Donbas Gas Market: Redistribution Ebbs and Rises

It looks like serious changes are again in store for the Donbas natural gas market. Among the outward indications are the eye-opening statements made by Naftohaz Ukrayiny (Oil & Gas of Ukraine) Board Chairman Ihor Bakai when visiting Moscow November 27. He said, in part, that Russian Gasprom sent a telegram to the Ukrainian Cabinet, advising it of a December 1 cutoff of gas supplies to the Industrial Union of Donbas, a company acting as the region's gas trader catering to the oblast's industrial enterprises.

Gasprom's decision, according to Mr. Bakai, is explained by Donbas firm's owing over $90 million (including previous years' debts) for gas.

He further stated that he had discussed the issue with Gasprom and Itera executives. Among other things, they considered the possibility of shifting supplies originally meant for the firm being cut off to another gas trader operating in Ukraine. Mr. Bakai asked Itera to name such a trader for the Donbas.

In other words, if allowed to have his way, Bakai's initiative would mean another major redistribution of the regional natural gas market, with far-reaching consequences. However, even at first glance this information betrays certain discrepancies. First, Gasprom has no contract with the Industrial Union. Considering its December figures, the corporation intends to receive 200 cubic meters of gas from four independent Ukrainian suppliers and from Itera International Energy.

Most likely, when talking about the firm's liabilities to Gasprom, Mr. Bakai meant precisely what the Industrial Union owed Itera. Indeed, the latter was expressly displeased by the situation that had developed. Its management informed First Deputy Premier Anatoly Holubchenko on November 17 that the organization would receive no more gas as of December 1.

Industrial Union's press service told The Day that after a week of talks Itera said that there would be no gas cutoff, and that the company would receive December's supply quota in full.

Flying to Moscow, Mr. Bakai may have known nothing about this decision. Or perhaps he did, in which case his intention to get a new gas trader for Donetsk oblast means a great deal more than a simple desire for stable payments.

In Ukraine, a gas trader does more than buy and sell gas. In a way, it is a data-processing center regulating the movement of products on one commodity market or another. Since the time of the Unified Energy Systems of Ukraine, gas traders have controlled not only gas but other commodities' inflow, using the commodities to pay for gas. In other words, they could exert a decisive influence on the enterprises making these goods.

In fact, the relationships between the Industrial Union of the Donbas and the Center should be interpreted within this context. While controlling regional liquid markets, the corporation has in one way or another confronted varying encroachments from Kyiv. In the second half of 1997 these encroachments became so intense the corporation found itself in Premier Pustovoitenko's bad books.

Outwardly, the conflict was evident in the firm's former CEO Viktor Haiduk resigning as deputy chairman of the oblast state administration in late August 1997.

However, in the spring of 1998 the clouds dispersed, as though in keeping with the laws of nature. The corporation finally received confirmation of its gas supply contract and its relationship with the Center began to warm.

To a considerable extent this breakthrough was determined by IUD's having developed a number of rather interesting gas payment schemes allowing the use of barter to pay Ukrainian enterprises' arrears on gas supplies. In addition, the firm together with Mariupol Steel financed the construction of a gas pipeline linking the city to Donetsk, allowing it to supply Mariupol with gas from transit pipelines to Europe.

Meanwhile, its relationship with Kyiv was neither even nor uneventful, but the capital had to put up with the corporation's activities, considering that now and then it lent the Center a hand.

This balance of power was finally upset in early November. Mariupol's Azovstal head Bulianda was replaced by Valery Sakhno working hand in glove with Vitaly Haiduk and with connections among the regional bureaucratic elite. Industrial Union and affiliated structures were now becoming a major influential factor in the region.

Kyiv needed to be quick on the uptake and moved accordingly. It is hard to tell whether Mr. Bakai's words indicate a new period of coldness between the corporation and Kyiv or that it is just another tactical maneuver made by the Center to show the regions who is boss.

In any case, Ihor Bakai made his statement at the peak of construction of Ukraine's gas market's new 1999 segment, making one wonder about the Donetsk gas market and what lies in the offing for it next year. After all, it is just part of a whole gloomy picture.