ensued, and remain.
Despite the new Nord Stream 2 pipeline connecting Russia to Germany via the Baltic Sea, now nearing completion, Europe is reducing natural gas in its energy matrix. Russia remains a key foreign supplier of natural gas, but countries from the U.K. to Germany are just using less of it.
Naftogaz’s deal with Russia returns Ukraine as a transit route into southern Europe. This is good news for both the company and the country.
The December settlement of a years-old court battle between the two also forced the Ukrainian Gas Transmissions Systems Operator to remap how they transmit energy, making it more of a European-style system.
Kobolyev said that new Naftogaz contract with Gazprom following the settlement would not return Ukraine to previous delivery volumes, but that it was “acceptable.”
He also told a crowd in Davos that the deal allowed the removal of transmission bottlenecks with Europe. Ukraine, Hungary, Poland, and Slovakia can now freely exchange gas flows through Ukrainian territory.
Kobolyev said corporate governance reform needed to make improvements, too, before Ukraine becomes a place where European energy companies want to invest, or, at the very least, want to store natural gas.
Ukraine has many underground storage facilities that are largely untapped and can be used for Europe, eventually, if the reforms and the trust are there.
Over the years, there have been numerous attempts to reverse energy reform in Ukraine and that kept the country beholden to Gazprom. But recent moves to unbundle transmission operations could turn Ukraine’s energy market into less of a den of political backstabbers and out of control, often spiteful oligarchs, and make it more reliable to new investors and customers.
Naftogaz has been out of the Russian gas market for the last five years due to the political crisis between Kyiv and Moscow.
“We all know the problems with Ukrainian gas legislation and we all know the issues that are unresolved still,” Kobolyev said. He did not go out of his way in Davos to throw a bone to the Russians. For many in official Kyiv circles, Russia is a sore spot. “From the point of view of Gazprom, some of those issues were damaging to them so it was a good excuse for them to stay away from Ukraine,” he said. “When those issues are fixed, I think you will see more investment here...and it starts with Russia’s Gazprom.”
Read the original text at Forbes.com.