Firtash and Privat resist Naftogaz’s encroachment on Ukrgazenergo as Gazprom prepares to enter Ukraine’s gas market

Protesters linked to Firtash and Privat rallied against Naftogaz’s attempts to replace Ukrgazenergo in Ukraine’s gas supply scheme.

Protesters connected to major factories in Ukraine that have been sparring with Naftogaz over gas deliveries rallied on Tuesday in front of the national energy company’s office. The picketers were protesting against reductions in gas supply to the industrial enterprises.

The gas cuts are a result of the factories’ unwillingness to sign new supply contracts after political pressure forced the gas trader Ukrgazenergo from Ukraine’s internal market.

Negotiations in Moscow between Naftogaz and Gazprom appear to have found a solution to placate the protesters, as the newly established Gazprom Sales Ukraine (GSU) will provide most of the factories in question with gas beginning in May.

Naftogaz dismissed the rally as a “political show,” and part of “unprecedented pressure from the side of interested business groups with the aim of complicating and delaying the negotiations currently underway in Moscow [between Naftogaz and Gazprom over a middle- to long-term gas supply agreement].”

Naftogaz’s statement further defined those “business groups” as Dimitry Firtash-controlled enterprises and the financial-industrial conglomerate Privat Group.

Firtash is a co-owner of Ukrgazenergo and the key Ukrainian figure in the country’s shady gas supply scheme. Ukraine’s Prime Minister Yulia Tymoshenko has long rallied against the role Firtash has played as a gas middleman between Central Asia, Russia, Ukraine and Europe. Her government has led a push to replace his presence with that of the state-owned Naftogaz.

Earlier this month, factories that are controlled by Firtash and that had been receiving gas from Ukrgazenergo–namely Rivneazot, Crimean Titan and Krimsky Soda–complained that Naftogaz was limiting their gas supplies. Naftogaz has asserted that Presidential and Cabinet of Ministers decrees have stripped Ukrgazenergo of its right to provide gas on Ukraine’s internal market. It has aggressively sought to transfer sales previously with Ukrgazenergo to its own gas marketing subsidiary, Gaz Ukrainy.

“Tymoshenko, give the criminals in Naftogaz a slap on the wrist!” The factories have refused to sign new contracts with Naftogaz once Ukrgazenergo was removed from the scheme.

These companies, however, refused to sign new contracts and instead have asserted that their agreements with Ukrgazenergo are still valid. They have warned that dropping gas pressure could lead to technical problems and even catastrophic accidents, particularly since many of the factories are chemical producers.

Naftogaz, via its spokesman Valentin Zemlyansky, asserted that gas supplies to these enterprises have remained above the technical minimum required to avert a disaster.

While it may be expected that Firtash would protest actions that limit the revenue to his companies, Privat’s inclusion in the dispute is slightly more surprising.

The Privat-controlled Galychna and Neftekhemik Prekarpatia oil refineries both suffered reduced gas supplies due to a failure to sign on with Naftogaz. Representatives of these companies were also allegedly present at the protests in front of Naftogaz’s offices, in addition to workers from Firtash-connected enterprises.

Privat and Naftogaz have a recent history of conflict within Ukraine’s energy sphere, as they are sparring over the fate of Ukrtatnafta and its Kremenchug oil refinery.

The two companies have also had a longer-running feud over Ukraine’s largest oil firm, Ukrnafta. Privat is a 42% shareholder, enough for a blocking stake despite Naftogaz’s 50% holding. The two sides have been unable to agree on the distribution of dividends, leading to a round of unsuccessful shareholders meetings and criticism from Tymoshenko.

Despite this history of conflict, Privat has generally been seen as an ally of Tymoshenko (though typically only when it serves the interests of the financial group). Privat has had its own problems with Ukrgazenergo, with the gas trader allegedly refusing to supply Privat-connected industries for a period of time last year.

Siding with Firtash in this latest dispute may be an attempt by Igor Kolomoisky, a key owner of Privat and the group’s most public face, to earn points with Firtash for future collaboration.

“Send the bandits in Naftogaz to jail!” Most protesters appeared to be from the Firtash-owned factory Rivneazot.

Kolomoisky suggested in a recent interview that he would be interested in buying out Firtash’s stake in RosUkrEnergo (RUE), a 50% owner of Ukrgazenergo and the key coordinator of Ukraine’s gas imports. Privat’s hold-out in signing contracts with Naftogaz may be an indication that it is expecting to do business in the future with Ukrgazenergo, despite the government’s intention to remove it completely.

Indeed, no word was given about the Privat-owned enterprises when Zemlyansky announced that negotiations on Tuesday in Moscow arranged to have GSU provide gas to the Firtash-connected companies.

While this arrangement may be a way for Firtash’s factories to avoid buying gas from Naftogaz, the situation hasn’t yet fully solidified. Neither Ostchem (Firtash’s holding company for chemical factories that includes the affected plants in Ukraine) nor Gazprom said they had any knowledge of the deal. A source in Gazprom told Kommersant that “the question of Dimitry Firtash was not raised during the negotiations.” Talk of Firtash is just “small change in negotiations between countries,” the source added.

Naftogaz’s spokesman asserted that the protestors had no legal justification and were instead looking only to make a scene.

The agreement (if it exists) may not even satisfy the protesters. “They haven’t given any concrete demands,” Zemlyansky told me. They are instead more interested in creating the image of dissent in an attempt to influence the continued restructuring of Ukraine’s gas sphere.

Those rallying in front of the office appeared to be actual factory workers (and essentially asserted as much, when I asked them) as opposed to the pensioners and students protesting the Dniproenergo conflict (which are typically hired for $10-20 day).

However, Wednesday’s steady rain and cool weather dispersed all but a few people sitting in tents pitched in front of the office. Zemlyansky said that he expects them to be completely cleared away by the end of the week at the latest.

A court case is currently in the works that aims to resolve any legal claims by the enterprises, as well as an anti-monopoly case lodged against Naftogaz’s increased presence within the gas market.

Meanwhile, the negotiations in Moscow have been pushed back to Wednesday as the two sides are struggling over additional (unknown) amendments to last month’s broad agreement and guarantees from Ukraine on the repayment of about $2 billion in debts for gas already delivered.

“Yulia, don’t let Rivne be destroyed!” Rain pushed out most of the protesters, though the tents still remain.

An early draft of the the amended agreement currently being negotiated allegedly included language that allowed Gazprom to unilaterally annul the new arrangement in the event of Ukraine’s failure to repay its obligations. The previous setup, featuring Ukrgazenergo, would then be put back into place.

I talked with Ukrgazenergo’s press secretary on Monday, but he didn’t want to comment on the situation yet, saying only that “things are still being figured out.” He did agree to talk after the “May holidays,” a two-week block of time between Orthodox Easter (April 27th) and (WWII) Victory Day (May 9th) when basically nothing gets done.

One development is likely during that time, however. If an agreement is reached in Moscow on Wednesday, the holidays’ centerpiece–International Day of Labor on May 1st–will see GSU enter Ukraine’s market officially.

Note: Zemlyansky confirmed that Ukrgazenergo’s April 1st shareholders’ meeting, which was held in Naftogaz’s office, didn’t reach a quorum due to the absence of RUE’s representatives. (RUE and Naftogaz are 50/50 shareholders in the gas trader.) He suggested that the spate of failures among energy company shareholders’ meetings (Ukrgazenergo, Dniproenergo, Kievenergo, Ukrnafta, Ukrtatnafta, etc.) is representative of today’s turbulent nature of Ukraine’s energy sphere. I would add that political turmoil is also playing a part.

Zemlyansky went on to call the situation surrounding Ukrtatnafta a “political issue,” saying that Naftogaz needed to wait for the politicians to sort out things before they could attend to the business side of things.

Waiting for politics to resolve itself, though, seems at times to be a never-ending endeavor here.

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