Ukrgazenergo on the ropes, but gas intermediaries in Ukraine aren’t yet TKO’d

(2/28/08) – Update on my attempts to talk with Ukrgazenergo appended at the end of the post…

Vladimir Klitchko getting a good punch in on Sultan Ibragimov, even as Ukraine's government continues to spar with Gazprom and intermediary companies on a new gas scheme - From Please excuse the metaphors, but they are in honor of Vladimir Klitchko’s recent boxing victory (for which he got hearty congratulations from Tymoshenko and Yushchenko while unifying three major heavyweight belts). Meanwhile, in the gas sphere…

For weeks the fate of natural gas trader Ukrgazenergo has looked pessimistic. Earlier this month, Ukrainian Prime Minister Yulia Tymoshenko’s government had called for investigations into the legality of the company’s founding while she vilified its management as “energy terrorists.” One Ukrgazenergo employee said that at this point the firm’s fate rested “with God.”

Ukrgazenergo is facing government pressure - From Tymoshenko is working at helping God decide Ukrgazenergo’s fate, instructing government-connected consumers to not buy gas from the trader and for the customs service to not clear imported gas meant for Ukrgazenergo. Tymoshenko expects to have Ukrgazenergo “removed from the market” by the beginning of April. April 1st is also the deadline imposed by Gazprom for reaching an agreement on the new supply scheme, and these two actions are complementary in Tymoshenko’s eyes.

However, at one point the draft agreement between Gazprom and Naftogaz on the new makeup of the bilateral (plus Central Asia) gas scheme kept Ukrgazenergo essentially in place. Gazprom would simply buy out the shares of RosUkrEnergo to bring its holding up to 50%, on par with Naftogaz and in line with the agreement reached between presidents Viktor Yushchenko and Vladimir Putin. Statements from Tymoshenko’s apparatus, however, conflict with this notion and instead assert that no such intermediary is needed within Ukraine’s internal market. They cite some of the same arguments that I outlined earlier against the expanded role of Ukrgazenergo’s successor, particularly in light of Gazprom’s increased holding in the joint venture. (Alla Yeremenko has a piece in last week’s Mirror Weekly giving a similar run-down.)

The problem is now reconciling the arguments of Tymoshenko with Yushchenko’s stubborn adherence to the status-quo (and its associated prices, which are a known quantity and set relatively low) along with Gazprom’s ambition for increased profits. Uncertainty over the future composition has led to questions surrounding debts and volumes of gas consumed and currently in storage–no one knows if those structures that owe money will survive long enough to pay it. Tymoshenko predictably blames the intermediaries while former Fuel and Energy Minister Yuri Boyko (who is deeply involved in these same intermediaries) says that such accusations are merely misdirection meant to disguise the illegal practices (i.e. siphoning off gas) of Naftogaz.

Following prodding from Tymoshenko, Ukraine’s General Prosecutor’s Office has launched investigations into Naftogaz’s activities and is beginning with charges of theft within one of the state energy company’s subsidiaries costing the government over $35 million. Tymoshenko has stressed that the investigations should concentrate on problems arising from leadership connected to the last government. However, the head of Ukrgazenergo’s management board, Igor Voronin (an associate of Boyko and himself likely one of those targeted by Tymoshenko) sent a letter of his own to the prosecutor’s office alleging criminal behavior by the current management of Naftogaz.

Gazprom’s recently-released financial report for the first nine months of 2007 lists RosUkrEnergo with $217 million in profits on $7.4 billion of revenues (up from $5.7 billion for the same period last year). The report also lists $2.7 billion in short-term accounts receivable for Gazprom from RUE, which would correspond to the roughly $2.4 billion figure mentioned before.

Based on Gazprom’s quarterly reports, RUE bought 54.25 bcm from Gazprom during 2007 (just below its 55 bcm contract) — 16 bcm of gas in the first quarter, 11.93 bcm in the second quarter, 10.95 bcm for the third quarter and 15.45 bcm in the fourth quarter. Sources within Naftogaz and Gazprom say that Ukraine bought less than 50 bcm from RUE, leaving over 5 bcm for re-export. Alla Yeremenko suggests RUE exported about 7 bcm last year, which would lead to profits of around $1.5 billion based on the import-export margin between Ukraine and Eastern Europe.

It’s hard to believe that RUE’s profits jumped over $1.2 billion in the final quarter of 2007, as suggested when comparing the latest profit figure with the expected numbers from re-export. Instead, a good chunk of that would likely go towards RUE’s short-term debts to Gazprom, presumably as payments for gas already received. This would correspond to Gazprom’s desire to keep RUE involved in the re-export side of the scheme, ensuring that the trader has an income source to repay its debts.

I was hoping to confirm some of these figures and activities with RosUkrEnergo but was not able to get into contact with their office. Within the last week or two, it has removed the contact information for its Ukraine and Turkmen representatives from its website. I had earlier saved the information (and a google cache has it too):

Representation in Ukraine:
Ukraine, Kiev 01004, Krasnoarmeyskaya Street 1-3/2, building 6а, 3rd floor
Phone: +380 44 4952222
Fax: +380 44 4593866
Nikolai Sorokin – Head of representation

Representation in Turkmenistan:
Turkmenistan, Ashgabat 744036, Business Centre of the Administration of the government body of the president of Turkmenistan Saparmurat Turkmenbashi Shayoly 124, office 102
Phone: +993 12 456970
Fax: +993 12 456965
Abdullaev Islam Adamovich – Head of representation

No one answered the Kyiv phone number so I instead went to the address, which happens to be in the swanky Arena City / Mandarin Plaza complex that is owned by RUE-big wig Dimitry Firtash. I was unable to locate an office for RosUkrEnergo, but was instead directed to the offices for UkrGazEnergo within the same structure. While I was not able to get past security, I may be able to set up a future meeting with a company representative.

Of course, given Tymoshenko’s intention to remove it from existence, I may need to hurry…

Update: I returned to the Ukrgazenergo office today with a letter summarizing my research goals, background, and some basic questions.  A security guard from the previous time was nice enough to deliver the letter for me, and upon returning from the 6th floor he told me to wait.  About 15 minutes later, a representative came down to talk with me briefly (as he was leading me out the door), essentially saying that now was “not a good time” but to come back later–that a meeting could be possible.  I told him that I’d heard about a few troubles facing the company, and promised to return later.  He was very civil (though didn’t give me a name or contact information) and seemed possibly interested in potentially being helpful (enough qualifiers there?).  We’ll see…

4 responses to “Ukrgazenergo on the ropes, but gas intermediaries in Ukraine aren’t yet TKO’d

  1. Given Tymoshenko’s modest progress, I’d say you still have a pretty big window of opportunity for your mission impossible!:)

    Just make sure you know where you’re going. After all, it’s probably the most publicity-averse energy company in the world:)

  2. I’ll keep you updated on how it goes. The security guys were actually pretty nice, in general — especially for having to deal with some weird foreign guy who showed up unannounced.

    There’s an Ukrgazenergo shareholders meeting scheduled for April 1st, so should be interesting to see what comes from that — assuming the company is still intact by then.

    Also, at least Ukrgazenergo has a website — can’t say that much about Gunvor, the oil trader alleged to have Kremlin links…

  3. Love at first sight:)?

    When RosUkrEnergo became Ukraine’s supplier in 2006, it was months before they launched their website.

  4. Did you show them your CIA badge?:)

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