Naftogaz chief: We don’t want to be a monopoly

Naftogaz CEO Andriy Kobolev [European Commission]

What is often missed when Naftogaz gets called a monopoly is that the firm was intended to be one by previous Ukrainian governments. Current reforms will make it compatible with EU law, the company’s CEO Andriy Kobolev told EURACTIV in an exclusive interview.

Andriy Kobolev has over eight years of experience in the oil and gas sector in Ukraine. Prior to his appointment as CEO of Naftogaz , he was an adviser at the AYA Capital private investment and banking group. Before that, he worked for Naftogaz between 2002 and 2010.

He spoke to EURACTIV’s Senior Editor Georgi Gotev.

Last Friday (10 April) you visited NATO, and said that Russia was waging a “hybrid war in energy” against Ukraine. What do you mean, and why did you visit NATO in the first place?

NATO is a very efficient platform in terms of explaining trends. We explained to them what is going on. We use this platform to explain our position, what we are doing, why we are doing it and what our final goal is. Regarding “hybrid war”, if you look at energy in Eastern Europe, you will easily notice that it’s no longer business, but mostly politics with an element of political influence. That is why it is important for people in Europe to understand why transparent and efficient market practice is important, to render such hybrid wars impossible.

Your visit also coincides with the adoption, one day before, of new legislation in Ukraine bringing your country’s gas market into line with the EU’s Third Energy Package, which aims to boost competition in the energy sector. Is it a coincidence?

It’s not a coincidence that we have developed this legislation, with significant input and help from, for example, the Energy Community, from the European Commission. This now will also need EU assistance, in terms of developing sub-legislation, as this law is only a starting point.

In our approach to reform, we tackle unique elements, but we believe that there is no need to reinvent the wheel. If there are mechanisms and efficient tools in other markets, we should look at them and try to implement them in Ukraine. That’s our approach.

It was reported that this legislation targets oligarchs. Is this true? The name of Rinat Akhmetov was mentioned.

This law it not designed to fight against any specific oligarch, or oligarchs themselves. This law is designed to remove monopolies, and to make the market more transparent, more efficient and therefore to bring a market-based price approach. This may make unhappy certain people who have interests in preserving monopolies in certain areas. But on the other hand, our general approach to reform is not directed against specific people, or groups of people. We are bringing market prices, and we believe that fair competition will make things proper.

But Naftogaz is also a monopoly. Are you prepared to engage in real reform?

We ourselves propose that Naftogaz should be dismantled as a monopoly. What is often missed when people say Naftogaz is a monopoly is that this company is a monopoly not because it wants to be one, but because we are obliged to be a monopoly. It’s very easy to explain. In 2013, the market price of gas was somewhere between $400 to $270 for one thousand cubic metres (tcm). But the maximum tariff at which households were purchasing gas was limited, and the weighted average price was somewhere around $30 to $40 per tcm. So it’s a ten time difference. The question is what company would be buying for 400 and selling for 40? The answer is simple: Naftogaz. This is a company that bears the responsibility for being a supplier to consumers that are not paying the market price. The reason is that previous governments were trying to pretend that they are protecting customers by guaranteeing low gas prices. This is of course an unsustainable model. In Europe, they do things differently: subsidies are given only to those who have no income, who are considered socially disadvantaged.

The centrepiece of our reform is that we want the system to be efficient and fair, so that only those who need it will get the subsidy, through money, not through gas. And this is where Naftogaz will play a crucial role, because we will be the source of funding of this subsidy, and charge the market price for those who can afford.

Another task for Naftogaz in this transition period is to make sure that gas prices are more or less market-based. The process starred in 2014, when we opened reverse gas flows from Europe and created actual competition for Gazprom. Many people ask us why Gazprom gave us a [$100 per tcm] discount. In reality, this is not a discount. It’s an adjustment to make Russian gas price competitive compared to gas we buy from the EU. And when people say reversed gas is Russian gas, it’s not. It’s gas that comes from the European gas market, and it’s a mixture of many types of sources. But it’s less expensive than the gas we can buy from Russia. But that’s the only and major reason why Gazprom adjusted their price.

I don’t understand why Naftogaz should continue to provide support for the disadvantaged. Normally, social services should provide this kind of assistance. If Naftogaz behaves like a social service, I doubt that this would be consistent with EU policies.

Exactly. We share the same opinion, and that is our position. However it happened, so that historically, Naftogaz was the vehicle used by the government to extend social protection policy to all people in Ukraine. We believe this is not feasible economically. One of the elements of the reform is that this will be changed. And even if the government decides that Naftogaz should sell gas to certain consumers under special conditions, then the supplier should be compensated by the government for the difference.

Regarding the trilateral talks for Russian gas supply to Ukraine for the next 10 months or so, can you clarify the Ukrainian objective? According to some statements, Ukraine plans to stop importing Russian gas.

The key idea of these negotiations is to achieve an agreement in a trilateral format of the kind that has been successfully used over the past winter. This format should prevent future gas crises.

Now when we have diversified, when the dependence on Russian gas has decreased significantly, it is still important for us, for the EU, and we hope for our Russian counterparts, that there are predictable relations in gas matters. That means predicable pricing, that means uninterrupted transit, that means compliance with the Third Energy package. And these negotiations are required to make sure that all three preconditions are met.

We highly value the participation of the EU, of the European Commission especially, in these negotiations. This gives the negotiations transparency and helps find an outcome.

Ukraine now needs to pay in advance for the gas it will receive from Russia, to the tune of $1.5 billion. Is that a problem?

$1.5 billion is the amount we are looking for at trade financing. Because we are buying gas in the summer, at the lower price, and we need liquidity to put the gas in underground storage, and then re-sell this gas in winter with a premium. It’s purely a commercial exercise. Pre-payment is not the best thing we would like to see. But Gazprom insists, and this brings discipline to our relations. This could be a good thing at the end of the day.

One of the objectives of Ukraine’s alignment with the EU’s Third Energy Package is to attract investors. Russia would also like to see European investors for its Turkish Stream gas pipeline project, which is aimed at bypassing Ukraine. Who do you think will be more successful?

Companies will come to the places where they will see financial feasibility. If you look at the Turkish Stream idea, you will see that it is not financially viable, and that it doesn’t make sense to implement it.

However, in Russia, political drivers are more important than financial ones. If you look at what happened in 2013, you’ll read the international experts’ reports about Gazprom efforts to oppose reverse gas flows to Ukraine, which cost the company more than $6 billon. We didn’t do our own calculations, but that number looks very close to reality. And that illustrates how politics sometimes prevail over economics.

From an economic perspective, no Turkish Stream will be more feasible and more competitive than the European route. We believe that this project is another bluff that may have other targets, such as to prevent Europe from importing gas from the Caspian region. Honestly, I don’t think this is going to be competition.

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