Gas getting more expensive, Ukrainians getting poorer

Author : Oleksiy Kushch

Source : 112 Ukraine

The International Monetary Fund promised to give Ukraine 3.9 billion dollars tranche, and the increase in gas prices is the cornerstone of its requirements
20:20, 29 October 2018

Open source

The International Monetary Fund promised to give Ukraine 3.9 billion dollars tranche, and the increase in gas prices is the cornerstone of its requirements. The issue of the fight against corruption has been relegated to a secondary position. And official Kyiv is not loath to answer about its “successful” fight; allegedly, vertical corruption is already won; now we deal with its horizontal level.

And now, let us speak about the numbers: this year and next year, more than 3,6 billion USD will be allocated from the state budget for utility subsidies. It seems to be a good law of communicating vessels. We take 3.9 billion USD from the fund and funnel almost all of them from the state budget, thus favoring several monopoly financial-industrial groups.

Related: IMF demands to increase gas prices for Ukrainians by 40%

Usually, any unpopular decision with us is immediately accompanied by special “booms.” So, the “boom” one. No more bonuses for Naftogaz (national oil and gas company of Ukraine – Ed.) management. From now on, 90% of the profits go to the budget. This is a reasonable requirement, especially taking into consideration the fact that they have already received a huge number of bonuses, and all these numerous managers would hardly sit in their chairs after the next elections. And well, very infantile citizens might be pleased with the fact of transferring the profits of Naftogaz to the state budget. Our officials adore opening ceremonies but hate constructing and building itself, and all this profit poured into the budget, will only help several governors to receive their bonuses.

“Boom” two. No more increasing. Well, this "forgotten merry song" is very old, now it consists of sour notes. As long as the power is totally dependent on the IMF, it will be forced to "raise and increase." Tertium non datur.

“Boom” three. The increase in tariffs will allow raising the production of Ukrainian gas through investments in new wells and drilling. This idea is the trump card of the pro-government discourse, so let us consider it in more detail. The former ministers said that due to the increase in tariffs, we would significantly increase our own gas production and lose our energy dependence on the Russian Federation.

Related: IMF ready to approve new programme for Ukraine after heating tariffs hike

If we look at the dynamics of natural gas production in Ukraine since 2010 (data from Chornomornaftogaz, that is, Crimea, are not taken into consideration), we will see that in 2010 we have produced 20.055 billion cubic meters. In 2013, this figure increased to almost 21 billion cubic meters. And during this period gas tariffs for the population were several times lower than now. In 2015, this figure fell to 19.896 billion cubic meters, and in 2017 it rose to 20.825 billion. But (even with a small increase) this still remains lower than in 2010. We can find quite a strange correlation between the size of the tariff for the population and the volume of production. Or maybe tariffs “correlate” with something else?

By the way, speaking about reducing energy dependence on the Russian Federation. It can be achieved by several methods. In a direct way, that is, increasing gas production in Ukraine, developing energy efficiency, in parallel, and by reducing gas consumption in productive sectors of the economy. It could be easily noticed that our energy "strategy" consists precisely of the against backflow. After total de-industrialization of the economy, when gas prices have destroyed almost all the entire chemical industry, and many enterprises simply shut down their production during the winter not to heat their facilities, the government actually achieved a sharp reduction in gas consumption - mainly in the industrial sector. The other sectors also try to save in the way of the cold student audiences and "distance learning courses."

Related: Good news: Ukraine finally gets new IMF agreement

At the end of 2017, prices for industrial consumers in Ukraine ($ 295 per thousand cubic meters) were higher than in the UK (237), Bulgaria (243), Czech Republic (272), Romania (282), Italy (285), and Poland (286). And even little less than in France (302), Hungary (312), and Germany (322). Now it becomes clear why many industries that are tied to the gas consumption, especially all kinds of chemical plants, were developed in Central European countries and why Ukraine’s economic growth rates still cannot reach the optimum level. At the same time, Ukraine has the second largest gas fields in Europe (after Norway) and the largest gas transmission system on the continent, including unique underground gas storages, making up 20% of European ones. So having such competitive advantages, why it creates the worst conditions for its customers?

The current government has decided to raise the gas price for the population to the level of import parity. This is explained very simply - any product must have a market price. But the funny thing is that there is no full-fledged natural gas market in Ukraine: 90% of consumer needs (population and heating utilities) are satisfied by UkrGasVydobuvannya, the largest Ukrainian gas producer, and this is our own gas. Now its price is determined on the basis of price parameters at the NCG hub (Germany), plus transportation costs and entry-exit tariffs on the western border of Ukraine. According to the Anti-Monopoly Committee, binding to import parity led to an artificial increase in the price of Ukrainian gas from 57 USD per thousand cubic meters. to 171 USD, that is, more than three times.

Related: Ukraine and IMF agree on new Stand-By Arrangement program for $3.9 billion

In fact, the pricing policy in countries with energy reserves must proceed from the simple principle that this wealth belongs not to the monopolies, but to the people. But the technology of fixing this accessory might be different. For example, with the anti-monopoly restrictions on the growth of prices for gasoline in the United States make filling a car two times cheaper than in Ukraine. And no one says that the American economy is "not a market economy."

Norway has a completely different system: there, a high level of wages allows you to keep high gas prices for the population (440 euro per thousand cubic meters), although this country is the largest exporter of energy resources. But the profits from gas sales in Norway are not used for bonuses of the top managers of a state-owned company. Even if Norway runs out of oil and gas, the Norwegians will have extra money to borrow: the fund’s resources are invested in shares of major international companies (over 60%), debt securities - investment grade bonds (over 30%), and real estate (from 2 to 5%).

Related: New IMF program facilitates Ukraine's access to funds worth $8 million, - American Council analyst

And now, let us answer a simple question: which model is used in Ukraine? None of these models is used. After all, we have significant gas reserves, a unique GTS, underground storage facilities. At the same time, prices for industry are higher than in many European countries. Tariffs for the population tend to be close to the import parity.

The gas price for the population has not really reached the European level yet, however, it has long exceeded the level of our well-being: even with the growth of the minimum salary in 2019, the Ukrainian will be able to buy 0.49 thousand cubic meters of gas for it. An average Bulgarian is able to buy 0.66 thousand cubic meters, the Pole, Romanians, and Hungarians - 1.2 thousand cubic meters, the Czech - 0.8 thousand cubic meters.

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This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.

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