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!

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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?

A look back and a look forward – The Yanukovych presidency so far

Today I am not going to write much.

I will bring to your attention this Carnegie article published on 2 April 2012, highlighting the highs and lows of reforms to the Ukrainian economy under the current president.  Suffice to say, its author, Nazar Kholod, it not so very wide of the mark and as a general recap so far, it is well worth a read and a reasonably accurate summary.

Next up, a You Tube video of Ukraine’s Foreign Minister, Mr Gryshchenko, during a presentation and Q&A session as the IISS in London on 3 April 2012.

Enjoy!

LNG Terminal – Yushni creeps closer to becoming a reality

Every now and again I mention LNG and Yushni in the same post and have been doing so since 2010 when I first put my money on Yushni being the eventual location of any LNG terminal for Ukraine.

It seems my prediction was right and that a feasibility study has just been completed for locating it there.  Good news for Odessa as it brings it a step closer to commencement.

The cost for constructing a LNG terminal there has been cited at approximately Euro 800 million.  A further Euro 121 million to create a supply channel for the LNG tankers and Euro 113 million to link the new terminal to the gas transport system.  In total  about Euro 1.3 billion.

That sounds a lot of money, and it is, especially for cash strapped Ukraine.  It is not far off the normative figure for such a terminal however.  The recently completed LNG terminal on the Isle of Grain in the UK came in at slightly over Sterling 800 million.  Scope of works considered, the costs seem about right through a feasibility lens.  The study also states a construction to commission time of 49 months – again about right baring any very nasty surprises.

The major question for now, is how this needed infrastructural terminal will be financed and over what period of time.  The plan, it seems, is to raise 30% from internal investors in Ukraine.  In fact I believe the usual suspects have already agreed to do so, leaving 70% to be funded either by bond sales or other credit arrangements.

It has to be said that Euro 1.3 billion is not a lot of money for the usual suspects should they have wanted to finance it completely and I suspect that a government/State of Ukraine stake in the terminal is therefore non-negotiable and the powers that be have decided  Ukraine will hold the majority stake.

The plan is that the terminal will supply LNG into the Ukrainian system at about $40 per 1000 m3 of gas for its services.  Not a bad service mark-up on the LNG bought from nations like Turkey and even with that service charge added to the price of Turkish LNG it still remains considerably less than the terrible cost to Ukraine of the current gas deal with Russia which still has another 7 years to run.

In fact it may be useful to put the cost of the proposed LNG terminal of Euro 1.3 billion in context with the monthly gas payments to Russian of approximately $1 billion.  Long term and from a diversified energy supply chain viewpoint, quite obviously the proposed LNG terminal makes economic sense.

That being the case, let’s hope that a decision is made promptly and the LNG terminal is given the go-ahead at Yushni.

Assassination attempts, Chechnya, Odessa the EU and oil prices

Well it seems that attempted assassinations of Russians and Chechens in London are making the news over in Blighty.

Not so long ago I wrote about the attempted assassination of German Gorbuntsov at Canary Wharf and now it seems MI5 are struggling to remove a Chechen of extremely dubious and nefarious background from London, who they believe is likely to be involved in a plot to assassinate Ahkmed Zakayev, (the self-appointed Prime Minister of the Chechen Republic of Ichkeria) who has claimed asylum in London.

The MI5 court documents show the bizarre situation where two Chechen (Russian Federation) citizens have claimed asylum in London and one is believed to be involved in a plot to assassinate another.  It is extremely rare that MI5 court documents reach the public domain, so click on the link and have a read.  You will see once again Article 8 of the ECfHR is going head to head with national security concerns.  This time however, it is not a radical Islamic cleric who stands to benefit but a would-be conspirator in an assassination plot on UK soil.

Less we forget, not so very long ago two Chechens and a Russian either died or were detained in Odessa when they managed to blow up an apartment they were renting in the city.  Speculation about a would-be plot to assassinate Mr Putin emanates from Russia, Odessa authorities believe they were here to assassinate a high-flier from Odessa.

What is not in dispute is their nationalities, the explosion at their rented apartment in Odessa, the death of one in that explosion and the capture of two others, regardless of their intended target.

All of these things draws our attention to a more active Chechen insurgency with a growing inclination to act outside both Chechnya and the Russian Federation.  A cause for concern indeed but not one to get overly carried away with unless you happen to be a likely target.

However, I do wonder how long it will be before there is a change of tactics once again and these people decide that economic targeting will produce far more publicity and far more devastating results, that will incur far less loss of life (if any) but equally prove to have far less chance of detection and being caught at the time of any act or thereafter.

I am talking about huge sections of pipelines carrying oil and gas from Russia, across Ukraine and serving the EU.

Not only would ad hoc sabotage of these pipelines cause Russia and the EU major headaches if they were carried out often enough as far as energy supply is concerned (not to mention environmental damage), but it would also apply a huge amount of market pressure on Russian economics when market confidence becomes rattled.

Market confidence is a global issue when it comes to oil and thus nobody would escape the aftereffects should this ever happen.  The markets would expect strong and decisive action from Russia in Chechnya, humanitarian groups would be desperately waving the red warning flags over human rights when an undoubted crackdown came from Russia, but where the EU and US leaderships would sit is far harder to determine.  For certain national interests would far outweigh and human rights concerns when it comes to energy and oil.  Interests verses values once again (or realpolitik if you prefer).

Now we may all have our own thoughts about the effectiveness of Russian policy towards Chechen and other separatists regions in the Caucasus,  but this year alone there have now been at least 3 high profile nefarious incidents not only outside Chechnya but also outside the Russian Federation, so the policy of those who carry out such acts, either as a result of Russian policy or as a result of a change of policy by their own processes, would seem to have resulted in an expansion of high profile activity outside the traditionally reported theatre.

If policy is indeed changing, one wonders how long before acts against Russian economics and energy take precedents over current targeting methodology and what effects that will have on the EU and Ukraine in the process.  One hopes that the policy makers, spooks and international policing organisations whilst having a watchful eye on assassinations are also looking at the possibilities that can effect the larger picture.

A difficult situation for Russia and the Caucasus already.  A difficult situation for a much larger geographical area if both modus operandi, targeting and geographical theatres begin to change.

Turning the tide – Ukraine and gas

Well there has been much written, including by myself, over the Ukrainian situation with Russian gas, the pressure the 2009 gas deal puts on the Ukrainian budget and the amount of time before Ukraine can take upstream projects and turn them into downstream production to alleviate this problem.

It is not often I write about rumour, however what I write next comes from a usually very good source and thus I will tell you anyway as it is likely to be more than a rumour coming from him.

Many have questioned what use the Ukrainian Gas Transport System will be to Ukraine if or when Russia builds Southstream and no longer needs to use the Ukrainian GTS.  With no gas and transit fees for Russian gas making its way to Europe and insufficient Ukrainian produced gas for quite a few years to come, what use will it be.

The answer it appears is to turn the tide.  More precisely the answer is to turn the direction in which gas is pumped in one particular part of the system.

The rumour is that Naftogaz Ukraine is going to sign a short term deal with RWE (I used to work for them – RWE Nukem to be exact) and buy gas at spot market prices from the EU and push it back from the EU system via the Slovakian system into Ukraine.

Spot market prices for gas are certainly far lower than the current rate Ukraine pays to Russia under the 2009 gas agreement.

Very good – but the rumour does not end there.

As we all know Odessa is to have a LNG terminal in the near future to help reduce the reliance on Russian gas.  That LNG most likely coming from Turkey which would make sense as it is less than a day sailing away.

In the meantime, it would appear that the Ukrainian government has been talking with Turkey and Bulgaria, Bulgaria having a newly refurbished LNG terminal and gas transportation system.  The plan is to buy LNG from Turkey, ship it to Bulgaria and then pump it into Ukraine.  Both Turkey and Bulgaria are currently happy to do so and assist a fellow BSEC nation.

So there you have it.  Parts of the Ukrainian GTS normally associated with gas flowing from Russia across the country out into Europe will now have the tide turned and gas from Europe (at vastly cheaper spot prices to the 2009 gas contractual prices) will be coming into Ukraine from Europe via the Ukrainian GTS.

Quite how Russia will respond to Germany (via RWE) Slovakia, Bulgaria and Turkey all having a part to play in pumping cheaper gas into Ukraine than Russia does remains to be seen, but credit where credit is due to the current government for managing to pull this off if the rumour turns out to be true.

Oh the tides of fortune in the nefarious energy markets!

As long as Ukraine abides by the minimum contractual amount imported from Russia as per the 2009 agreement, the rest can be bought far cheaper through this arrangement given the current price of gas on the spot markets.

Russian pressure is building on Kyiv

Quite unsurprisingly, with the EU, IMF and “the West” in general suffering from a bout of Ukraine fatigue not seen since the Yushenko/Tymoshenko years,  and with Ukraine tied to a ruinous gas deal signed during those years, Russia with a Presidential election next month, is piling on the pressure and rhetoric at Kyiv.

Back in July 2011 I wrote about trade disputes between Russia and Ukraine building up and amongst the many disputes currently on-going is a cheese war.  Russia has currently banned all Ukrainian cheese and to be honest it is getting the same headline press in Ukraine as the current gas negotiations for which Russia is attempting to drive a very hard political bargain.

Tymoshenko may well have signed Ukraine up to economic suicide when authorising the gas contract between Russia and Ukraine in 2009, but to get out of it, Yanukovych must now commit political suicide.  The price for Ukraine to have gas prices the same as Russian users does not depend upon it surrendering the Ukrainian gas transport system to Gazprom any longer.

The price is now signing up and being a full member of the Customs Union.  To do that would put the long negotiated and soon to be initialed DCFTA with the EU in an exceptionally precarious position if not a completely unworkable position.  Tied to the DCFTA is of course the political Association Agreement which regular readers will know I thought was not a particularly bright idea from the EU side, envisioning the exact scenario we now see unfolding over the geopolitical battle for Ukraine.

Thus far Ukraine has refused to buckle to such pressure, however this week saw the upping of the Russian anti considerably.

I predicted back in January 2010, that the Ukrainian GTS would become an empty and useless system (other than for domestic supply).  Not that it was difficult to predict, anybody who takes an alternative view to Ms Tymoshenko over policy will usually turn out to be right.

Two days ago, to turn up pressure on Ukraine further, Russia announced that the construction of the South Stream gas line will begin in December 2012 and that with it, plus the new working Nordstream plus the recently Gazprom acquired and fully owned Belorussian GTS, will mean that no EU gas will then be transited via Ukraine.

The pressure on Kyiv will now be enormous, as that is likely to be the Russian position going forward for some time.  It would be easy to say, just release Tymoshenko and the EU and IMF will come riding over the horizon to the rescue, however, the latest opinion polls not controlled by the government showed only 30% of Ukrainians believed her jailing was political.  The vast majority according to that poll therefore think justice has indeed been done.  The fact her jailing managed only 2000 protesters would seem to back that poll.

Whilst the international audience may well be happy with her release, the domestic audience, and they are the people who vote, may not be as happy, to say nothing of a large number of MPs.

The important question for the EU, Russia and Ukraine is now whether Kyiv will stay strong or if it will crumble.  It is said in every crisis there is opportunity and this maybe an opportunity for Ukraine to show both Russia and the EU it will not be bullied by either, however the pressure is tangible!

Thus far though, since that Russian announcement, Ukraine seems to be standing strong – thankfully – just the kind of crisis to force Ukraine look to opportunities to move on and become less reliant on Russian gas.

Gas disputes and reduced supply again – Russia v Ukraine 2012 (and the EU)

For once Ukraine maybe well served by having the current hard-nosed power vertical of the Party of Regions in power.

Why? In the past week, Italy, Poland, Austria, Czech Republic, Bulgaria, Greece, Hungary, Romania and Slovakia have all noticed large drops in the supply of gas from Russia.

Needless to say these drops have occurred when nations like Ukraine, Poland and Bulgaria etc have been on the receiving end of -15C temperatures and more during the last week.

Gazprom’s Alexander Medvedev (yes he is related to the current Russian President) has immediately accused Ukraine of using far more gas than it has been contracted to buy, despite Ukraine only a few weeks ago being lambasted by Gazprom for reducing annual usage to 27 billion cubic meters per year, a figure below the 33 billion cubic meters it was contractually obliged to buy under the awful 10 year deal negotiated by Ms Tymoshenko in 2009.

Now which is it?  The breaking of the contract by using less than contractually obliged to do as claimed only 2 or 3 weeks ago by Gazprom, or an incredible 60 billion cubic meters as claimed a few days ago by Gazprom, putting the blame of EU shortfalls on Ukraine over-using gas from the Ukrainian gas transport system?

For once we have a government that has thus far not crumbled to Russian pressure for the past 12 months over all matters gas related to Russia.  Ukraine has a government that has not crumbled under immense EU pressure over Ms Tymoshenko either (rightly or wrongly).  When the Ukrainian government now claims it is not using any more gas that it is contracted to use, I tend to believe them.

Why do I believe them?  Well Poland, who have reported a significant drop in deliveries over the past week via their distributer PGNIG, are not supplied by the Ukrainian gas transport system.  PGNIG is supplied by the gas transport system that passes through Belarus over which Ukraine has absolutely no control.  In fact the Belorussian gas transport system is now completely owned by Gazprom after the Belorussian government crumbled under Russian pressure only a few months ago.

This seems to be a case where Russia would like to increase the pressure on Ukraine via blaming it in a media war for EU gas delivery shortfalls, despite the obvious fact some nations suffering shortfalls are not supplied via the Ukrainian gas transport system at all.

Quite simply, given the cold snap currently being suffered across Eastern Europe and Eastern European EU members, one can simply expect that demand is far greater than the Russian ability to put sufficient gas into the existing pipelines.  It serves Russian purposes to blame the old unreliable transit nation of Ukraine rather than take responsibility itself or declare the system is working at a maximum until new pipelines are built.

Fortunately, the Ukrainian government is not likely to take any responsibility for this and will, one suspects, take a strong position (which they have done already with Russia and the EU over other issues) and stick to their guns very publicly if necessary, denying any wrong-doing.  Avoiding populism and being bullied is one thing the current authorities seem to do rather well (much to the annoyance of both Russia and the EU for different reasons).

Whether there will be any need to robustly and publicly deny taking off more gas through the GTS than is contracted for remains to be seen, as it is unlikely the EU will believe such ridiculous Russian claims when some members do not get their gas via the Ukrainian GTS but are still suffering from lack of demanded gas.

Nevertheless, Ukraine must win the media war if there is going to be one and that is going to be very difficult whilst Naftogaz Ukraine remains one of the most notoriously opaque and political of all State owned enterprises.  When Ukraine will have a government with the balls to split this behemoth up into separate operating divisions and privatise some or all of them remains anyone’s guess, but it is something that needs to happen just for the sake of transparency that shareholders would demand from any IPO.

One thing is for certain, no Ukrainian official will be rushing to Moscow to sign yet another truly awful gas deal because some EU countries are feeling a little chilly and complaining to Ukrainian authorities about it!