Feuds freeze gas market modernization
The deadline is Aug. 1.
That’s the end date of the biggest fight on Ukraine’s gas market right now, which pits the state-owned Naftogaz and its subsidiary UkrTransGaz against gas oligarch Dmytro Firtash, currently trapped in Vienna as he fights off extradition to the United States on fraud charges.
The feud revolves around switching from monthly gas purchases to daily ones, which Ukraine is set to do by the beginning of next month.
Ukraine’s current system of monthly payments depends on paper contracts and letters being sent between suppliers and purchasers. The change requires serious investment in making new software and electronic platforms for gas purchases.
Supporters of the policy argue that this would eliminate the risk of market manipulation, while adding the transparency of constantly changing prices. Naftogaz and UkrTransGaz – Ukraine’s gas pipeline operator – are pushing for the policy’s implementation to be delayed, after already putting off its implementation for three years.
But the push for daily balancing has led to Naftogaz crying foul, alleging that regulatory changes associated with the shift will allow Firtash’s Regional Gas Company to rob the system of more gas with a lower level of liability. RGK denies the allegations, and has implied that Naftogaz is delaying a policy that would increase transparency on the Ukrainian gas market.
The battle comes in the shadow of accusations from Naftogaz that Firtash has robbed as much as $2.5 billion from Ukraine’s gas market since 2014 by cooking the books of the regional gas distribution firms that form RGK. Others accuse UkrTransGaz of benefitting from certain “understandings” that arise from accounting manipulations made possible through monthly, and not daily purchases of gas.
“It’s infighting between Naftogaz and RGK,” said Gennady Kobal, director of the ExPro consulting firm. “But the development of Ukraine’s gas market is being delayed by the lack of daily balancing.”
At stake in the conflict is Ukraine’s compliance with the European Union’s Third Energy Package, a set of regulatory requirements that, once implemented, will allow Ukraine to fully integrate into Europe’s energy market.
The issue has gained momentum in recent months as EU bureaucrats have applied pressure to Kyiv to speed up the unbundling of Naftogaz and bring gas prices in line with their import price from Europe.
The Kyiv Post obtained a letter from the World Bank, EU delegation to Ukraine, and the European Energy Secretariat to Prime Minister Volodymyr Groysman on June 19 which “underlined the urgency” of the issue, and called on the government to “accelerate” the “introduction of daily balancing.”
WHO’S SABOTAGING WHO?
Both sides of the conflict have accused each other of sabotaging the other.
RGK suggests that Naftogaz and UkrTransGaz are delaying the policy out of a mix of technical incompetence and unspecified benefits from monthly balancing.
But Naftogaz’s Yuriy Vitrenko, in a blistering letter to the European Business Association, said that the daily balancing policy change was coming as part of a larger operating code for Ukraine’s gas pipelines that would allow the country’s regional gas distributors to allocate how much gas was lost to “unsanctioned removal.”
“We emphasize that the problem lies not in the frequency of balancing, be it daily or monthly, but in the complex of rules on which the balancing will operate,” Vitrenko wrote, implying that regional gas distributors could use the regulation to place “billion-dollar sums” on “honest purchasers.”
Oleksandr Paraschiy, an analyst at Concorde Capital, phrased it diplomatically.
“There are certain risks that payables in the gas sector will increase,” Paraschiy said. “Because, actually, these gas companies in fact are not obliged to pay on time for the gas they are purchasing.”
On top of that, Naftogaz’s public service obligation forces the company to keep supplying, widening the possibility that even more gas and cash will be drained from its coffers.
RGK denies the allegations, saying that it would take “a country-wide mafia” to trade in billions of dollars of illegal gas.
“It’s like the joke about your daughter being a prostitute,” said an RGK spokeswoman. “One person says to another: I heard your daughter is a prostitute. The other replies, ‘I don’t have a daughter.’ ‘Well, it’s my opinion,’ the other says.”
“It’s simply an attempt to drag out by any means the implementation of daily balancing.”
UkrTransGaz spent Hr 98 million ($3.7 million) on a software contract with Hungarian firm IP Systems Zrt. in 2016 to modernize its systems for daily balancing. Naftogaz has claimed that the project was sabotaged, leading it to fire the head of UkrTransGaz in April.
Two sources on the market told the Kyiv Post that representatives of Naftogaz have claimed that the Hungarian software contractor was secretly bought out by Firtash, who then corrupted the software.
But when asked about this claim, IP Systems Zrt. General Manager Fuzi Akos denied it.
“Please be informed that IP Systems Zrt. is 100 percent owned by myself and employees of the company in the frame of Employee Stock Ownership Plan,” he wrote. “We have never had and don’t have any cooperation with Dmytro Firtash or companies associated with him.”
Akos added that UkrTransGaz accepted the software after testing in 2017.
“The delivered commercial dispatching platform for UkrTransGaz is fully functional and is used in Croatia and Hungary in everyday business operations for daily balancing and storage services,” he said. “The software complex is able to support daily balancing operations in its current form.”
RGK was the first company in Ukraine to switch to daily balancing, announcing the modernization drive at the end of May 2018.
Firtash’s team have seized on the opportunity, positioning themselves as trying to modernize the country’s gas market despite the best efforts of recalcitrant and backwards state operators.
Associates of Ukraine’s President Petro Poroshenko have joined in on the effort, attacking UkrTransGaz for failing to implement the policy.
The National Energy Regulatory Commission, which formulated the daily balancing policy in November, said it was preparing to audit UkrTransGaz over the conflict.
“Over the past few months quite odd things have occurred, UkrTransGaz has blocked access to the system of all service orders and actually blocked work on the implementation of the system,” said NERC Chief Oksana Krivenko.
Kobal, the gas industry analyst, pointed out that the European Commission had approved the code in January.
“And only now has NAK Naftogaz presented its complaints,” he said. “100 percent of companies support the implementation of daily balancing, but nobody wants to have problems with UkrTransGaz. So they are trying not to say it publicly.”
If UkrTransGaz fails to be prepared to handle daily balancing by the Aug. 1 deadline, it will raise, at a minimum, serious questions over the Hr 100 million spent on software.
Or, as Krivenko joked, “The worst that could happen is that the accounting will be done in (Microsoft’s spreadsheet program) Excel.”