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Ukraine's underground storage catches up with injections

Injections into Ukraine’s underground storage were exceeding 80m m³/d as PE went to press – good news for its western counterparts who depend on the reliable transit of Russian gas through Ukraine

By 17 October, state operator Ukrtransgaz had about 16.2bn cm stored and, taking into account the faster rate of injection, the plan to stockpile 17-18bn cm by the end of the month was looking feasible even though the heating season had already started.

In theory Ukraine could therefore have enough gas to go through the withdrawal season without incident – last October Naftogaz started lifting the gas from store with just 16.5bn cm put away. But last winter was abnormally warm, which is an important factor.

As the heating season has started, domestic demand is already at 90m cm/day, Naftogaz chairman Andriy Kobolev said on 15 October, so its ability to inject more gas is limited. It is receiving 114m cm/day from Russia, 11-12m cm/day from the EU and over 55m cm/day from domestic production.

Another limiting factor is the chronic lack of money. Naftogaz could increase supplies from reverse-flow capacity but it can’t afford that for the moment. It received $500m from “international financial organizations” including the European Investment Bank and the World Bank, with EU guarantees at the end of September to pay for Russian gas, allowing the transfer of $234m to Gazprom and hence the restart of imports on 12 October. On 9 October the European Investment Bank and the World Bank signed an agreement backed by EU guarantees to lend Naftogaz $520m to purchase gas.

On 30 September EBRD announced it was ready to advance Naftogaz a $300m, three-year revolving loan to buy gas from EU sources on a tender basis. The pre-tender procedures started in September, and the supplies within this project were expected to start in October, but Kiev was slow to approve the deal.

The official reason for this was technical difficulties, according to the country’s energy minister Vladimir Demchishin. But on 15 October, the prime minister Arseniy Yatsenyuk said the ministry was blocking the deal and the next day the cabinet approved the deal with the EBRD. It also voted for the plan to restructure the corporate governance of Naftogaz, which was seen as a pre-condition from its “European partners” who also attended the cabinet meeting.

Ukraine storage injections

The company’s top managers believe they can transform it into the country’s first company to meet world standards. The plan’s key element, according to Kobolev, is the institution of independent directors. Yatseniuk proposed representatives from the IFO for these positions. Meanwhile, the critics of the document expressed concerns that it was more of a framework than a concrete plan and allowed too much uncertainty regarding the future operation and ownership of Naftogaz’ production, transportation and storage assets. This in theory suggests that the state may finally lose control over those assets in the process of reforming Naftogaz.

Nevertheless, the delay with the deal with EBRD means Naftogaz will not receive the $300m to tender for reverse-flow suppliers until November. Meanwhile the company’s own financial situation is still far from brilliant. According to the company’s report for 2014, disclosed in the end of September, its net loss for the previous year rose almost 5 times year-on-year, and reached hryvnia 88.4bn (about $4bn). This year Naftogaz has managed to improve its balance – its net loss for the first half was down to a seventh of what it was in the year before, at hryvnia 4.5bn.

The company put much effort into lobbying for higher domestic tariffs for gas and heating for the public sector in 2014-2015 but only when the heating season is under way will it be clear if that has borne fruit with higher payments. The rhetoric praising “market principles” and “European prices” grates in a country where salaries, pensions and the level of service fall far short of those in Europe.

As of the end of 2014 consumers owed Naftogaz and its subsidiaries over hryvnia 38.7bn, and there is a significant possibility that this figure will go up when tariffs rise.

There is still hope of more gas production at home, but again time is not on Ukraine’s side. On October 6, a bill calling for lower private-sector rent payments from 55% to 29% for shallow wells (less than 5,000m) and from 29% to 14% for deep wells (more than 5,000m) has passed the first hearing. The rent payment rate for state-owned Ukrgazvydobuvannya, Ukraine’s biggest gas producer is expected to decrease to 29% from 70% today. Ironically, the latter proposal has drawn the attention of Yatseniuk, who said this idea undermined the system of the budget subsidies for households. He asked the president to veto the final version of the draft if that proposal makes it that far.

The only thing which has changed for the better since summer is the truce between Naftogaz and Ukrnafta, which was contolled by powerful Privat group led by ex-Dnepropetrovsk governor Igor Kolomoisky. After a long stand-off the sides finally managed to sit down and to elect former BG executive Mark Rollins the new chairman of the board on 22 July. On 2 October Ukrnafta, where Naftogaz owns 50%+1 share, finally managed to pay last year’s dividends. Naftogaz’ share of the spoils, hryvnia 630m, was transferred to the state budget, as the sides agreed earlier.

In another development, Ukraine’s state fiscal service in August said it approved the restructuring of Ukrnafta’s tax debt of about hryvnia 9bn. And the fate of Ukrnafta’s dividends for 2011-2013 – hryvnia 1.7bn, due to be paid by April 2015 – is still under the question. The last occasion they were mentioned was in September when Rollins said Ukrnafta was “ready” to pay them by the year’s end.

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