January 1st passed and Naftogaz apparently was not able to promulgate its 2006 IFRS report, a key provision in its $500 million 2009 Eurobond issue. Failing to do so now pushes Naftogaz into a technical default, which may lead to creditors demanding repayments of over $2 billion in loans. This, in turn, would surely bankrupt the troubled national energy company, underscoring recent comments by newly-elected Prime Minister Yulia Tymoshenko on the financial fragility of Naftogaz.
Oleg Dubina, recently named head of Naftogaz, met with Tymoshenko after the 1st and outlined many of his concerns, indicating that the firm had lost about UAH 2.5 billion in 2006 and UAH 5 billion in 2007 (about $500 million and $1 billion, respectively). Alarmingly, Dubina also said that Ukraine’s gas storage facilities, which are typically injected with extra gas during the fall in order to provide consistent service during the peak heating season, are dramatically low on supplies. This assertion — that there exists now only 617 million cubic meters of gas in state storage facilities — seems hard to believe given the roughly 20 billion cubic meters allegedly in place by the end of the fall. It appears that the uncertainty instead stems from questions over just who controls the gas that’s there, a possible repercussion of the confusing and unexpected gas storage / repayment issue that flared up between Gazprom, Naftogaz and RosUkrEnergo back in October. Also at issue, the storage sites have allegedly been leased out on 25-year terms at below “market” values, though this development originally surfaced during the previous round of gas re-negotiations (in late 2006).
Ukraine’s substantial storage capabilities are one of its overlooked assets, compared to the facilities’ more visible cousin, the high-pressure gas pipelines running from Russia to Europe across Ukrainian territory. However, if a deal more in line with European prices could be re-negotiated with the companies currently using the facilities (primarily Gazprom and its associates), this would create a well-needed additional revenue stream.
While Tymoshenko has suggested granting tax breaks to Naftogaz as it attempts to weather these financial difficulties (despite an actual tax burden increase for the firm, according to the new budget), the company will continue to face problems as it is forced to supply much of its gas to customers at small or negative margins. Tymoshenko has called for the creation of a commission to investigate the circumstances behind the large debts facing the company. Set to convene on the 9th and report its findings at the end of the month, the commission has its work cut out for it.
If the commission can discover any smoking guns associated with the leeching of profits from Naftogaz — besides general mismanagement and a near-impossible economic situation — then the firm may have a better chance at eventually reaching financial viability. The specter of bankruptcy for the company tasked with keeping Ukraine’s population warm this winter and power its industrial sector is rather unsettling.
However, despite the failure to publish its 2006 report, Naftogaz’s creditors have apparently not yet called in their debts. While partly this may be a result of struggles in communication between the western lending firms and a Naftogaz that, along with the rest of the country, is essentially shut down for the New Years and Orthodox Christmas holiday season, it may also stem from a meeting two major creditors had with Ukraine’s new government a couple weeks ago. They came away from talks with Tymoshenko assured that the government would offer a sovereign guarantee on the debt repayment. Sure enough, a clause in the recently-passed 2008 government budget provides for up to $2.4 billion in state funds in order to keep Naftogaz afloat.
This assurance — along with other personal promises made during the meeting — appear to be enough to keep the Eurobond holders from initiating a run on Naftogaz for now. The 2006 IFRS report should be near completion — one of the last hurdles was apparently the passing of Naftogaz’s deficit-free operating budget for 2008, which recently came through. With any luck, the report will be published soon, which will further calm down the firm’s creditors.
Meanwhile, Dubina’s attempts to reach a direct deal with Uzbekistan on supplies of natural gas now face a significant obstacle, as the Central Asian country inked a deal with Gazprom selling much of its export gas production to Russia. While prices (and exact volumes) were not disclosed, the cost offered by Gazprom is said to be in the level of other nearby countries, including Turkmenistan and Kazakhstan, and likely amounts to between $150 and $170 per thousand cubic meters. Dubina had allegedly offered $180 for Uzbek gas (likely between 5 and 10 billion cubic meters), understanding that transit costs through Russia would bump the price to about $220 at the Ukrainian border. This is higher than the $179.50 charged by RosUkrEnergo, but Dubina planned to re-export some of the Uzbek gas to the rest of Europe to make up the difference.
Now, however, this plan appears to face difficulties, as very little gas (maybe around 3 bcm, maybe none) will be left over after Uzbekistan supplies Gazprom and its own domestic consumption. Dubina may attempt to keep pushing, however, and try to at least establish a toehold for Naftogaz to re-enter direct gas negotiations with Central Asia. This could be a step — along with a conclusive governmental investigation in Naftogaz and associated changes, increased tariff collections from Ukraine’s gas consumers, and gradually rising gas costs for the country’s residential customers (Note: I’m not even going to get into the problems facing the domestic production sector.) — to normalizing an often contentious and flawed natural gas industry.