Category Archives: Ukraine

Firtash Arrested in Austria

Firtash - Group DF

Dmitro (Dmitry) Firtash was arrested in Vienna today on an FBI warrant for organized crime stemming from a 2006 investigation.

Readers of this blog (from five years ago, at least) are well aware of his role in Ukraine’s energy sphere.

He is most well-known perhaps for being the central Ukrainian behind RosUkrEnergo, a gas middleman from back in the day.  Before being outed as the Ukrainian businessman behind the venture, he was notoriously camera shy.  Since then, he has worked to burnish his image (though the creepy corporate shot above is a bit weird) and expand his Group DF assets.

Some reports link Firtash with infamous gangster Semion Mogilevich, though he has disputed this connection.  When Mogilevich was surprisingly arrested in Moscow in 2008, some thought that it might resonate down to Firtash and others.  However, Mogilevich was released on bail, despite being listed as one of the FBI’s top 10 most wanted, and Firtash continued to grow his business.

He and Tymoshenko have a long-standing feud. As she emerges more powerful in the latest round of Ukrainian leadership, it could be expected that he may suffer as a result, especially given Ukrainian politicians’ propensity for retribution. His arrest is also being viewed as a means of putting pressure on Russia, sending a message to oligarchs with ties to the country that they could be targeted as part of the Washington’s frustration with Putin’s moves in Crimea.

I haven’t written here in a long time (clearly), but upon seeing the big news, I decided to take a break from finals studying and post something.  Maybe I’ll follow up with more later.  Follow me on twitter if you want: @hansstege


Top 4 energy issues Ukraine’s new president will face in 2010

New year celebrations at Kyiv's central square, the Maidan

New year celebrations at Kyiv's central square, the Maidan - from

Happy New Year!  Celebrating 2010 and my return to blogging, I present the top four energy sphere issues that Ukraine’s new president — likely to be determined on a February 7th runoff election — will face in the coming year.

  • At #4, modernizations across the board. Ukraine’s coal mines are notoriously unsafe, its gas transportation system is in need of investment, and its refining sector is facing massive technological deficits.  Modernizations at an industrial level can improve energy efficiency and boost the competitive positioning factories facing difficult times.  How the government incentivizes locally-based investments and how it finds the money and partnerships for large-scale modernizations (particularly for the gas pipeline system) will be key.
  • At #3, inflation and gryvna depreciation. While not specifically energy-related, the potential for continued inflation and further depreciation of the gryvna have a range of implications to Ukraine’s energy sphere.  In particular, the majority of Ukraine’s energy sources are imported and bought with dollars while they are sold domestically on a gryvna basis.  For institutions like Naftogaz that are based on relatively strict gryvna-based budgets, any increase in the exchange rate makes payment for gas imports that much more difficult. ¶ For consumers, this is most evident with the price of gasoline, given Ukraine’s high reliance on crude imports.  Oil is bought with dollars, largely refined locally (where companies must pay gryvna wages) and the products are sold in gryvna terms.  As the exchange rate weakens, the nominal price of gasoline increases for consumers, a trend that can be particularly vexing if they notice global oil prices not rising in a similar fashion.
  • At #2, oil supply issues to refineries. Ukraine’s refining capacity is woefully underutilized and hampered by problems in securing adequate crude supply.  Kremenchug no longer receives Russian crude after Privat seized it in late 2007.  Neither of the two Privat-owned western refineries get Russian crude either, and both are operating at very low utilization rates due both to the supply issue as well as low complexity hampering the quality of product output.  Lisichansk gets fairly stable crude deliveries from TNK-BP, but is still only at about 40% of its potential capacity.  Odessa was near full utilization until a dispute with Ukrtransnafta forced a disruption and a new pipeline supply scheme in October 2009. ¶ If crude supplies stabilize, particularly for the key refineries, then an important industrial segment will have a stronger operating environment to push the recovery, and will be better prepared to make the investments in order to transition to higher fuel specification (see above).  Also, on a macroeconomic basis, the country’s current account balance should strengthen as oil product imports decline.  It would likely also represent a step towards more genial energy cooperation with Russia, since that is the most likely source of crude for Ukraine.
  • At #1, recalculating gas tariffs. Ukraine’s government needs to fix Naftogaz’s finances so it no longer relies on cash injections from the central bank or IMF funds.  The only way for this to happen is to bring revenues more closely in line with costs.  While the NERC (the regulating body) has been willing to pass along increases to industrial consumers, sometimes even at unjustified levels, pushing them onto residential and “budget” users has been more difficult.  It’s been impossible to do politically, with Tymoshenko being unwilling to take on the damage to her popularity such increases would bring.  Meanwhile, the IMF is screaming down Naftogaz’s door, essentially demanding a more realistic tariff for the currently subsidized users. ¶ While technically under the purview of the Prime Minister, how the new President (and likely the new PM) handles this issue will be very important for bringing Ukraine out of perpetual “crisis” mode, particularly given the monthly account settling Naftogaz faces with Gazprom.  A few different tactics need to be pursued, including increased energy efficiency to lower demand (current demand drops are relatively temporary due to slowed economic activity), a push toward individual gas metering to better measure consumption, and a shift away from blanket subsidies to a system of income-based assistance.  No one wants babushka to freeze, but that doesn’t mean that the middle-class family living three doors down should get the same discount that she does.

Gas war reignites in a big way

A couple friends have mentioned my lack of blogging, and its absence is particularly notable now during the latest iteration of the Ukraine-Russia gas spat.

I’ve been working on the conflict at work (which has kept me busy, and away from this blog) and following it quite closely.  However, at this point I don’t feel I can put the time and effort into a post that the current situation would deserve.  Hopefully I’ll be able to do a “postmortem” roundup, though that of course has to wait until it’s actually more-or-less resolved.

I say more-or-less because there’s no way that any agreement reached in the next weeks (and it could stretch that long to get something relatively concrete) will solve the underlying issues, just as none of the past contracts since the breakup of the Soviet Union have.

Here’s the deal though.

Gazprom has announced that they will be buying Central Asian gas at essentially netback European prices, as opposed to the rock-bottom prices that they’ve gotten historically.  (Whether or not they actually are paying what they say they are is another matter though.)  Europe obviously pays European prices.  The only cogs in the system that don’t pay “European” prices then, are Ukraine and Russia (internally) itself.

Russia was apparently willing to continue “subsidizing” Ukraine by passing along a set price for the year of $250 per mcm, so long as Ukraine froze transit fees, ceded more of the internal industrial market to its local marketing arm Gazprom Sales Ukraine (GSU), and opened up some strategic infrastructure within the country to ownership by Gazprom. Late in 2009 would bring more negotiations for the price in 2010, before moving to a formula indexed off of gasoil and heavy fuel oil prices in 2011.

Ukraine balked, and Yushchenko ordered Dubina home from negotiations in Moscow right before the deadline.  The two sides made good on their posturing, and have ground the gas flow westward to a halt.

Putin has grown angry, suggesting Ukraine move to the “market” rate of about $450 / mcm immediately.  Yushchenko came back with his own $201 figure.  Based on the lag time in gathering the average oil product prices incorporated in Gazprom’s sales contracts, gas prices would be pretty much reaching their peak around now (corresponding to the all-time oil price highs in July and August 2008).

So if Ukraine were using a formula to determine their prices, they’d be stuck with a figure roughly corresponding to Putin’s threats.  But that price is adjusted quarterly, and because of the rapid fall in oil prices at the end of 2008, it is guaranteed to go down by about $50 by the time it’s recalculated in April 2009 — that is, if Ukraine moved fully into this “European”-style arrangement, which doesn’t appear to be likely.  If they did however, and if oil product prices stayed at about the same levels they are at now partway into this year, by 3Q2009 the gas price would drop nearly $100 and by 4Q2009 it would even be below the $250 / mcm originally offered.

Gas pricing is a tough job because it lacks the market drivers and signals of other commodity exchanges.  It’s particularly obtuse when two monopolies are the buyer and seller.  Add in the political back-story behind each country and their historical relationship, and you have a rather complicated situation.

P.S.  Check out the coverage by LEvko, Taras, and Adrian for more regular news updates.  The Oil Drum also has been posting about it, as has the local press (once they came back from their New Year’s breaks).

Gas talks on hold

In the US, John McCain is suspending his campaign to address the country’s distressful economic situation.  In Ukraine, Yulia Tymoshenko has suspended key natural gas price negotiations due to the country’s distressful political situation.

From Monday’s Kommersant:

On Friday Prime Minister Yulia Tymoshenko communicated that negotiations with Russia on the price of gas in 2009 have been halted because of the political crises.  Naftogaz intends to use this pause to wait out for the December lowering of world hydrocarbon prices, which theoretically allows it to get gas at a more advantageous price.  Analysts figure that this expectation is not unfounded — if oil quotes, to which gas prices are connected, will continue to drop, than the cost of gas could end up being lower by 25%.  But if the pricing market isn’t favourable, it threatens to be a significant loss.

The head of the government, Tymoshenko, announced to journalists that because of the political instability in Ukraine, negotiations with Russia on the supply of natural gas have stopped for the time being.  “Without question, when there is an uncertain situation in Parliament, an uncertain situation with the coalition, holding negotiations doesn’t work out [не получается],” noted Tymoshenko.  A highly-placed source in Gazprom confirmed to Kommersant that the Ukrainian side has for the time being halted consultation on the price of gas.  “Next week representatives of Naftogaz were supposed to arrive to reach agreement on the pricing fromula and concrete points in the agreement.  But the visit was put off for an unspecified amount of time without explanation,” said the source.

Oleg Dubina, the head of Naftogaz, explained the delaying of negotiations not as political, but with completely comercial justifications.  According to him, the later that a contract is reached, the less the price of gas for Ukraine could be.  Based on the price-setting formula that Gazprom uses, the price of gas is connected to the price o oil, which gets lower as we approach December, asserted Dubina on Friday.  Correspondingly, gas for Ukraine also would become cheaper.  Therefore, Naftogaz figures that “it’s not worth it to rush into signing [an agreement].”

Should give Naftogaz a bit more time to try to secure another loan to buy the fuel it needs for the upcoming heating season.

There’s more to it than just relying on this “December price drop”…

More seeps out on Vanco’s partners

Update (9/21/08): A bit more on Khmelnitsky, the alleged figure behind Integrum, is appended below.

A very intriguing article in today’s Eurasia Daily Monitor by Myroslav Demydenko digs into possible organized crime connections to one of the investors in the Vanco-led Black Sea oil and gas project.

Through an offshore subsidiary, the US-based Vanco makes up about 1/4 of the joint venture established to run the development of the 13,000 square km offshore tract.  The other partners were revealed to be the Rinat Akhmetov-owned DTEK, the anonymous Austrian investment firm Integrum Technologies (more on them later), and Shadow Light Investments, owned by Evgeny Novitsky–who, according to Demydenko’s article, has connections to a Russian mafia outfit:

According to a number of reports in the press and the book Darkness at Dawn-The Rise of the Russian Criminal State by David Satter (Yale University Press, September 2004), Evgeny Novitsky is alleged to be a member of, or very close to, Russia’s Solntsevo organized crime gang.

Satter wrote that Solntsevo had close ties to a Russian company called Sistema [I would classify being “director” as having “close ties”], which is linked to Moscow Mayor Yuriy Luzhkov and to the IVK, the information technology company, of which Novitsky was director. Solntsevo, working through the company SV-Holdings, eventually came to own a large share of IVK.

… Kommersant wrote on July 22, 1997, that an unnamed official of the FBI had revealed the names of three individuals suspected of being “shadow bankers” for the Solntsevo mob, one of whom was Evgeny Novitsky.

There are more connections and citations listed by Demydenko to reiterate Novitsky’s supposed connections to the mob, including tantalizing references to infamous gangster Semyon Mogilevich, who some claim is in deep with RosUkrEnergo.

As for Integrum:

Integrum Technologies has refused to disclose its main investors, and Vanco executives have admitted on a number of occasions that they do not know the identities of the owners of Integrum…Evidence suggests, however, that Kyiv Investment Group, a company owned by Ukrainian oligarch Vasyl Khmelnytsky, is one of the hidden partners of Integrum.

Update (9/21/08): Khmelnitsky is a former Tymoshenko supporter who has since switched over to the Party of Regions.  However, their separation was reportedly relatively amicable and without scandal.  Khmelnitsky’s main investments are within the Kyiv property sector.

Meanwhile, the Cabinet of Ministers passed a resolution to divide up another large Black Sea shelf plot into 33 smaller sections, rather than license it off as one large structure.  OMV had reportedly early expressed interest in the project, but it’s unclear how this–and the ongoing scandal surrounding Vanco–could affect their viewpoint…

Gas and Politics

So it seems that I have left Kyiv just as things are getting interesting.

My Fulbright scholarship ended this summer and I have moved to Washington DC to begin working in the energy consulting field. Events in Ukraine’s energy and political fields continue to draw my attention, though, and I hope to keep this blog updated—certainly more frequently than I have for the past month.

Perhaps the key issue in the energy sphere now is how the deepening political crisis will affect the ongoing talks between Naftogaz and Gazprom concerning the price of imported natural gas for Ukraine. Last year’s negotiations happened between the transition of the Party of Regions-led Rada and the tenuous Democratic Coalition (headlined by Tymoshenko at PM). PoR deputy Yuri Boyko negotiated the deal in October 2007, but Tymoshenko immediately voiced objections and began pulling strings to put her own stamp on the agreement. That led to rounds of protracted and contentious negotiations that lasted well into 2008 before a key deal was signed in mid-March. Until then, in an unstable and imperfect arrangement, gas was being supplied to Ukraine without a contract.

Negotiations for next year’s contract began months ago, tied in with Tymoshenko’s goal for a long-term deal with Gazprom. While a multi-year contract is unlikely at this point, progress is continuing on next year’s deal. This big question is the price charged to Ukraine, guaranteed to rise from the current $179.50 per thousand cubic meters (mcm). Predictions run from $250-450, and they tend to be connected to various “concessions” granted to Russia, running from the status of the Russian Black Sea Fleet in Crimea to maneuvers for Ukraine’s 2009/10 presidential elections.

The fracturing political landscape affects the mandates of the various actors involved. As I mentioned, last year’s deal was principally negotiated by Boyko, who was then the Minister of Fuel and Energy. This year’s negotiations have mainly been conducted by Oleg Dubina, the head of Naftogaz, a position beneath the ministerial level. Both positions, though, ultimately report to the Prime Minister, Tymoshenko.

She herself has gotten involved in the negotiations, and one of the issues raised is how she accepts directives passed on to her from the president. Yushchenko has traditionally given the Ukrainian negotiators instructions for their meetings with the Russian side, but as he and Tymoshenko continue their drift apart, it seems more and more unlikely that the two will be able to cooperate. They had already bickered about this issue last winter, with Tymoshenko proudly proclaiming that she had talked with the Russian delegation “without directives,” only to be confronted with the list of instructions passed to her from the President after it was posted on the Presidential Secretariat’s website.

Yushchenko himself is not a good negotiator for natural gas deals. His former nickname within Gazprom upper management was reportedly “The Artist” because of his finicky and aloof manner. During meetings following the Orange Revolution he gave no indication of understanding the complexities of the gas business, and did not appear to be too invested in the outcome.

Since then, Yushchenko has taken the task more seriously for a variety of reasons.

  • He witnessed the effect of unpopular deals after outrage at the 2005 agreement helped contribute to the split of the Orange Coalition.
  • He recognizes the boost in popularity gas deals can bring to the figures involved, and seeks to capitalize it—or at least prevent Tymoshenko from solely benefiting from it.
  • He resists ceding any more authority to the Prime Minister, using his directives to emphasize the political pecking order he is trying to maintain.
  • He respects the economic impact of gas deals and, drawing on his background as a successful economist, positions himself as more in touch with the realities of the financial ramifications. (This economic experience is generally contrasted with Tymoshenko’s aggressive social spending plans.)

The two sides have both asserted that they will be able to present a unified front in the ongoing negotiations, and keeping the talks at company-level (i.e., between Dubina of Naftogaz and Alexei Miller of Gazprom, rather than Tymoshenko and Putin or even Yushchenko and Medvedev) should theoretically help keep the political fallout at arms length.

In reality, there is no way to completely divorce the maneuvering of Ukraine’s politicians with the natural gas negotiations, and every twist and turn will be used as “proof” of Tymoshenko’s alleged deal with Putin or Yushchenko’s rumored affinity to RosUkrEnergo. Politics has been deeply intermingled in Ukraine’s natural gas relations with Russia and Central Asia since the breakup of the Soviet Union, and it is unlikely to cease being so at this point.

As a footnote, I expect the price to be between $300 and $350 per mcm, though this is of course speculation at this point. A lot depends on how the costs are derived, as I explained in an earlier post.

Also worth mentioning is that Ukraine’s main stock market, the PFTS, has declined over 60% since January 1st, 2008, making it the worst performing stock market in the world. The PFTS performed extremely well last year, perhaps leading traders to feel that it was over valued at the start of 2008. Unhealthily high inflation, poor regional financial performance, geopolitical worries exacerbated by the Georgian conflict, and the upswing in domestic political instability have all contributed to the decline.

A pattern…

Update (8/8/08): I’ve appended a quote from today’s Ekonomicheskie Izvestia article on Marathon’s quiet exit from Ukraine.  The article also includes a funny caricature featuring Tymoshenko

Gas production from independents is flat

The Vanco situation is pretty well documented.  Other stories are less so.

Following its London IPO in June, Cadogan Petroleum saw its share price plummet when two of its licenses were called into question last month by the Ukrainian courts.  (In 2007, the EBRD had purchased a 5.2% stake in Cadogan as a way to help promote independent oil and gas production in Ukraine.)

In July, the Naftogaz subsidiary Chornomornaftogaz announced the annulment of offshore agreements with CBM Oil and Shelton Canada Corp, two other small-scale oil and gas producers.

A similar announcement was made in June regarding cooperation between the US-based major Marathon Oil and Chornomornaftogaz.  Now Marathon is packing up its Kyiv office and leaving Ukraine.

In all, 73 subsoil licenses have been revoked by the Ministry of Environmental Protection, with another 83 still under threat.  The majority of these were granted in 2006-7, under former PM Viktor Yanukovich’s government.  Back in December, the new Yulia Tymoshenko-led government announced plans for a major check of all licenses, in an alleged attempt to root out “speculators” who were sitting on valuable reserves but not investing into their development.

When Tymoshenko came to power in 2005, she made a similar push.  By February 2006, 504 licenses granted between June 23rd and December 31st, 2004 (again, under Yanukovich), had been revoked.

Rooting out corruption is one thing; shooting yourself in the foot is another, a point that President Yushchenko seems to be trying to make as he cites problems with foreign investor relations at Kryvorizhstal and the new terminal at Boryspil airport.

Ukraine seems to be struggling at reaching a balance between making the country attractive for foreign investment, preventing corruption from spreading, and engaging in revenge by attacking past moves made by political opponents.

Meanwhile the oil major Shell continues to have a presence in Ukraine, both with downstream retail and a exploration and production joint venture.  The company has committed $100 million for developing a project in the Dnieper-Donets basin, but it remains in the early stages (seismic surveys are expected to be completed by next summer, last I heard).

Successfully implementing this project, with potentially a couple hundred million tons of oil equivalent at stake, would be a huge boon to Ukraine’s foreign investment climate, and might make up for some of the pummeling it’s been getting lately.

Update (8/8/08): From today’s Ekonomicheskie Izvestia article “Marathon left on the sly“:

An industry specialist within the Ministry of Fuel and Energy structure told Ekonomicheskie Izvestia that, “Marathon decided to close their Kyiv office and leave the market without any extra noise in order to not attract any extra attention to the event. They got tired of waiting for progress in negotiations with the Ukrainian government for further cooperation and decided to end the study of their posible perspectives within the country. Marathon’s mood was also negatively affected by the problems with the license of the American company Vanco for work on the Prykerchenskaya section of the Black Sea.”