Gas: turning the corner

Official Kyiv has ignored the EU-Ukraine Energy Finance & Investment Summit 2011 in Vienna. As The Day has already reported, no representatives of the Ukrainian government came to answer the questions of potential investors about the existing energy projects and investment barriers. This attitude of the powers-that-be is surprising, to say the least, because investments in power generation is not just an important but a crucial question for today’s Ukraine. The launching of alternative fuel supply routes by Russia is diminishing the role of our country as the main transporter of gas and oil to Europe. For this reason, it is important now for Ukraine to draw support from the Europeans. This can be done by “tying them up” financially to the Ukrainian pipeline. Have the European financial organizations changed their plans of participating in modernizing the Ukrainian gas transportation system in the light of the latest events in the energy sphere? This is the subject of an exclusive interview André KÜÜSVEK, European Bank for Reconstruction and Development (EBRD) Country Director for Ukraine, granted to The Day during the summit.

You told The Day earlier that the bank was prepared to invest a billion dollars within five years in the modernization of Ukraine’s pipelines. Are these plans still valid?

“The bank said in Brussels in 2009 that it had originally been planning to invest 400-500 million euros. But the final figure will depend on the composition of the investment pool for modernizing Ukraine’s gas transportation system (GTS), the pace of reforms in the gas sector, the reforms in Naftohaz Ukrainy, and the new price of the Russian industrial and household gas. In other words, to assess the amount of future investments, we must be sure that Naftohaz will be able to show at least minimal profitability in the medium term.”

Still, you mentioned a billion dollars in The Day interview.

“A billion dollars is a joint investment plan of the EBRD, the World bank, and the European Investment Bank (EIB). Plans have changed since then because we have now a feasibility report from the company Mott MacDonald. I can say on its basis that the EBRD and the EIB are prepared to allot 300-310 million dollars to carry out the original pilot project to modernize the Urengoi-Pomary-Uzhhorod segment. Further funding is to be negotiated.”

Why have the declarations of readiness to invest in modernizing the pipeline not yet followed by concrete steps to actually launch the project?

“Because there is neither a concrete plan to restructure Naftohaz Ukrainy nor a gas market reform strategy. The government and the Ministry for Fuel and Energy promised to make these documents available.”

“ALL THE PROCESS SHOULD BE TRANSPARENT, OTHERWISE THERE IS NO USE CHANGING ANYTHING”

Do you think the two components are missing as a result of the lack of political will to make difficult decisions or for some objective reasons?

“Judging by what the Presidential Administration, the Cabinet of Ministers, and the Ministry for Energy and Coal Mining are saying, there is a political will to reform the energy sector today. There is a will, but restructuring is an enormous and complex project. And, before you begin to carry it out, you should have a clear idea of all that this implies. In my view, it is better not to hurry up with restructuring – let it be two years later, but it will be better to draw up and get approved all the necessary documents in a proper way. All the processes should be transparent, otherwise there is no use changing anything.”

When is the Urengoi-Pomary-Uzhhorod modernization project going to be launched?

“Concrete dates depend on the pace of reforms in the energy sector, but I hope this will occur in 2012. If we see the gas sector development strategy and the Naftohaz reorganization plan in December 2011, it will be possible to sign a project funding agreement within the first six months of the next year. Otherwise, the dates will be put off.”

Russia has launched Nord Stream. In this connection, do you think the Ukrainian pipeline is no longer attractive in terms of investments?

“Nord Stream’s rated capacity is transportation of 27 billion cubic meters a year. So Russia will really have an alternative access to the European market. But it is only 27 billion cubic meters, while Ukraine can transport 100-110 billion cubic meters of gas a year. Therefore, modernizing Ukraine’s gas transportation system is a very urgent question, and, in spite of the launching of Nord Stream, the Ukrainian pipeline still remains very attractive to invest in.”

What is your attitude to the widespread opinion that switching to the ruble as legal tender for Naftohaz Ukrainy payments is running the risk of the company increasing its debt burden and, as a result, going bankrupt and coming under Russia’s influence?

“I do not share this opinion. It is the Ukrainian state’s internal affair to choose the currency to pay Russia for gas. Naftohaz’s condition will not depend on whether it pays in hryvnias, dollars, euros, or rubles. As long as the country can buy [the chosen] currency without any obstacles, there will be no problems.”

Will the ruble-based crediting improve or, on the contrary, worsen the national company’s financial state?

“It seems to me this will have a negligible effect on the company’s financial state.”

Are you taking part in the ongoing negotiations on the establishing of a consortium to manage the Ukrainian GTS?

“No.”

Does this mean you are not interested in being a party to the consortium? Are you not afraid to be left out because experts believe that the Russia-Ukraine cut-rate gas wrangle will result in the establishment of a two-party consortium?

“It is today the prerogative of Naftohaz to manage the GTS. The EBRD is prepared to credit the Ukrainian pipeline’s modernization. We are potentially interested in being able to participate in managing the company. Should there be any changes in the shareholding structure of Naftohaz or Ukrtranshaz (the entity that manages the GTS), we will be speaking in concrete terms. I do not want so far to comment on the format of a still inexistent consortium because the talks on this matter have been dragging on for years without any apparent result.”

“THE EBRD IS PREPARED TO ALLOT ABOUT A BILLION EUROS IN 2012”

Could you say how much is going to be invested in Ukraine in 2012?

“We are prepared to allot about a billion euros. But the amount can be even higher. Everything depends on whether private sector loans will be in demand. I expect the share of energy sector projects to rise. Let me remind you that it accounts now for 15 percent of the bank’s overall loan portfolio and will reach about 25 percent by the end of this year.”

You have said before that there was a shortage of foreign investors in early 2011. Has the situation changed now?

“Unfortunately, there still is a shortage of foreign investors in Ukraine. Western businesspeople are not exactly rushing to invest in Ukraine.”

How would you assess the pace of reforms in the energy sector?

“We would like to see more fast-moving reforms. But practice shows that reforms of this kind are carried out gradually everywhere. I can note certain progress in the political dialogue. This year Ukraine has achieved more than in the past five years, as far as energy-sector reforms are concerned. So there are some achievements.

“Besides, we are still demanding that Ukrenerho be corporatized and become a joint-stock company that applies all the principles of corporate management. A decision has almost been made on this matter – it only needs to be expressed in legal terms. In other words, there is some real progress, but there is no final approval of this initiative at the Cabinet level.”