Naftogaz Open Letter: a Year Without Gas Imports From Russia

AN OPEN LETTER FROM NAFTOGAZ UKRAINY:

25 November 2016, Kyiv – Today is the first anniversary since Naftogaz stopped importing gas from Russia.

It is an important milestone for independent Ukraine, as just three years ago gas was a major symbol of Ukraine's political and economic dependence on its northern neighbor. This dependence, being maintained through manipulating volumes of supply and prices for Russian gas, forced Ukraine into political and economic concessions.

When Russia had started its military aggression and annexed the Crimea in spring 2014, the  gas dependence became extremely painful for Ukraine. Overcoming it was a major challenge for the company’s management in 2014-15.

In less than two years of work and with the help of our Western partners, international financial institutions, coordinated efforts of the president, the government and the parliament, we have managed to achieve an important result: the attempts of the Russian leadership to use gas for political pressure on Ukraine are not efficient any more.

The gas dependence on Russia is eliminated. Naftogaz and the rest of Ukrainian importers now have access to alternative gas sources and can choose among dozens of suppliers. Many parties joined their efforts to enable sufficient gas supplies from Europe to Ukraine. Meanwhile, Ukraine remains a major route for Russian gas to the EU and ensures secure transmission.

Without alternative gas supplies from Europe, we would have had to buy gas from Russia at non-market prices, with billions of dollars additionally paid to Gazprom for the gas which had not been used in previous years (the take-or-pay principle), as well as to pay for supplies to the occupied Donbas that are beyond our control. Breaking the gas supply monopoly  of Russia enables us to fight for Ukraine’s gas independence in arbitration now.

The efforts to eliminate the dependence on one gas supplier caused a number of other important systemic changes.

First, Ukraine has started an unprecedented wide-scale reform of its gas market. The country has been quickly integrating into the European energy space; and the biggest European gas suppliers either are already operating on the Ukrainian market or have declared their intentions to enter it. The share of private gas importers has increased from 1% in 2014 to 26% by the end of October 2016. The gas market has been liberalized for commercial customers. The share of private suppliers here reached 78% in 2015 and continues to grow in 2016. A number of laws and regulations have been adopted paving way to creating a civilized gas market in Ukraine, including the household segment.

Second,a revolutionary anti-corruption reform of corporate governance has been launched in Naftogaz, one of the biggest state-owned companies. The reform aims to prevent political meddling in the company's operations, eliminate corruption drivers and transform Naftogaz into an efficient and competitive company.

Third, during the short period, Naftogaz has been transformed from one of the most loss making companies in Eastern Europe into the biggest contributor to Ukraine's state  budget. In 2014, Naftogaz deficit equaled 6.2% of GDP, while in 2016, Naftogaz demonstrates profit and does not need any funding from the state budget. This year, Naftogaz plans to pay nearly UAH 60 billion of taxes, which equals to approximately 10% of the total budget revenue.

These results were achieved in part thanks to the replacement of destructive implicit subsidies with direct subsidies to low-income citizens. In addition, Naftogaz has significantly improved its operating efficiency through exclusion of intermediaries from procurement  and sales, as well as introduction of a new transparent procurement system, which has already saved more than UAH 1.5 billion. The company covers its obligations in time, demands payment discipline from its counter parties and actively defends its interests in courts. Naftogaz becomes a transparent and open partner. The largest international financial institutions, global commercial banks, leading European gas suppliers and gas-field equipment producers are now cooperating with us.

Finally, thanks to the implemented reforms, Naftogaz has an opportunity to invest more in its own gas production. In 2015, Ukrgazvydobuvannya increased its investment in gas production by 50% against 2013, from UAH 2.2 billion to UAH 3.4 billion. In the first 10 months of 2016, Ukrgazvydobuvannya spent UAH 2.5 billion on domestically produced equipment, which is almost equal to the 2015 total. This means that striving to become independent from a single gas supplier, Ukraine has also made good progress in several allied sectors.

We appreciate committed and fruitful cooperation of the European Commission, the Energy Community Secretariat, the governments of Slovakia, Poland and Hungary, the World Bank, the EBRD, President of Ukraine Petro Poroshenko, Ukrainian PMs Arseniy Yatseniuk and Volodymyr Groysman, Ukrainian MPs, customs officers, expert community and civil society – all who have managed to make the impossible possible in this tough time.

During the three years of fight on the energy front, Naftogaz has become self-sufficient and ceased to be a burden on the state budget; a free European gas market is being formed in Ukraine; customers get gas and heating in time with no need to make political concessions to Russia. Ukraine was able to increase its defense budget by several times and protect itself instead of having to finance wasteful gas cross-subsidies.

There is still much to be done in development of Ukraine's gas market, comprehensive integration into the EU energy market, Naftogaz reform, creation of a powerful independent TSO, which would comply with international rules, etc.

Nevertheless, Ukraine has proved that coordinated efforts of people aiming to achieve the result are sufficient to overcome any obstacles.

ENDS.