Naftohaz counts its loss

The company Ukrainian Energy Exchange, based on data from Ukrenerho, estimated that if the Ukrainian energy field continues to be deprived of investments, then around 2013-14 it may reach a critical point after which a real danger of systemic accidents with unpredicted consequences is possible. The situation in the National JSC Naftohaz also remains unclear. Recently the website of the State Commission for Securities and Stock Market published the company’s quarterly report. It states that the company suffered from net losses of 21.4 billion hryvnias in 2010, while in 2009 its net profit was above 1.25 billion. And this is one of the bestearning public companies.

These and other energy-related risks were the topic of a round table conversation organized by the Bleyzer Foundation with the participation of the company Human Dynamics. The foundation’s executive director Oleh Ustenko reminded participants that during the last decade the government has said that power consumption in Ukraine has been declining. However, as the expert explained, Ukraine is simply followng global trends, albeit remaining “behind the whole planet anyway.” Energy consumption per GDP unit in Ukraine, according to Ustenko, is twice the world average, eight times more than in the US, and 15-20 percent more than on average in CIS countries [in fact Ukraine’s energy intensity, a widely used measure of energy spent on creating a given amount of wealth, is close to three times higher than in the US, and comparable to other CIS countries – Ed.], while electricity production per capita remains low. This imbalance should be solved both for the country’s energy security and its sustainable economic growth.

Ustenko stresses that in Ukraine the structure of energy resource usage almost doesn’t change. According to him, if one compares the usage structure in 2009 and the probable structure for 2014, there will be no difference between them. For example, the share of natural gas, according to the government’s estimates, should be decreased from 35 percent to 29 percent. But the share of the traditionally dominant coal sector, will increase by only one percent — to 24 percent. Alternative energy resources will remain marginal. “The goals and tasks the state sets,” Ustenko concludes, “are so unambitious that they will not lead the country to a new spire of development.” He opines that in 2010 investments in the energy sector increased by three percent and constituted 9.8 billion hryvnias, or 0.9 percent of the country’s GDP. “This is little, but not too bad,” the expert evaluates and continues, “but it would be good to look at the distribution, how this money was used.” And then a strange conclusion appears: “Investments in the energy sector in 2010 were decreased by 19 percent, to 4.9 billion hryvnias. On the other hand, investments in the National JSC Naftohaz of Ukraine increased by 35 percent.” The expert supposes that the funds are actually used to support Naftohaz, not all energy spheres of Ukraine.

Director of economic programs at the Razumkov Center Vasyl Yurchyshyn supposes that Ukraine’s readiness to reform the energy sector is close to zero. He bases this on data showing that 40 percent of direct foreign investments coming to Ukraine go to services, while the state debt grows much faster than such investments. “If I were an investor,” the expert meditates, “I would also think thrice before investing money in the real sector of such a country.” “All the government does in the energy sphere,” Yurchyshyn points out, “is manipulate tariffs.” At this, the expert thinks, it avoids the dialog with the population, which, surprisingly, pays well for energy sources (96 percent). And while there is no dialog, the politicizing of decisions takes place, and reforms remain on the level of superficial transformations.

“The problems with the energy security in the country are mainly caused by the state’s unreadiness to quickly adapt the economy to market prices,” supposes Ildar Gazizullin from the International Center for Policy Studies. That is why, in his opinion, Ukraine has very low energy efficiency and is dependent on imports. Regarding the coal sector, Ukraine’s great hope, Gazizullin singles out that “this sector is even less transparent than those of oil and gas,” in addition, he says, coal is not the cheapest resource, if competing energy sources are considered an alternative.

Where shall we go then? All participants of the discussion agreed that the work of the Ukrainian energy sector can be improved only if real market transformations are realized, namely privatization. At this, this issue seems to reconcile the opinions of previously irreconcilable opponents. For example, director of NOMOS Mykhailo Honchar, commenting at The Day’s request on the proposal of the co-owner of RosUkrEnerho, businessman Dmytro Firtash (whom he repeatedly criticized), to sell 20 percent of shares of the National JSC Naftohaz Ukrainy, said: “This proposal can’t be called either good or bad. Everything depends on what its final goal is. The point is that the present-day Naftohaz, as a rather non-transparent structure, cannot be an attractive object for the stock market. The exception would be a situation where someone harbors plans regarding the possibility of legally entering a company entirely owned by the state. But legal privatization by means of an IPO, as was recently suggested by Naftohaz’s leadership, requires considerable preparatory work, what has been spoken about for many years already. In its current state the functioning scheme of the National JSC is a way to nowhere.”

Heat electricity generation is another black hole in the Ukrainian energy sphere. Among other things, it was discussed at the recent 2nd annual conference of the Adam Smith Institute “Ukrainian Energy Forum.” Ukraine needs 10 billion dollars just to normalize the emissions of Ukrainian power stations. Overall, the reforming and modernization of the Ukrainian electric energy sphere, according to the estimates of the investors that attended this conference, requires some 80-100 billion dollars. As participants of the conference opine, as a result of using such investments for the modernization and construction of new objects, and also for structural changes, Ukraine will be able to enter the market of energy exports and become a real (not just a formal) member of the European energy community.

The Deputy Energy Minister of Ukraine Mykyta Konstantinov deals with issues of reforming the energy market. According to him, the Ministry of Energy and Coal Industry hopes to ensure the carrying out of reforms by means of financial resources from the EU, notably a special-purpose program for reforming the energy sector. Will this money be given for programs which even Ukrainian experts call unambitious? This question will partly be answered in two months in London, where the 7th annual conference of the Adam Smith Institute “Ukrainian Investment Climate” will take place.