Ukraine imports energy resources at world prices. We are at no one’s mercy

That Serhiy Yermilov, now serving his second term as Minister for Fuel and Energy (he had to resign earlier from this office because of differences with then Vice Premier Yuliya Tymoshenko), is about to be dismissed has been much talked about since the first day of his work in the Yanukovych cabinet. Meanwhile, the latest news in the energy field is that what seemed a totally insoluble problem of commissioning the Odesa-Brody oil pipeline has been solved and not without the minister’s participation. This immediately triggered a new attack. The Internet spread what turned out to be unconfirmed rumors about his dismissal. Commenting on their sources, the minister noted, “I have a lot of so- called friends who would consider the day of my resignation or dismissal as their second birthday. As the president has not yet formally dismissed me, they are reveling in their favorite pastime, spreading rumors.” In his interview with The Day, Serhiy YERMILOV speaks about the sore points and priorities of the Ukrainian energy sector.

ODESA-BRODY

“We have very little information about your latest visit to London. What was its purpose? What did you accomplish and fail to do?”

“The capital of Great Britain hosted a meeting between our delegation and all the major companies that could take part in the development of the Odesa-Brody oil pipeline. Among them were Caspian oil-producing and consuming companies as well as East European oil transporting firms which can also be involved in supplying Caspian oil. I can name the main participants. They are Chevron Texaco, Conoco Philips, and the transporting companies inseparably linked with Ukraine’s Transnafta, namely, the Slovak Transpetrol and the Czech Mero. All these companies were represented by top decision-making managers. Significantly, there was no dispute over whether it is worth being involved in this project. Absolutely all the companies support it, the only obstacle being the passive position of Slovakia’s Transpetrol. This is very easy to explain: 49% of its authorized capital belong to the Russian Yukos Company. We know what is behind this. So we are actively trying to eliminate this bottleneck in the soon-to-be-commissioned Eurasian Oil Transit Corridor. There will be consultations at various levels in the immediate future and, taking into account that the Slovak state, which will soon join united Europe soon, controls 51% of Transpetrol’s stock, the problem should be solved.”

“As to the sources of the oil to fill the pipeline, acquisition costs, and sales markets, all these problems are being practically solved. Naturally, the interested sides are negotiating the best possible arrangements, such as what firm can offer the most cost-effective cooperation, whether to buy oil or borrow it under a tied loan for a certain period...

All this will be done in the next two months. We have already received some offers. I personally would like the oil to be the property of an oil transporting company. Yet, we are so far talking about Ukrtransnafta, for anti-corrosion oil is an integral part of the whole project’s value and fixed assets. This makes it possible to set a rate based on the actual transport cost and assessing the pipeline’s effectiveness in real terms. The project’s depreciation rate will also include the depreciation cost of the anti-corrosion oil.

“In London, the delegations of Ukraine, Slovakia, and the Czech Republic signed on Ukraine’s initiative a memorandum on establishing a task force to draw up a feasibility report on transporting oil across Slovak territory. (The Czech company has already confirmed its readiness to transport the fuel.) The task force is also to study the economics at every stage and, should any necessity arise to make additional technical decisions, to assess investment requirements. I will note that the Druzhba oil pipeline’s free capacity at the segment from Brody to the Czech Republic via Slovakia is about nine million tons a year. Of great importance for oil owners and buyers is the single through rate at the segment from the Pivdenny oil terminal to the refinery at Kralupy. Mero, Transpetrol and Ukrtransnafta must assess this rate and sign an appropriate agreement. The memorandum provides for drafting this kind of agreement.

“The meeting also discussed ways to transport Caspian oil to Austrian and South German refineries, which presents no special problems either. As to Poland, one contract has already been signed and another is being negotiated. There have been lucrative offers about buying anti-corrosion oil and extending the pipeline from Brody to P л lock. Tellingly, several large banks, including the European Bank for Reconstruction and Development, want to cooperate with us in this extension. Yet, we are in no hurry. We are making a feasibility report together with the Polish side. Obviously, the latter is greatly interested in this, as are all the Caspian oil-producing firms in having this oil transported to the Baltic Sea and northern Germany, where it can be loaded onto 300,000-ton tankers.

“On the whole, the visit was very successful. We also met Chevron Texaco’s top management. The latter assured us they were fully prepared to begin implementing the project as soon as the above-mentioned bottlenecks are removed.”

TO SIC ON OIL

“When this country was debating whether to use the pipeline in the direct or reverse mode, you obviously came under massive information fire from part of the media and the political forces represented in the coalition government. How would you assess, from this perspective, the quality of our coalition and of the parliamentary majority-cabinet link often touted as achievement?”

“It is time that measures the effectiveness of a decision. Not so much time has elapsed since the coalition was formed. In my opinion, the coalition is gaining strength rather than breaking up. The parliament has voted on Constitutional changes and continues to pass laws, while the cabinet shows a quite stable performance. As to attacks on me personally, they have nothing at all to do with the coalition as a whole. They were caused by various underlying processes which are still present, if only to a lesser degree. Seizing on the Odesa-Brody debate as a pretext, some characters easily found a fine opportunity to cast aspersions on specific individuals. I know them by sight, I often talk to many of them, and their level of ‘competence’ is no secret to me. Their actions were doomed to failure because there was no mud at all to sling at me and thus force me to resign.”

CONCENTRATION OF ASSETS

“Another national joint-stock company, this time in the electricity sector, is being established. There is very little information about its purpose, just some versions.”

“The most true-to-life version is the president’s. His edict in fact establishes this company and explains why. The purpose is to preserve what is still government property. It is impossible to continue privatizing the remaining stock in a, so to speak, normal and civilized manner under today’s conditions. So I support this decision. All companies follow, sooner or later, the procedure of bankruptcy and readjustment. It is clear that even if the State Property Fund allowed these companies to be privatized, the process will be thwarted and our financial-industrial groups will just tear the energy sector apart, as they usually do, while he state will gain nothing. So the president made an absolutely correct decision. As to the very process of establishing a new national joint-stock company, our ministry decided to spearhead and bring it to fruition as soon as possible. The government will decide soon on the draft resolution, approve the company’s statute and the list of shares in its authorized capital, and to follow all the procedures set out in the presidential order and the law. This will in fact be a quite transparent holding company.”

“Will the company incorporate regional electricity supply or generating companies?”

“It will embrace all state-owned stock. A holding company is not it itself an entrepreneurial entity, it only manages the stock. This is why it will have to be given clear business guidelines. There are six types of licenses on the energy market. The company must obtain these to be able to earn money. This will be very transparent and understandable. Payment rates for this, as well as other, monopolists will be determined through a transparent procedure at public hearings and approved by a national commission. There is nothing of the shadow economy here: all we are trying to do is keep intact what the state still has (and we still have quite enough) and allow these facilities to work normally.”

“Can we say, to sum it up, that the company is being set up to prevent the pilferage of state energy assets because the price of property usually drops on the eve of the presidential elections?”

“In my view, this one of the main reasons. As to the ministry, I have always advocated noninterference in economic activity. The mass media occasionally accuse the Ministry for Fuel and Energy of hands-on management... Let me remind you that we discontinued administrative interference in energy market operations two years ago. Work is done on the basis of bids, while funds are distributed according to an algorithm approved by the board of directors. Moreover, the directors subordinated to our ministry no longer hold a majority in it. There were very many instances when the board of directors turned down the ministry’s proposals. This is normal. This money belongs to the market, so it is up to the latter how to distribute it. This practice must go on. I do not think that company President Dubyna will interfere in market processes. For the holding company will include both the power-generating companies, which will sell electricity on the wholesale market, and the regional power-supply companies ( oblenerho), which will buy it from the former. Still, if we concentrate the corporate rights, we will be able to pursue a coordinated managerial, financial, and economic policy in the interests of the state and each of the companies.”

“Does it mean that the establishment of an electricity national joint-stock company will suspend the privatization of oblenerhos?”

“It has already been suspended by a presidential order. This will be further confirmed by a cabinet resolution. This means that all the stock being handed over to the electric holding company must be in state ownership only. Privatization is not advisable at the current stage.”

THE FORMULA OF GAS

“Russian ambassador Viktor Chernomyrdin says he is convinced that the international gas transport consortium will begin functioning in March. Could you comment on this? In what format will it work? How do things stand now?”

“The consortium can start working today in the bilateral Ukraine-Russia format only, with Naftohaz and Gazprom participating. This stage is important in that a 300-km segment is scheduled to be built. Perhaps a decision will be made by that time to draw up a feasibility report on extending the pipeline as far as Novoplotsk. This makes sense.”

“In other words, a new pipeline is being built, and the consortium will saddle it. But will it have anything to do with the old Ukrainian pipeline?”

“No decisions of this kind have been made as of today.”

“But are there any possibilities? Precisely in this direction?”

“There are always possibilities. The question is different: what approach should we take? I am the head of a task force in charge of the gas transport consortium. We have been studying all models and semi- models for a year or so and after everything rejected them all. We left only one of the three possible models: a concession to use the transport system. A group of expert lawyers is now drawing up changes to Ukrainian laws and standards, so that, first, the concession can be effected, and, secondly, this should be attractive to the concessionaires. So far, there are no final proposals acceptable for the cabinet and later for Verkhovna Rada. We have very complicated laws and an airtight gas transport system. So concession is theoretically possible, but we must first revise the laws.”

THE ATOM

“What do you think is the situation in the nuclear energy sector?”

“Enerhoatom has finally ridden out the financial crisis. There are problems with accounts payable, never-ending lawsuits, etc. Yet, as this company receives practically 100% funding of all its expenses, it knows how to hold its cards close to the vest. What we need is a law on debt clearance. This will finally solve this problem. The ministry can now be less absorbed in daily routine because the company is finishing the construction of two power units on its own, has been fulfilling the nuclear power plant safety program for almost two years, maintains good relations with all its contractors — as far as fuel supply, waste disposal, spare parts delivery, etc., is concerned — and has solved all its social problems.”

“But is it fair that, on the one hand, the company has to set up a nuclear power generation cycle at its own expense and, on the other hand, it has seen electricity market sales tariffs reduced?”

“The current 100% secured tariffs make up the expenditures for the nuclear fuel cycle. They are rather small: UAH 120 million a year against the company’s turnover of 6.5 billion. Still, to exclude the subjective factor, we have drawn up changes to the law On Electric Power, and the company will be exempt from bearing these costs. The nuclear fuel cycle will be funded via the wholesale market of electric power, as are many other governmental programs.”

SAFETY PRECAUTIONS

“Could you briefly define the basic principle of the state’s energy security? Maybe, the gas situation in Belarus prompts you to make some conclusions?”

“There are different views about energy security, energy strategy, etc. Different countries have different possibilities in this field. For example, Russia has surplus oil, gas, nuclear fuel, and coal — all kinds of energy resources. Conversely, Japan, which has nothing at all, shut down its last coal mine fifteen years ago and imports gas in liquid form, does not consider this a tragedy. Moreover, I would say that Russia’s energy security has taken a downward trend today because the problems of price formation have not been solved in a civilized way, large-scale cross-subsidizing still continues, i.e., some industries are being kept afloat at the expense of the others, and there are no basic principles of the relationship between producers and consumers. Ukraine has substantially boosted its energy security by way of establishing a civilized relationship between the fuel-energy complex and the consumers. In other words, if the consumer of any energy resource shows a serious approach to this matter, pays on time, and thus allows the supplier to replenish this resource and make up for expenses, it makes no difference for this consumer whether this gas was produced in Ukraine or in Russia’s Tiumen. It is the supplier’s task to find and deliver the fuel and offset his expenses. This is, in my opinion, the basic principle: mutual responsibility of the consumers of energy resources and those who produce and supply them today. This is not the case in Belarus. The latter has not chosen to buy energy resources at world prices as Ukraine has. We are no longer at anybody’s mercy, we are not begging anybody for anything either. What we are doing is fulfilling foreign economic contracts. I remember the times when we bought gas for $82 per one thousand cubic meters. Today, we have entered the Turkmenistan market and begun to work with Uzbekistan and Kazakhstan. We do not buy gas from Russia, we just receive some as payment for transit services. The price for this gas is firmly linked to the transit rate, i.e., the higher the gas price, the higher the rate. We are protected here. We buy oil at world prices, too. If the Odesa-Brody project comes to fruition, we will have another source to import oil from.”

“In this connection, one more question is about establishing the Single Economic Space (SES). One of the arguments in favor of it says that energy resource prices are close to those inside Russia. What would happen if this project materialized? Would Ukraine benefit from this?”

“I think it is the hope of dilettantes that if we form a union, we will be given gas at $30. This is wrong. When we speak of cooperation of the four states in the energy sector, this means a common fuel and energy balance. If Ukraine runs short of gas and oil, it has the right to buy a certain surplus quantity from the SES partners. But this does affect prices. Fair competition within the SES is impossible unless the same prices are set on the domestic and foreign markets. This is why when the United Energy Systems of Russia says it wants to cooperate with us, we say: you will be selling your product to Ukraine on equal conditions with our oblenerhos only if our electricity-generating firms buy gas at the same prices at which you buy it. This is what I call equal conditions in a free trade area.”