Yurii Boiko: Ukraine has levers for talks with the EU and Russia

Prime Minister Mykola Azarov of Ukraine has instructed Energy and Coal Industry Minister Yurii Boiko to make sure Ukraine’s own oil is used with maximum efficiency so as to stabilize light oil market prices. “This is the most important task today and Energy and Coal Industry Minister Boiko is personally responsible for it,” said Azarov. The Day fully agrees with him, which is why we asked Minister Boiko for an interview.

The National Electricity Regulatory Commission has postponed a decision on higher gas prices for the population and Teplokomunenerho heating facilities. Is it because the issue hasn’t been coordinated with the unions? Do you think the unions will keep resisting? What would the outcome be for Naftohaz Ukrainy, considering the company’s heavy losses in 2010?

“This price increase in an objective necessity. Ukraine depends on imported gas supplies and this dependence has grown over the past several years. This is the main reason for the IMF’s criticism. They believe we aren’t developing domestic gas extraction because of the low import prices. Let me remind you that domestic gas is sold at 580 hryvnias per 1,000 m3. At the same time, Russia extracted 600 billion m3, not 20 billion like Ukraine, and sold it to their consumers in Belgorod oblast (right next to Ukraine) at 870 hryvnias per 1,000 m3.

“It is important to know that the additional money made due to higher gas prices for the population will be used to expand gas extraction in Ukraine. Some 1.2 billion hryvnias will be channeled into the implementation of state licenses on the Sea of Azov and the Black Sea. I mean the Subotynske, Shtormove, Odeske and all the other gas fields that we believe will yield more gas with such investments, so our consumers won’t have to pay more for imported gas.

“Naftohaz Ukrainy has bought a state-of-the-art drilling platform in Singapore. It will be delivered to the Subotynske gas deposit on the Black Sea this fall. I’m sure we will carry out the task the President assigned us and considerably lower energy imports in five years. I see prospects for a solution to this problem.

“While preparing for higher gas prices for the population, we worked out a clear cut and effective system of protection for citizens who cannot afford the new prices. An analysis of the situation showed that many people entitled to subsidies never applied for them because of the red tape, so the subsidy procedures were considerably simplified by introducing a ‘single window.’ I’m sure this system will protect this category of the population.”

How about an initial public offering for Naftohaz Ukrainy, considering that this would bring in more than five billion dollars? This subject has been broached by you and the president. Have the company’s creditors agreed? Will the law that prohibits any kind of foreign ownership of Naftohaz Ukrainy’s property be nullified? Will the company be restructured as required by the European Energy Charter (to which Ukraine is a party) and other EU instruments? Does this mean that the idea of an international consortium and Naftohaz-Gazprom merger, brought fourth during the Ukrainian-Russian talks has been finally discarded? Or maybe this joint-stocking and IPO are a simplified version of the same scenario?

“Getting Naftohaz Ukrainy onto the world stock market is a complicated matter that requires a carefully weighed approach. IPO is a means rather than an end, a stimulus response to the problems that have accumulated within this company and in the industry. Various restructuring options are being worked out and analyzed to improve Naftohaz’s performance. Among these options are joint ventures, signing cooperation agreements, exchange of assets, raising funds through the IPO, and so on. All pertinent findings involving leading international experts will be submitted to the Cabinet of Ministers of Ukraine.

“The IPO option requires time and detailing it now would be premature. Naturally, stock market sales imply more than one buyer. I hope there will be many investors willing to buy these stocks.”

You have gained certain medium-term guarantees from Moscow for stable gas transportation through Ukraine using its own gas transportation system. Of course, this won’t be enough if Russia starts building the South Stream (I seem to recall that these guarantees will expire by the time this bypass may start functioning). Don’t you think that Russia is simply bluffing, squeezing all possible concessions out of Ukraine during the talks, waiting for it to give up struggle, realizing that the Ukrainian option of gas transportation to Europe is considerably cheaper than the construction of the South Stream, even allowing for the Ukrainian GTS upgrading expenses?

“Our stand in this matter remains unchanged. The Ukrainian gas route is better for Russia economically, even historically if you will, than the construction of any alternative pipeline. The Ukrainian GTS is one the world’s largest and is capable of transporting up to 200 billion m3 a year, even with modest upgrading investments. So far, the annual amount has been 100 billion m3 of Russian gas (80 percent of all gas supplies to the EU). We would like to receive from our Russian partners clear-cut, long-term guarantees on Russian gas transit through Ukraine, with an eye to the construction of bypasses. Here the situation remains ambiguous and this makes it impossible for Ukraine to concentrate manpower and industrial potential, to allow our companies and partners to feel confident about the future and make plans. Also, we asked our European colleagues a straightforward question. What did they think was better for the European Union: the Nabucco Project or the South Stream, as our direct rival? In fact, the two are analogous projects as part of the same European market. We don’t understand why our European partners are supporting both projects, and I mean EU countries.”

Gazprom CEO Miller said in a lobby interview, during a recent roundtable in Moscow, that Russia will never discard the South Stream idea, not for any concessions by Ukraine, except if Ukraine joins the Customs Union with Russia, Belarus, and Kazakhstan. Do you think Ukraine will have to agree to this scenario?

“In terms of gas transit, Ukraine has levers for talks with the European Union and Russia. Many believe that only Russia isn’t playing fair with Ukraine. Wrong, considering that the South Stream is a joint Russian-European project, so we can’t sit back and watch what’s happening there, the way the previous Ukrainian administration did. They didn’t seem concerned about any bypasses and let them be actively implemented. Let me repeat that we do have levers for talks with the European Union and Russia, and we’re using them in full measure.”

Events in Japan and the reaction of many countries, particularly Germany, have presented Ukraine with new challenges, considering its Chornobyl experience. Is it possible that we will abandon the planned new nuclear power units. There is also the option of closing down old power units where the required upgrading hasn’t been completed. What would be your decision as minister?

“Progress in nuclear power engineering is inevitable, yet after the Chornobyl tragedy many have actively opposed this thesis. Most politicians realize today that there is no future without nuclear power engineering. This is very important for Ukraine because it is among the key operators on this market.

“Of course, there is the problem of safe operation of nuclear power units. There is a special international organization that assesses the term of such safe operation and issues authorizations. Each such document is valid for three years, even if a given power unit can work for 10-12 years. In other words, this authorization has to be renewed every three years.

“Work continues on renewable energy sources. We fully support the European Union’s alternative energy targets (2020) and are partners in several programs.”

The Ukrainian oil market has been having serious problems this year. You said prices would go down. Well, you know better, yet the events in the Middle East and Japan appear to be sending totally different signals. Do you still contend that gasoline prices will go down? How can this be accomplished?

“Oil market stability can be achieved only by providing equal conditions for all operators. The previous government gave preference to importers for several years. As a result, half the market turned out to be stocked with imported fuel. Here the prices are fully dependent on international markets. On the one hand, domestic refineries lowered their output, leaving over a billion dollars’ worth of added value abroad to support foreign suppliers of oil products.

“All insinuations that the oil market prices will be regulated by that market are wrong. Considering that prices have a direct effect on all spheres, all walks of life, the government will always keep the prices of oil products under rigid control and regulate them on a downward curve. Despite the ruckus in the press in response to the government’s decision to lower these prices, we will keep waging this policy because we have a vivid example: Turkey. They let the prices loose, relying on the market, and now they have to pay two euros per liter of RON 95.

“In view of the unstable world oil market situation, we put off the customs duty issue and proposed to ease the tax burden on oil traders. Also, to support the domestic refineries, we propose to abolish VAT on imported oil.

“The Ministry of Energy and Coal Industry, jointly with market operators, determined the price limits for RON 95, the most popular kind of gasoline, setting the ceiling at 9.75 hryvnias per liter. We believe that the measures we’ve taken, along with a price decrease trend on the world’s oil exchanges, will keep these prices within set limits on the domestic market, and that it will be eventually possible to start lowering them step by step.”

Does Ukraine plan to start privatizing power generating facilities this year? Are you sure that the best such facilities won’t end up in the hands of our private generating leader, DTEK?

“This year a pilot project will be carried out, with between five and six distribution and two generating companies being privatized. The process has begun. I expect that an auction for the first distribution companies and a generating one will be announced before the middle of this year.

“It is hard to forecast the outcome, but the ministry’s stand is as follows. The key question each bidder will be asked will be about the sum invested in modernization, so Ukraine can honor its commitments in the energy sphere, which it undertook when joining the international energy community.”

What are your plans for the Teplokomunenerho facilities, given the mind-boggling sums in gas bill arrears?

“Let’s start with the formal aspect of the problem. Article 13 of the Law of Ukraine ‘On Heat Supplies’ reads that the local government is responsible for these supplies. The Law of Ukraine ‘On the Main Principles of Functioning of the Natural Gas market’ (No. 2467-VI of 07.08.10) and Resolution No. 1729 of the Cabinet of Ministers of Ukraine (12.27.01) envisage that imported natural gas is sold in Ukraine on condition of payment in full by the consumer.

“In fact, Naftohaz Ukrainy keeps supplying gas to TKE for central heating and hot water despite more than eight billion hryvnias’ worth of debts. Otherwise Ukrainian apartment houses would look like part of the setting of The Day after Tomorrow. The ministry and Naftohaz Ukrainy have repeatedly forwarded to the Cabinet of Ministers and law enforcement agencies requests and proposals aimed at stabilizing the situation and enhancing financial discipline. Regrettably, all we have to date are growing debts, equaling Ukraine’s monthly payment for Russian gas.

“The government plans a series of measures to reform this sector of the Ukrainian utilities. First, it is necessary to lower the losses of gas and generated heat in the course of transportation, thus lowering the cost of each gigacalorie. And, of course, financial discipline must be restored and maintained, along with working out the acquittance algorithm and raising the level of gas and heat consumers’ payments to Naftohaz Ukrainy.”

I have to ask you about the closure of unprofitable, unpromising coal mines, and privatization of the latter. What will be the principles and conditions of this process? Won’t those in power forget about the miners, about social and environmental aspects? Will the privatized mines receive budget funds on a par with the government-run ones?

“The Ministry has been working on problems in the coal industry since March 2010, with the government’s and president’s support. Our main task is to solve concrete production problems, like re-equipment and reconstruction of the coal sector, increasing productivity, and social issues. At present, the coal miners’ salaries are below the legally established level and the mines can’t afford any social programs. All these problems have accumulated over decades and ought to be solved.

“What have we accomplished so far? We have stopped the productivity decline. Since last May productivity has shown an increase (plus 73,700 tons last year) and coal output was higher than in 2009. Over a billion hryvnias has been channeled into the industry as nongovernmental investments. This made it possible to start re-equipping coal mines. Arrangements have been made with banks for long-term loans. Investment projects have been worked out for every mining business (totaling 5.5 billion hryvnias). We have reinstated the national program ‘Coal Miner’s Health’ and raised the payroll by 20 percent. The miners are paid on time and in full. After carrying out technological and investment projects, this year we expect output to increase by a million tons.”

Do you believe in the success of two potentially promising Ukrainian projects, prospecting for and developing shale gas, and the construction of a LPG terminal? Will the Russians let us carry them out, considering that they are trying hard to discourage us, especially in what regards the shale gas?

“Ukraine is an independent state, so it doesn’t seem proper to discuss any other country trying to discourage us from enhancing our energy security. We are currently a highly competitive operator on the shale gas and coal-bed methane market. Judge yourself: Gazprom, TNK-BP, Chevron, Shell, and many other companies did more than say they were ready to take part in the development of Ukrainian gas fields. They’re making active arrangements. At the very minimum, Ukraine will learn how much nonconventional gas can be extracted. But we are aiming for the maximum. Ukraine will have a highly competitive gas extraction market on its territory. As you know, the stronger the competition, the larger the amount of dividends the national consumer receives in terms of higher extraction rates and lower energy prices.”