Ukraine – An energy hub – Be careful what you wish for

On Friday 3rd May, whilst I was enjoying my time off in the Odessa sunshine and taking in the beach life, Ukrainian Energy Minister Eduard Stavytsky had a meeting with the EU Energy Commissioner Gunther Oettinger (as well as Royal Dutch Shell and Exxon Mobil amongst others) in Brussels.

What became immediately apparent, if it wasn’t already clear before, is that Ukraine has decided that it can become a gas hub for the European continent and intends to pursue that strategy, making the most of its gas transport system and more particularly its vast underground gas storage facilities (50 billion cubic meters).

The infrastructure, whilst somewhat decrepit and thus in need of some serious investment, does at least exist already.

Very good – and an obvious goal to pursue given the soviet legacy Ukraine inherited.

But then there is the widely talked about “resource curse” to consider should Ukraine actually achieve its aim of both Black Sea Shelf and fracking production, transit and storage.  It may very well turn into an oil and (mostly) gas State.

Quite possibly a very good thing for the Ukrainian economy, GNI and indeed citizen income as well.

But at what social cost?

Of all 23 nations on the planet where 60% or more of GDP is derived from oil and gas – not a single one can be classed as a democracy.

Further all are very corrupt, almost completely unresponsive to the demands of their populations and have extremely low accountability amongst the political elite.

Looking at the Human Development Index which is a key identifier when it comes to identifying liberal consolidated democracies, almost all oil and gas States with 60% of GDP coming from those sources have extremely low HDI scores regardless of citizen wealth and GNI per capita.

That is not to say a low HDI score prevents democracy, of the bottom 46 ranking nations in HDI, 13 can be deemed a democracy of sorts and 2 of those, as liberal democracies.

Looking at the top 25 HDI scoring nations, only Singapore is not a democracy – and from the top 40 HDI scoring nations they are all democracies less Singapore and a few small oil and gas States (Qatar, UAE etc.)

Thus becoming an energy producing exporter and hub may well have dire consequences for an already “feckless” (per academic definition) political system in Ukraine.

One of the best ways to identify an effective and consolidated democracy seems to be to take the Freedom House score and multiply it by the World Bank anti-corruption score, and more often than not it closely mirrors the HDI position in the HDI league table – Spooky!

In fact, discounting the Islamic world, there is a very strong correlation between democracy, freedoms and any HDI score a nation has.

So becoming an energy producer and energy hub as planned will destine Ukraine to the usual fate of oil and gas dominant GDP nations with regards to democracy?

Well, not necessarily.

“Feckless” as the Ukrainian politics are and have been historically, there is nothing to prevent the current “feckless democracy” of Ukraine moving to a consolidated effective and possibly liberal democracy prior to the full  realisation of the energy producing/energy hub plan.  Should that movement to an effective and consolidated democracy occur prior to, or even simultaneously with the “energy plan”, then all may bode very well for democracy in Ukraine.

A very smart scholar named Przeworski has proven that (again removing the Islamic world from the equation) should the personal purchasing power of a nation reach a certain monetary figure (currently about $10,000, but a figure that needs to be index linked to remain relevant), then no democracy has ever crumbled.

In effect with a diversified economy and the average purchasing power per capita of $10,ooo or more, democracy is not only consolidated but invincible to the challenges of other governance models due to the middle class/ independent bourgeoisie.

Ergo, empirical evidence and academic works from the likes of Lipset, Prezeworski, Welzel and Ingehart etc, would all point towards the necessity of moving Ukraine’s currently “feckless politics” to an effective democracy whilst simultaneously trying to reach $X personal purchasing power and climbing the HDI league table if democracy is to survive any significant oil and gas increased share of the Ukrainian GDP.

The question is can the feckless political system stop being feckless before it leads Ukraine into the black hole of the resource cursed nations?  Looking at the entire Ukrainian political landscape and personalities within, that seems very unlikely without consistent external pressure and guidance.

All in all, an obvious and achievable plan for Ukraine – with very scary possible outcomes should it succeed.

Shell (companies), Ukraine, hydrocarbons and the limits of Ukrainian journalism (not to mention a willfully blind EU eye)?

The day after the EU met with Edward Stavysky, the current Ukrainian Energy Minister, a meeting that will bring about a high level round table over EU sponsorship over the upgrading of the Ukrainian gas transport system (GTS) amongst other things – I am left pondering many things.

There has been a bad smell over the inclusion of a company called GEO Service arbitrarily in Ukrainian government deals with major oil and gas explorers and producers.  The reason for the bad smell becomes a little clearer with this piece in the Ukraine Pravda – but it no surprise.  It is no surprise that the oil majors are going along with it either.  Big oil (and gas) is a very murky business no matter who is involved.  This for them is standard practice no doubt.

However, it does not stop at Geoservice and the inferences made within that article – possibly more so when mentioning the current Ukrainian Energy Minister.

Unfortunately Ukraine Pravda does not go further than to elaborate on what it was spoon fed/given to build a story around – and investigative journalism in Ukraine is not particularly the safest of jobs.

However, if there was a Ukrainian investigative journalist at a loose end, they may not go far wrong in looking at the Energy Minister himself and other seemingly “no value” or “strange” business entities somehow involved in hydrocarbons in Ukraine – other than the infamous Geoservices which seems to concentrate media attention.

If they were to need a few dots to join together, some interesting dots amongst the vast mosaic of opaque vested interests could be a dot/company called “Vodi Ukraine”.  Another dot would necessarily be Nadra Ukraine.  Perhaps those dots could be joined together?

The Vodi Ukraine  (which means Water Ukraine)  misnomer should not put off our investigative journalists.  Vodi Ukraine may have more to do with hydrocarbons than water perhaps?

Maybe if these dots do connect, they should look to the dots relating to shale gas exploration in western Ukraine and who holds the exploration licenses.  The oil majors who are going to explore there know already – it shouldn’t be too difficult to find out – officially or via leaks.

Naturally if all those dots can be connected – that leaves the dot that is the current Energy Minister, Eduard Stavysky.

Now he is not the dot behind Nadra Ukraine.   He is not the dot behind the oil majors exploring shale in western Ukraine.  So how does his dot connect if indeed it does?

As Vodi Ukraine adds no value to the chain but somehow managed to get the exploration licenses in western Ukraine and is therefore within the chain for no apparent reason that to siphon/make a profit from actually doing nothing of value – one might ask, perhaps, who is the dot behind the Vodi Ukraine dot?  Our ministerial dot perhaps?

As I say, I am no investigative journalist, and far be it from me to make categorical statements when lacking the type of evidence produced in the Ukraine Pravda link above, that there would be a story there waiting to be broken – but I was always very good at dot to dot as a child and never once messed up the picture.

Now if all those dots did make a pretty (but nefarious) picture just as the Geoservice dots do, given the open door policy to Ministers the oil and gas majors have, then the EU must have a completed dot to dot picture – and thus must be willfully turning a blind eye – even if for the greater good as they may see it.

Anyway, what chance that an investigative journalist would join all the dots I mention eh?

Sold – Odessa Oil Refinery (A crude and murky business)

Back in October 2011, I mentioned that the LukOil terminal in Odessa had just been put up for sale.

It has now sold.  At least it is sold subject to contract exchange.

The new owners are an umbrella company called VETEK LLC based in Kyiv.  VETEK was registered as a company in Kyiv on 28th February 2013 and is headed by a chap named Andrey Koshel.

VETEK LLC, appears to be a holding/umbrella company for Gaz Ukraine – fronted by Serhiy Kurchenko, the Kharkiv lawyer, owner of Metalist Kharkiv FC, and friend of Olexander Yanukovych, son of the current president of Ukraine.

If that seems simple, Gas Ukraine is indeed a holding/umbrella company for a number of companies and has its head office in Simferopol Crimea, and who owns what behind the front of Serhiy Kurchenko is far more difficult to determine.  Gas Ukraine, naturally, is an importer of gas, LNG, oil and owns a rapidly expanding empire of several hundred petrol stations dotted around the country.

It also appears that Odessa refinery was not the first choice acquisition for VETEK/Gaz Ukraine – It originally went after the Lysychansk refinery owned by TNK/BP who subsequently removed it from sale due to it being an asset it could charge Rosneft for during its take over.

Anyway, the net result is that whomever is behind VETEK LLC and Andrey Koshel – or should we say whomever is behind Serhiy Kurchenko who fronts Gaz Ukraine, now own the Odessa refinery – which has not operated since 2010.

In fact the only Ukrainian refinery to operate in the past 3 years has been Ukrtatnefta – who I mentioned exactly one month ago - embroiled in nefarious circumstances - naturally.

So, it will be interesting to see whether the new owners of the Odessa refinery will make it the second of the six existing oil terminals to be operating in Ukraine, or whether Ukrtatneft will be allowed to continue as the only refinery in the nation to be active.

Smelly? – Maybe it’s just the gas!

A day of annual global reports – Ukraine

I will immediately steer clear of the Transparency International Corruption Perception Index 2012, which unsurprisingly ranks Ukraine at 144th and perceived as corrupt, simply because that will grab the mainstream headlines.  Ukraine still perceived as corrupt shocker – blah blah blah – not news at all!

Instead I will bring to your attention the 2012 International Index of Energy Security Risk – an index where Ukraine ranks bottom of the top 25 energy users – but is improving!

“Since 1992, the Ukraine has had by far the worst energy security index scores of any country in the large energy user group, both nominally and compared to the OECD. Its scores over the period averaged about 181% higher than those for the OECD. A net importer of oil, natural gas, and coal, Ukraine scores particularly poorly on energy expenditures and energy use intensity. However, Ukraine’s overall risk has been trending downward. From its peak of 2,732—277% above the OECD average—in 1996, the country’s total risk score fell to 2,011 in 2009—still 130% above the OECD average but a considerable improvement, and recent trends suggest further improvements.”

Well, I can’t keep being the harbinger of entirely doom-ridden and gloomy news all the time can I?  - It seems even though Ukraine is destined to be at the bottom of the 25 biggest energy users league relating to energy security for some time, it is at least making most notable progress in the right direction!

It’s a shame the same encouraging trending dynamics can’t be said for much else in Ukraine over the past 20 years.

A best guess or pie in the sky? Ukrainian budget 2013

Although I studied economics as part of a degree in Business Management and Finance many moons ago, I can say without a shadow of a doubt that it was not exactly the most interesting of subjects, and one in which I had to motivate myself to maintain a respectable overall end grade.

The fact it is not an exact science, or indeed given recent events with a vast and very varied set of opinions from both well known and hitherto unknown “economists” and little else other than opinions since 2008, would suggest that to many it is not even a science but simply partially educated guesswork.  I make no comment!

Anyway, as is required by law, the Ukrainian budget for 2013 has to be agreed by the RADA before 2013 – which makes sense – other than due to the parliamentary elections and associated shenanigans which dragged the process on and on, the legally required resignations of the current Cabinet of Ministers due to said parliamentary elections and the soon to be appointed new Cabinet of Ministers,  on-going IMF negotiations by Cabinet Ministers who have now resigned and may have little authority by next week despite negotiating now, the gas price from Russia etc., etc., the 2013 budget will be something of a rush job with little time for debate in the RADA and quite possibly little or no responsibility for those who table it should they be dropped from the next Cabinet of Ministers.

Something of a mess procedurally when it comes to time-lines and that is without going into the proposed 2013 budget which is some 461 pages long, all of which are splattered with columns and columns of numbers, issued to a RADA membership some of which will not be RADA members next week and unseen by some successful candidates that will be RADA members next week.

Those personnel changes could even affect the composition of the Budget Committee that has submitted the budget proposal for 2013.

From what I have gleaned from those who have seen the draft budget, the government intends to continue to subsidise gas prices to consumers in 2013.  A stance that will make the on-going IMF negotiations very difficult, particularly as I understand that the gas price foreseen in the budget works on today’s pricing of $417 per 1000 cubic meters of gas.  That will mean the government will have to find UAH 21.5 billion ($2.7 billion) to cover the difference between purchase price from Russia and sale price to the Ukrainian consumer.  Ouch!

Further, an envisaged inflation rate of just over 6% and a US$ to UAH exchange rate of no more than 8.5 are foundations for the entirety of the 2013 budget.  Wishful thinking in both cases!

Possibly even worse, is that this budget is to go to the RADA tomorrow, and that means the almost disbanded current parliamentary assembly may well just vote it through as their very last act before the new parliament sits for the first time.  That, when amongst the current RADA members very few have seen it, and I strongly suspect given the average IQ amongst RADA deputies, hardly any will understand it, thus it seems fraught with danger or nefarious intentions – not that the new parliament will radically raise the IQ level of the parliamentarians or their understanding of budgetary matters.

The question therefore must be, given that the 2013 budget is supposed to be the economic blueprint for Ukraine next year – why the rush to get it finalised at the start of December and with an old parliament when there is the entire month to debate and tinker with it with the new parliament?

Still waiting…….

No, no, no.

Whilst we are still waiting for an eventual final election count for all constituency seats and then a decision by the opposition whether to accept the elections results or not some 8 days after polling day, that is not what I am referring to – though it would make a cynical tweet of mine some days ago, stating the US would have their elections and count the votes before Ukraine, rather appropriate.

What I am referring to is the appraisal of the Ukrainian gas transport system (GTS) by Baker Tilly Ukraine, part of Baker Tilly International,  as was supposed to be done by 1 August 2012.

Having been awarded the contract in March 2012, one wonders just how long it takes to appraise the 72 compressors, 110 plants, 1451 gas distribution stations, 38,000 kilometers of main and branch pipeline and 13 underground storage facilities.

Was such an undertaking contractually agreed in March too ambitious to be completed by 1 August?

We are though now into November, so the question arises, just when will this appraisal be completed?  The results will be of interest to those both within and without Ukraine.

Ukraine signs new gas deal – with RWE of Germany!

You will remember back in early March I mentioned a cunning plan from the government of Ukraine to buy gas from RWE in Germany and reverse the flow of sections of the transport system in order to import it, thus reducing the amount of contractually very expensive Russian gas?

Well, Naftogas Ukraine has quietly signed an agreement earlier this month with RWE  just as predicted.

Now then, what are the chances of Turkish LNG being shipped Bulgaria and reversing the flow back to Ukraine (another option) until the Odessa LNG terminal is build?

Bold political and energy moves indeed, as it will certainly annoy the newly installed Mr Putin and Gazprom who have happily been milking Ukraine for the last few years.

Let’s see what the Russian response will be!

* * * * *

As an aside, if you read yesterday’s post and are wondering what the outcome of the EU-Ukraine summit was, here is the official press release.  No surprises in it just as it was no surprise the EU Euro 2012 boycott failed to take off.

What should be clear to the EU by now is that the current government is quite happy to, and indeed is doing quite well at, creating the legislative norms that run parallel to those of the EU and as such the DCFTA side of the EU/Ukraine negotiated agreement will continue to progress fairly well.  The political AA side of the agreement will not progress much at all.  All such signs are documented by the EU itself in its ENP Country Progress Report – Ukraine!

Quite a contrast to the previous government where the political integration was far more achievable, but it was also a government completely unable to to draft and pass anything like legislation meeting EU norms.

Given both sides will continue to have the same strengths and weaknesses, it would seem a reasonable tactic to encourage the current government along the legislative reformation path as much as possible, and then hope for a change of government who are legislatively incompetent but will politically meet the grade.

Failing that, sooner or later the EU will realise that financial investigations and the seizure of nefariously acquired or hidden  assets held within the EU territory relating to all Ukrainian politicians, from all parties, will be the most feared stick they have in their bag that may force Ukrainian politicians to go along the EU’s preferred path regardless of their strengths or weaknesses. – Now there’s a bold policy step!

(Alternatively, the EU can just let Ukraine drift back to Russia and watch it help make the Eurasian Union become a workable model.)

Naftogaz reorganisation and the role of the State in development

The Ukrainian loss making State owned behemoth that is Naftogaz Ukraine is about to get broken down, reorganised but not, as the EBRD have stated is necessary over the years, privatised.

Actually that may not be quite accurate, there are certain parts of Naftogaz that are now legally banned from privatisation and others that quite possibly could be privatised.

What has been legally banned from privitisation, be it existing or newly created entities within the Naftogaz structure we are about to receive, is the following:  Any part of the organisation that transports gas via pipeline through either trunk or distribution pipelines,  underground storage facilities and Naftogaz itself.

Now you may think that leaves nothing to be privatised or partially privatised, but Naftogaz is a behemoth as I state.  There is nothing to state that the Naftogaz subsidiaries such as exploration, transport, logistics (etc) entities under the umbrella of  Naftogaz, are off limits to privitisation that I have found within the newly signed law.

All I can see is that the gas transport system, gas storage facilities and umbrella/holding company will remain State owned and legally cannot be privatised.  This press release would seem to confirm that.  The rest of the organisation’s subsidiaries, as far as I can tell, could well be privatised at some point in the future or indeed closed and their roles put out to private sector tender.

It is not unusual in Ukraine for the government to keep possession of certain parts of the nation’s infrastructure.  Airports for example.  The terminals and all integrated bits and pieces necessary to make an airport run can be owned or leased for long periods privately, but the runways remain the property of the State.  The reason being, apparently, is that should there be a war, the State has immediate access to, and control of, all runways of Ukraine.

This goes someway to explaining many fairly nice and new modern airport terminals with runways that resemble suffering multiple IED incidents.  The terminal owners are not overly keen to maintain a State owned runway when it is really a State responsibility.  Likewise, the State know if they wait long enough, the terminal owners will eventually do something, even if it is the absolute minimum, to keep the runways serviceable.

Putting aside the inevitable conflicts and derelictions of responsibility where State meets private sector in Ukraine, it is possible to understand the retention of certain infrastructural assets by the State even if some would disagree with State ownership.  Some prefer no State involvement, others possibly limiting it to a “golden share” scenario in any privitisation, and yet others are more inclined to give the State legal powers to simply take control of such assets in times of national emergency and rely on State regulations during times of peace. – Different nations use different models, some use all the models I have mentioned and more in different areas of the national infrastructure and for different reasons.

Your position is probably based on how narrow or broad an economic definition you would give to what is “public goods” and what you consider is a national strategic asset.

This brings us to the tricky issue (or not depending on how hard your views are) of the role of the State in national development, and in the case of Ukraine, it is probably fair to say it falls on the developing nation side of the line rather than that of developed, despite any infrastructural legacy of the USSR.

I would say it probably actually sits on the line and falls completely into neither the standard definition of developed or developing, as far as nations go.

If we compare Ukraine to the USA or Japan (or other similar “Old EU” nations) the development path is likely to be far harder and less swift but for reasons that we may not immediately recognise.  It will be easier to blame the government (of which ever party is in power) for the lack of progression to reach those “Old European” standards, than it is to look back at the histories of the nations we are comparing them to and how they achieved their development successes.

Suffice to say, the State did have a big hand to play in those successes and in a far less globalised world, be it  economically, business-wise and through international laws.

Nations like the US, UK, Germany, France, and others succeeded in creating a far better entrepreneurial climate than Ukraine.  There is no denying that.  Ukraine still manages to kill off much of the white economy and white entrepreneurs through the bureaucratic and corrupt legacies inherited from the USSR.  Thus there is a large black economy, large black entrepreneurial base and a middle class that is small and in many cases un-auditable when it comes to discovering quite how their financial status and social strata has been achieved.

However, we must also recognise that the successful nations had State interference that created protectionism, subsidies and generally unfair trade conditions whilst building their developed nation status.  Even today we can watch Senate economics hearings via live podcasts where economists will sit and plainly state the the US is a protectionist economy.  The EU single market by nature and design is protectionist.  There are subsidies galore for alternative energy R&D and alternative energy companies to give a modern, contemporary example.   The controversial Common Agricultural Policy within the EU is yet another.

Such examples are bountiful when looking at the histories of the developed nations I have mentioned so far when it comes to insuring the establishment of a domestic sector via State protectionist practices before allowing a more liberal attitude.

The UK for instance even went as far as only allowing trade with other nations if the cargoes were carried by British ships.  The US upon independence imposed incredibly high tariffs and import taxes in order to allow the newly founded nation to develop internal producers and demand for the internally produced goods.  Even in the 1920′s the US maintained the highest import tariffs in the world, second only to Spain at the time.

German unification under Von Bismarck also brought with it incredibly high importation tariffs whilst Germany evolved internally through the State’s protectionist policies.  State manipulation occurred again when East and West Germany unified.

Where Germany differs from the UK and US under Von Bismarck, is simply that the State at the time was driven by an elite who wanted industrialised development and entrepreneurial classes, where as the UK and US did it via democratic governance.

I could go on and on and list developed nation after developed nation that has employed protectism for prolonged periods to reach the their developed status and not just within Europe or citing the US, but you by now get what I am pointing you towards.

Protectionism is not an option for Ukraine, at least to the scale and over the prolonged period of time that the “model developed nations” employed it.  Membership of the WTO, having to cede ground with the World Bank, IMF and others who have vested interests in Ukraine being opened up for the existing developed nations to enter, quite simply makes this a non-starter.

Ergo the protectionist policies that have allowed others to develop steadily and robustly whilst retaining absolute sovereignty beholding to none, have been replaced by the slower, liberal and politically manipulable  method of foreign direct investment (FDI) to only open and liberal developing nations.

Now I have no interest in protecting or attempting to justify the 20 years of continually wrong or poorly thought out policies of successive governments in Ukraine,  nor their consistently corrupt  practices when it has been their turn at the public trough.  Undoubtedly they, each and every one of them, have personally contributed to the lack of progress in Ukraine along with many of those they have appointed to run the agencies of State.

However, they are also not to blame for the time in history and global attitudes they have led Ukraine through, and having hoped to cast a light on the very different development paths available to those who have made it and those who are still in the process (now matter how retarded that process seems) maybe we can see some reasons why Naftogaz will remain a State owned company, why some subsidiary parts will not be privatised, why subsidies will continue to occur within the Naftogaz arena to the angst of external actors and why so much loss making infrastructure will remain, for want of a better label, “public goods” or deemed “strategic”.

Having written all of that, much of it still does not sit well with me as far as excessive State intervention is concerned, but as Aristotle put it, and who am I to argue, “It is the mark of an educated mind to be able to entertain a thought without accepting it”.

That said, much of what seems to be the modern agreement between State and society (not only in Ukraine) doesn’t sit well with me either.  I have the worrisome feeling that we as a society are far too keen to dump our personal responsibilities on the State and that the State in turn is far too keen to take them on.  Maybe it’s an age thing?