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Who will get Ukrainian gas?

Author : Oleksiy Kushch

International companies have long been eyeing the Ukrainian gas transportation system and are not averse to taking part in its "denationalization"
22:40, 19 November 2018

112 Agency

In fact, today's gas battles between various groups of influence are nothing more than a struggle for the future management of Ukrainian gas transportation system (more precisely, for what remains of it after the launch of Nord Stream 2). And for the creation of the domestic market, most profitable in terms of price parameters, with an eye on the privatization of Ukrainian gas production. The binding of gas prices to import parity has already maximally boosted domestic prices, which are 80% higher than the quotes of the German hub which is a price benchmark. And the injection of 80-90 billion UAH (3 billion USD) of subsidies from the state budget into this price model every year does not just heat up prices, but literally boil them. And now imagine that in this model up to 60% of domestic consumption is covered by own production of gas, the cost of which is much lower than those 8 500 UAH (308 USD) per 1000 cubic meters (which the population pays) and the volume of production is up to 21 billion cubic meters. A very profitable thing. Especially when you consider that all this machinery will be in private hands over time. In this sense, the current government is doing something like accelerated pre-sale preparation of the business and price hyperstimulation of the market. The price markup turned out to be truly reactive, and the officials involved may deserve the “bonuses” in the future.

If you remove the entire layered husk, we can very quickly get to the core of hidden processes, and for this you do not need to produce conspiracy theories. It will be enough to apply the usual system analysis.

Let's start with the transit. NAK "Naftogaz of Ukraine" attracted the company Rothschild S.p.A. (Italian division) as an investment consultant for unbundling, that is, the process of separating the functions of transit, production and sale of gas.

International companies have long been eyeing the Ukrainian gas transport system and are not averse to taking part in its "denationalization". Especially in the context of the construction of bypass gas pipelines by Russia. Create the conditions for the depreciation of the asset you need, buy this asset cheaply, resell over time expensively - the usual exchange strategy.

It’s no secret that one of the most likely candidates for managing our pipe is the Italian company Snam S.p.A, which has already bought up part of the Austrian gas transportation system and plans to do the same with the gas pipelines of Slovakia and Ukraine. In this case, it will have a transport corridor from the Russian-Ukrainian border to Italy, a country that has long been affiliated by the Kremlin to a system of hidden gas contracts. In this case, we are talking not only about supplying Russian gas to the Apennines, but also about selling it to other EU countries through a network of Italian traders. For the same reason, the Slovak company Eustream may appear in the list of candidates for the management of the Ukrainian GTS. One gets the impression that this is exactly the performance in which the final is already being read on the first cue.

By the way, the Italian ‘residence permit’ of investment bankers creates the thought that everything will be exactly like this. Why exactly the Italian group from Milan was attracted? The most likely answer: because the real contender for the Ukrainian GTS is also from Italy. Italian applicants for the management of our gas transport system are interested only in the main export gas pipelines going to Uzhhorod and then through Slovakia and Austria to Italy. It is not difficult to understand that in this case, the new “manager” will receive the most delicious peace, and Ukraine will be left with an unprofitable part of the GTS, which, without a substantial part of the transit fee, will hang like a rusty belt on the country's fragile waist.

The necessary course of the unbundling process should be provided by the new Naftogaz board. Last year Claire Spotiswood (Great Britain), Bruno Lesqua (France), Amos Hochstein (USA), Steve Heisen (Canada) were appointed there. Judging from the available biographical data, Claire Spotiswood took part in the reform of the UK gas market, Bruno Lescua worked as a top manager in the Gaz de France company.

Related: Gas prices hike in Ukraine from November 1

As for the gas production. At a time when Ukraine can produce 21 billion cubic meters a year, and domestic prices are too high, foreign investors are very interested in Ukraine’s gas fields and the potential of Ukrgasvydobuvannia. It is no accident that the former State Duma deputy and acquaintance of George Soros, Ilya Ponomarev, does not hide the fact of negotiations on the future privatization of this largest national gas producing company, although Kobolev did not confirm this information. Soros interest is understandable. In Ukraine, there may be a paradoxical situation, when a privatized state-owned company will sell cheap gas from its own production through its own trading intermediaries to the EU market, and expensive imported gas, obtained in a roundabout way from Poland, will be directed for domestic consumption. This will help, by the way, to argue the link between gas prices and import parity. In this case, the model will indeed be almost ideal: the privatized Ukrgasvydobuvannia will generate a financial flow due to the low cost of Ukrainian gas and high sales prices in Italy, and the Polish operators will increase the losses of Ukrainian consumers and the state budget for subsidies as a result of the sale of expensive "European" gas in Ukraine. At first glance, the situation looks implausible: a player like Soros is quite capable of lobbying for the adoption of laws guaranteeing the right of a foreign investor to sell gas where it is profitable. It is hardly coincidental that quite recently Ilya Ponomarev registered the Trident Acquisitions Company in the USA, which on the American NASDAQ attracted about $ 250 million of private investment for the implementation of gas projects in Ukraine. The main goal may be the future privatization of Ukrgasvydobuvannia. As Ilya Ponomarev said in an interview: “Now it seems that by world standards this is a small company that is meaningless to hold in government hands. I would privatize it, but not as one company. I would divide it into three parts, forbidding the one group to own these three parts. "

Now imagine that you have become the head of Naftogaz for one day and you need to lead the company to the above model. What do you need to do? First of all, it is extremely important to maintain the minimum possible parameters for the commercial storage of gas in underground storage facilities, so that no one could think about the profitability of their use and there is no justification for the high capitalization of the company during its transfer to long-term external management. In addition, it is important to bring the “transit ship” into an empty harbor with fallen pumping volumes, so that any proposal for renting a part of the GTS with a low price is perceived almost as a great mercy.

But the gas production system should be brought to maximum speed, using incentive tools such as preferential taxation (minimum rent payments for gas production in new deep wells in the amount of 6%), and maximum liberalization of tariffs for the population (for this, prices must be tied to import parity in order to hedge the seller’s future exchange rate risks). In addition, the pricing process itself needs to be removed as much as possible from the sphere of administrative regulation of the state, so that the consumer pays exactly what the gas costs at the moment in the German hub, taking into account the entry fee to the Ukrainian GTS, transit, storage and taxes, that is, using 80 % mark-up. Only in this case, the “conditional Soros” will receive not just the former Ukrgasvydobuvannia company with a set of licenses and wells, but a ready-made business, with a streamlined organizational structure, an effective price mechanism and preferential taxation. That is, "a candy."

Fortunately, we haven’t much time before the elections to realize such plans, but they will be “pushed” under the smoke screen of crisis and hopelessness, for example, as a way to pay off part of the country's external debt.

Read original article at 112.ua

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