Social (in)justice: Why natural gas is expensive in Ukraine?

Author : Oleksiy Kushch

Source : 112 Ukraine

When it comes to gas price for the population, social justice could be achieved not only through the development of the market and the creation of a gas hub in Ukraine but also provided that the society becomes a real beneficiary of the Ukrainian gas production system, albeit at a market price
11:20, 5 April 2018

Read the original text at

Open source

Apparently, a heroic deed has been noticed in the recent actions of Ukraine’s Prime Minister Volodymyr Groysman. He decided not to raise the gas price for the population. However, there are no reasons for rejoicing, because everything can change in two months (June 1). Our ministers are not capable of something more.

After the Cabinet’s meeting, it was decided to extend the effect of the so-called special obligations of Naftogaz of Ukraine and regional gas supplying enterprises with regard to natural gas supplies to domestic consumers (that is, to the population) as well as to heat and energy companies for another two months.

In recent months, the main battles in this “gas struggle” occurred, where the interests of external creditors, represented by the IMF and the government, converged. Of course, there is a group of people wishing to shake the situation during the final pre-election line. Of course, you can ask people: "Do not rock a boat, we have a seasickness". But the electorate is no longer afraid of the “vomitus” of the domestic “elites.”

Related: Rise in gas prices: Does IMF really require this?

If we examine the political background, the least favorite "Naftogaz" would do its job, while the government gets the paddle from the indignant proletariat. Relationships within the gas management vertical are already strained to the limit. After winning the Stockholm Arbitration, Naftogaz top managers have acquired an indulgence from the resignation for the next year. Therefore, some politicians have to keep the brand and ignoring the fact that Naftogaz leadership causes some personal dislike.

As it usually happens, our government would blame the International Monetary Fund for everything. To be fair, it is worth noting that the IMF never makes any direct demands for increasing or decreasing something. The Fund, the largest creditor of our country, wants to see the progressive elimination of the deficits that have emerged in various segments of the economy and the public administration system. And any deficit could be minimized both due to the revenues growth and due to the increased costs. With regard to the supply of natural gas to the population, the Naftogaz deficit might be overcome both with the help of simple extensive methods, primarily tariff increases, and with more flexible, intensive and complex mechanisms (for example, by increasing gas sales to commercial consumers that can pay the market price), as well as intensification of the management system and the more optimized corporate structure. Of course, it is much easier to constantly increase the tariffs for the population and increase your own salary. While doing this, do not forget about constant blaming of the "evil" IMF.

Related: Ukraine can reduce gas consumption by 5 billion cubic meters, - PM

On the other hand, what can change in these few months? The decision of the Stockholm Arbitration concerning the Gazprom-Naftogaz dispute has unlocked the process of creating a gas hub in Ukraine, which should attract the world's leading fuel and transit operators in order to ensure efficient transportation synergy, storage and sale of gas in the domestic market. And in this case, the price deficit will be overcome by the most important weapon of the market economy - open competition, when hundreds of operators selling natural gas will be able to offer a better price, not exceeding the administratively established upper limit. If a real market model is created, the monopolistic groups of suppliers would not create their puppet traders to imitate the competition, the price of gas for the population will inevitably decrease. Of course, we are not talking about the returning of the times when gas really cheap, but a price reduction of 15-20% is quite realistic.

The gas issue has always been extremely toxic for Ukrainian politics. Just recall the former Prime Minister Arseniy Yatsenyuk, who, while being in opposition, was actively persuading his counterpart Mykola Azarov that the gas, extracted in Ukraine, should be much cheaper for the population. But as soon as Arseny Yatsenyuk occupied the prime minister's office, all the “right” calculations were completely forgotten. Obviously, the gas issue causes our politicians a sharp attack of anterograde amnesia, like it happened with the hero of Memento film directed by Christopher Nolan. Let me remind you that in this film, the hero was "reverted" every 15 minutes, and he did not remember anything at all. The hero realized that he had to prepare a plan for revenge, he wrote down the most important facts of biography and promises in the form of the body tattoos. Actually, this is a good method to force domestic politicians to remember their pre-election promises.

Related: IMF demands Ukraine raise gas price to market level

According to the resolution of the Cabinet, adopted in March of 2017, Naftogaz was supposed to sell gas to sales companies for preferential consumer groups at a price of 190 USD per thousand cubic meters (excluding VAT, transportation, and distribution tariffs). In its financial plan for 2018, Naftogaz laid an increase in purchasing prices for natural gas, for which it purchases energy from UkrGasVydobuvannya company (without VAT), to 2010 USD per thousand cubic meters at the beginning of the year, and to 313 USD as of October 1, 2018. In comparison with the current level, the price growth amounts to 58.5% (if the financial plan is approved).

Naturally, the population would suffer the most, as "Naftogaz" provides gas supplies for utilities and gas consumers for the domestic consumers.

As you might have guessed, the scheme of virtual mixing of Ukrainian gas, the real cost price of which is much lower than the selling price, and expensive import supplies is a real Klondike for the profits. As of November 1, 2017, Naftogaz purchased 19 billion cubic meters of gas, of which 40% is imported, and 60% is gas purchased from UkrGasVydobuvannya (that is, gas of Ukrainian origin). As the investigations of the Antimonopoly Committee have shown, the current pricing methodology does not distinguish between imported gas and Ukrainian gas. At the same time, the "total" price is determined based on the price parameters on the NCG hub (Germany), plus transportation costs and entrance/exit tariffs on the western border of Ukraine. According to Anti-Monopoly Committee of Ukraine (AMCU), the peg to imported parity led to an artificial increase in the price of Ukrainian gas from 61 USD per thousand cubic meters up to 180, that is, more than three times.

Related: Gazprom appeals arbitrage ruling in dispute with Naftogaz regarding gas supply

If we take the indicators of the maximum prices for the sale of natural gas to the population (metered and VAT included), then we will see that starting from 2013 this indicator has grown from 103 USD per thousand cubic meters to 275 USD in 2015, that is almost 2.7 times. Only in the past two years, gas prices for residential consumers slightly decreased to 267 USD or 8,8 USD per thousand cubic meters (a 3% drop). But even this relative price stabilization did not have a positive social impact: the price run-up was too great in 2014-2015 when the ideologists of the tariff explosion laid a too wide delta for personal profit.

Further increase in natural gas prices for the population without creating a full-fledged market and appearance of truly market-based, independent traders will be perceived not only as a forced concession to the IMF for the next tranche but also as an acute social injustice.

But the launch of the gas hub will only remove the tariff tension for a while because even a 15-20% price cut will not solve the global problem of the insolvency of the population. Experience of Norway (as an energy-efficient country) shows fuel prices have never been truly market-oriented. They are only a mirror image of how much subcutaneous fat has the society accumulated and whether it is ready to “lose weight.” A rich Norwegian society is able to pay a high price for gas even in conditions of high volumes of its own extraction and export. The same can be said about the United States, where the president's rating is inversely proportional to the rise in prices for car refuels. And this is in a country where there are colossal oil reserves, including effective shale mining technologies. The price of gasoline in the States is an average of 50 cents per liter. This country is the standard model of the world market relations. Even under Putin's tyranny in Russia, the gas of own extraction for the population costs an average of 5.7 thousand rubles for a thousand cubes. We will not compare the solvency of our domestic market and the German one, but we can do an analysis of prices in countries similar to ours.

Related: Ukraine could become gas hub, but turning into black hole

Russia and Kazakhstan, as countries rich in hydrocarbon, endure the lowest gas prices for their population using the rents for gas production (in Russia, this is the mineral extraction tax): the equivalent of 100 USD and 53 USD per thousand cubes respectively. Belarus, which has a good transit potential, sells gas to the population at 115 USD per 1,000 cubic meters. But Ukraine, which can fully provide the population with its own gas and receives 3 billion USD a year for transit, sells gas to the public for 265 USD per thousand cubic meters, that is, it is almost five times more expensive than in Kazakhstan, 3.7 times more expensive than in Russia, and 2.2 times more expensive than in Belarus. With such a model of redistribution of public goods, ordinary Ukrainians will never be beneficiaries of the use of their national wealth, be it transit or natural resources.

Related: Qatar might supply liquefied natural gas to Ukraine: How real does it seem?

Social justice in such a sensitive issue as the price of gas for the population can be achieved not only through the development of the market and the creation of a gas hub in Ukraine, but also provided that the society becomes a real beneficiary of the Ukrainian gas production system, albeit at a market price. And for this, profits from the use of mineral resources should be redistributed in the interests of all citizens of the country, and not by one closed, albeit state-owned company.

We have been told that high gas prices are a kind of inoculation against corruption. It turned out that the "vaccination" is too strong, and high prices are just a part of a corruptive scheme.

It might sound a little bit pathetically, one should not only remember the election promises, but also think about Memento populo motto as a permanent principle of political life. This phrase does not need a translation.

Related: Britain seeks to replace Russian gas, - May

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

Система Orphus

If you find an error, highlight the desired text and press Ctrl + Enter, to tell about it

see more