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    European security depends on Russian gas transit via Ukraine, Naftogaz CEO tells NGW


Yuriy Vitrenko argues that Russian gas transit via Ukraine is important for other reasons besides the $2bn/year of revenues it generates.

by: William Powell

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European security depends on Russian gas transit via Ukraine, Naftogaz CEO tells NGW

Naftogaz CEO Yuriy Vitrenko is still pressing Washington to impose sanctions on Russia, he told NGW in an interview August 20. The Ukrainian state gas company head had visited the US as recently as July and was due to leave for Washington early September as part of the  Ukrainian presidential visit, led by Volodymyr Zelensky.

But some rescheduling might be necessary as government staff and politicians on 'the Hill' will also be caught up in urgent matters arising from the regime change in Afghanistan.

Vitrenko has been to the US capital several times since his controversial appointment as CEO in the spring (see below). He is adamant that Nord Stream 2 has to be halted. It might be too late to stop its construction – the first strand of the 55bn m³/yr line was due to be completed in August, coinciding with the 30th anniversary of Ukraine’s independence from Moscow – but it can be prevented from entering commercial operations, Vitrenko said.

The US government officials he met had been looking for a compromise with Germany and were largely supportive of the deal struck. It resulted in little more than promises that Berlin would take retaliatory action against Russia if its army violated any norms – as Germany would anyway as a Nato member. But Vitrenko said the US politicians he had met, Republicans and Democrats alike, were “more open” to the idea of sanctions, which he had discussed with both groupings.

Ukraine has several staunch allies in Europe: Poland is taking legal recourse to prevent the operational certification of Nord Stream 2 on the grounds that it violates the Third Energy Package, so that it cannot flow gas commercially. Since Nord Stream 1, the rules governing offshore pipelines have changed so they are treated as onshore pipelines, which Gazprom saw as discriminatory. Work on the pipeline had been suspended by the Danish government while the EU regulations were being amended, adding to the suspicion of EU bias against it.

Vitrenko said Naftogaz’ “Polish colleagues, the Baltic states and Slovakia have felt the malign influence of Russia and seen it use gas as political weapon, such as by creating artificial gas crises. Gazprom will face huge opposition to certification under the Third Package. We have heard rumours of some gas flowing lately and the pipeline operator can introduce gas for linepack [raising the pressure to make the line ready to begin steady deliveries]. Some gas can also flow out of the line [during testing] and we have heard that Gazprom has found a way around the sanctions and technical certification has been arranged with a local partner. But operational certification is needed as well.”

Nord Stream 2 AG has declined to explain to NGW how it would certify the line, following DNV's withdrawal last year from the project.

When asked why Ukraine was insistent on Russian gas flowing through Ukraine, rather than urging western companies to hit Gazprom in the pocket by buying less Russian gas, Vitrenko said that peace in Europe was linked to Russia using Ukrainian transit.

Poland will stop buying Russian gas from 2022, the CEO of state energy company PGNiG Jerzy Kwiecinski told NGW last year, as it said the money funded military operations in Ukraine, but Vitrenko sees the gas transit as a guarantor of peace for the EU. He said: “If Russia attacks Ukraine it will have to interrupt gas transit as well and EU countries will suffer. Russia will have to think twice: it is an important security dimension: it is definitely not just about the $2bn in transit fees.”

Vitrenko also points out that Gazprom is abusing its geographic position by preventing central Asian republics from accessing the Ukrainian pipeline system. There is more gas that could flow through Ukraine if Russia was not anti-competitive, he said.

But Gazprom knows that Europe needs its gas as the bloc’s own gas production shrinks for political (Netherlands) or physical reasons (UK, Norway). It is also developing alternative export streams in Asia and through the Black Sea, where the US and the EU have been less hostile to its Turk Stream 2 pipeline that will be even bigger then Nord Stream 2. However NGW understands that the last recorded Ukrainian objection to Turk Stream 2 was under the last president, Petro Poroshenko, which was more than two years ago. And that was in a meeting not with the Trump Administration but with the Turkish premier, Recep Erdogan.


New transit options

Naftogaz wants a level playing field for transiting gas. “In our ideal case, European companies can book capacity with Gas Transmission System Operator Ukraine, taking title at Sudzha for instance on the Ukraine-Russia border. If Nord Stream 2 is just for additional amounts of gas, as [German utility and Nord Stream 2 financier] Uniper says, then let it take the gas there and put its money where its mouth is," Vitrenko said.

"From a security point of view, Ukraine and the EU are in the same boat. We can use the money from transit to move towards the green economy. This is not just about security of supply, but about energy efficiency, using less gas, and about renewable energy such as hydrogen and ammonia and biogas, and about growing gas production.”


Upstream plans

Vitrenko does not believe that the company’s upstream arm Ukrgazvydobuvannya should do all the work on raising production on its own, but it should use technical contracts where the partner receives a bonus for production above an agreed base rate. But he said it is no coincidence that when the upstream was run by technical experts, gas production also rose.

When he rejoined as CEO the top three tiers of management had little to do with drilling, and he has moved petroleum engineers to the top and is starting to see results. “We hope to export gas in five to seven years,” he said, cautioning it is too early to be certain. “We will have to await the results of our pilot projects,” he said.


Reclaiming the middlemen

In a previous position at Naftogaz, Vitrenko was responsible for gas imports and he put an end to corrupt companies’ ability to trade on the domestic market. “The role of a national company is to decrease the opportunities of corrupt companies,” he said. Inside Ukraine, Dmitry Firtash still controls the majority of the gas supply and distribution companies, which buy gas cheaply from Naftogaz and sell it at a high price. “These companies are needed and they will remain there, even if he is not owner.

“But today we have started the process of reclaiming our ownership of them, working with the state bureau of investigation to establish the illegality of the privatisation of the distribution companies," Vitrenko said. "The most obvious example of corporate theft by the government was the demerger of Cherkassy Gas. It is now owned by Firtash. We have initiated proceedings to establish our claim to ownership. We have a very clear plan: to drive corruption out of the system.” The hope is that this test case will, if it goes Naftogaz’ way, allow other such companies to be brought back under the Naftogaz roof.

Vitrenko also said Naftogaz was working with the government on how to replace the company’s now-defunct public service obligations. PSOs have a slightly different meaning in Ukraine from western Europe and they are not allowed in the EU.

“There has to be social protection for the poor who cannot otherwise afford gas and heating, through the use of targeted subsidies. They will never be able to afford market prices. But there are some low-hanging fruit such as energy efficiency,” Vitrenko said. Ukraine has to abide by the European Union rules: ”We cannot choose the ones we want to apply, as if it were a menu.” 


Energy security

Ukraine exceeded the government’s gas storage target ten weeks early with 17bn m3, but it still wants to inject more as he says there is some risk of running out of gas this winter if the power-generation sector needs it.

“Ukraine is disconnecting itself from the Russian and Belarus power grids which will make us vulnerable as a gas supplier to spikes in the power market,” Vitrenko said. “We cannot buy power from them as the grids are no longer synchronous nor have we yet synchronised with the EU grids. We are a ‘power island.’ There is then a risk that generators will run out coal stocks and have to burn gas and so we have been working harder to inject gas. There is gas in store held by western companies, about 3.9bn m³, but we expect this to be sold in Ukraine. Our wholesale market functions well so traders should not see any difference in the price they receive, after allowing for transportation costs.”


Corporate governance

Corporate governance is a challenge for the government, he said. “In theory, it should have fired the supervisory board,” he said, as it had given Kobolev a glowing review, despite the amount of public money he had wasted. The company was largely loss-making and failed to achieve its targets upstream," Vitrenko said. The board resigned with a stinging letter to the government before it could be fired. Members were soon after rehired  on new contracts for a maximum of a year while a new team is recruited.

The supervisory board not only protested at Kobolev’s dismissal the day when it resigned but it also later took the line of the anti-corruption agency, which said Vitrenko’s appointment was in breach of the law on state companies – a view shared by other legal experts as well. One such, Alan Riley, said that Kiev had thrown away seven years' work rebuilding the country's reputation for good governance. The board suggested Vitrenko step aside until an investigation had finished.

One area where Vitrenko said Kobolev had failed was the Vision 2020 upstream plan for instance, whereby the country was supposed to be producing 20bn m³ by last year, while in reality production had hardly grown despite the money it has soaked up.

“The supervisory board failed to hold the CEO to account and it will have to be replaced given that its views were at such variance with the government’s. But it takes time to appoint new members. The aim is to have qualified professionals on the board and to take a typical OECD approach to tendering board appointments. But we are now in August and still the selection process has not started,” Vitrenko said.