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?

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.

Ukraine still trading with Iran – Shocker!

Stop the press!  Hold the front page!  The Moscow Times is reporting that Ukraine is still trading with Iran!

“Traders plan to ship 63,000 tons of Ukrainian corn to Iran in coming weeks, Kiev-based ProAgro consultancy said Thursday, citing data from Ukrainian seaports.

It also said traders had exported 16,500 tons of corn and 10,500 tons of sunflower oil to Iran so far in February.

ProAgro said the cargo with corn had left Ukraine on Feb. 3 for Bandar Imam Khomeini port, while a vessel with 10,500 tons of sunflower oil left Ukraine on Feb. 10. Ukrainian sunflower oil is due to be unloaded in the Iranian port of Bandar-e-Abbas. It was not clear how Iran had paid for the latest shipments of Ukrainian corn and sunflower oil.”

Now just why would Ukraine have stopped doing business with Iran?  Ukraine has done business with Iran for decades.  There are no sanctions in place asking UN members to starve the Iranian people in some kind of international siege.

Ukraine does business with Iranian allies and foes alike as well as Iran.  That is what exporting nations do.  The Ukrainian economy is one built on exports.  That is the wonderful thing about being non-aligned.  Everyone knows you will do business with everybody unless the UN specifically puts in place sanctions over certain goods.

The most controversial thing Ukraine has done in the past 2 years relating to MENA is vote in favour of the UN resolution by the Arab League at the UNGA meeting yesterday in opposition to Russian and Chinese objections and that is not enough to antagonise Russian and Chinese business arrangements with Ukraine.

It is difficult to see a way for sunflower oil and corn to be used in nefarious ways by Iran to project its influence in the region or indeed to repress its people domestically.

Is the point of this article more to do with the fact that Iran still has the financial ability to pay for imports?  If so it is naive to think it couldn’t.  Having been public relations enemy No1 for a few decades, is it credible to think Iran didn’t have the foresight to dump large amounts of cash in those naughty little opaque havens around the world who ask no questions and keep client identities extremely secret?

China, Japan, Korea are still buying Iranian oil, maybe they paid Ukraine.

Iran could have delivered a wheelbarrow full of cash or gold to the Ukrainian Embassy in Tehran as payment.

Maybe it paid in oil directly or via a refinery holding unsold Iranian oil.

Maybe it paid in drilling rights or shares in Iranian oil.

When you get into barter payments, title flipping, futures, commodity swaps and equity swaps by direct producers, shell companies, private banks, physical gold or simply large amounts of cold hard cash,  it becomes very easy to circumvent the international electronic banking sector.

People and nations are a lot more creative and innovative when circumstances dictate.

How Iran paid Ukraine maybe unknown, but rest assured that it will have done one way or another.

Death of an EU white elephant a risk to Ukraine – Nabucco

Well the death of the Nabucco pipeline seems to have finally arrived as I (and many others) have predicted years ago.  It was, of course, doomed to failure from the outset, not because of the idea or reasoning behind it both of which are sound, but because of the parties involved and the geopolitics.

Unsurprisingly, the Nordstream gas pipeline is now open and supplying gas directly from Russia to Germany removing at least some German/EU and Russian dependence on Ukraine as a transit route.

So why has Nabucco died?  Well for a start Azerbaijan and Turkey have eventually signed an agreement on any transit line through Turkish waters which you would think would be a step in the right direction rather than its death, but you would be wrong.

The death of Nabucco relates to putting enough gas into the pipeline at the Azerbaijani end of the pipe. Nobody was ever quite sure where the 30 billion cubic meters of gas to be pumped through Nabucco was going to come from.  The existing Shah Deniz field doesn’t produce that much gas in a year, there were and are additional risks by asking Turkmenistan to make up the difference by pumping into the same pipeline, and the latest Azerbaijani discovery, the Absheron field is some way from being developed.

None of this took into account the shares holders in the existing and highlighted Shah Deniz field which is not solely run by the government in Baku.  As in most cases there such ventures are joint ventures and the Shah Deniz field has several major stakeholders.  Stakeholders begin to worry about risk when other suppliers are needed to connect to the artery they push their product through as it allows external influences and actions that were never in the risk assessment model.

It is of course typical EU grandiose thinking to decide on a 30 billion cubic meter per year pipeline (not to mention 20 billion Euro price tag) ahead of knowing exactly where all that gas will come from.  It shows the awareness and risk analysis similar to creating a common currency without any common fiscal directives to run along side it, and we are all aware how that has turned out.

Anyway, BP, a major stakeholder in the Shah Deniz field has effectively pulled out of Nabacco and offered up its own, smaller 10 billion cubic meter per year alternative.  Thus, Nabucco is no more as there is no supplier of gas.

Good news for Ukraine you would think.  There is now only Nordstream and Ukraine as routes for Russian gas to the EU and no route from the Caspian Sea at all.

Alas, whilst Nabucco remained a pipe dream, Ukraine remained fairly secure as a gas transit route.  Nabucco was never going to work, everybody new it except those in ivory towers, but so long as the Nabucco pipe dream continued no other Caspian alternatives would be considered before this EU flagship pipe line.

The simple fact that Nabucco was as ill-fated from the onset as the Mary Rose, a similarly grand flag ship that barely made out of Portsmouth harbour, is all rather irrelevant to the planners within the EU.

Now however, whilst the Russian/EU South Stream pipeline plans may be on the back burner, to the point EU institutions are making promises of funds to upgrade the Ukrainian gas transport system with Russia and Ukraine, the Caspian Sea issue becomes a very real threat as far as Ukraine is concerned.

With Azerbaijan and Turkey in agreement over undersea routes, BP whilst pulling the plug on Nabucco has submitted a plan called the South East Europe Pipeline (SEEP).  Also submitted some time ago, but largely ignored was the Trans Adriatic Pipeline (TAP) amongst others.

All these smaller proposals envisage 10 billion cubic meters per annum delivery from Azerbaijan.  All these smaller proposals have quietly continued to jump through the geopolitical and sub-sea survey hoops.  Statoil and partners E.On, Ruhrgas and EGL would seem to have stolen a march with the TAP pipeline when it comes to the bureaucratic requirements and are probably ahead of other smaller project submissions in this regard.

BP and SEEP are some way behind.

It is also worth mentioning that Statoil and BP are equal partners in the Azerbaijani Shah Deniz field which could make things quite interesting as far as that partnership goes.

Regardless, the demise of Nabucco is not a blessing for Ukraine as it was a threat that was never likely to happen.  The alternatives, however, are very real threats with the undoubted finances behind them to make it a reality now that Turkey and Azerbaijan have signed their transit agreements.

The Azerbaijani government in Baku now has to decide which project to go with and the threat becomes a reality.

The saving grace, if there is one, is that neither the Russian/Germanic Nordstream or any 10 billion cubic meter pipeline from the Caspian Sea combined, will completely remove the need for gas transited across Ukraine.  Yet.

However things change.

On the up side for Ukraine, is that the exploration of the Black Sea shelf and tapping its own hydrocarbon reserves looks ever more likely with China, RD Shell, BP and Petrobas all signing or in the process of signing on dotted lines with Ukraine.  Ukraine could well end up being a net exporter in the decades ahead.  What is not sent to China or used internally could very well head towards the EU if the existing GTS system is saved from falling into further disrepair.

Unfortunately for Ukraine, given its complete inefficiency and bureaucratic nature, there is more chance of the Caspian TAP, SEEP and others being in existence before Ukraine gets its act together with its partners.

Odessa Oil Refinery For Sale

I am reliably informed by friends in Luk Oil that their Odessa refinery, which processes 3.6 million tonnes of crude a year,  is up for sale.

Will it sell?  I would imagine it will be snapped up rather quickly to be honest.

Why?  Because last week, without any pomp or ceremony in the public eye, RWE, MOL, Chernomoretzgas and Naftogaz completed a deal for Black Sea shelf oil and gas exploration.

One has to come to the conclusion the Mr Graffer at Luk Oil HQ in Moscow will have been receiving visits from the German, Hungarian and Ukrainian partners of this little quartet amongst others.

Ukrainian Gas Transport System – Trilateral JV

A quick post today as I have one more day dealing with the Odessa buildings inspectorate before the first of many signatures and stamps are collected for the documentation I need.

It seems that Russia has changed its position over a strictly bilateral agreement with Ukraine if it was to invest in and upgrade the Ukrainian GTS and agreed with Ukraine that any JV should be a 3-way affair with an EU partner as well.

Common sense one would say, given that Ukraine is the link in the chain between Russian production and EU consumption.

One assumes that this will put the South Stream pipeline on hold for now although it is far too late to halt the Nord Stream project that will go directly from Russia to Germany.

Why the change of heart from Russia?

Who is the EU partner?

Now I’m off to do battle with bureaucracy.

European Supergrid – Ukrainian opportunity?

Is the list of website subscriptions and twitter identities you follow a reflection on who you are? I think quite probably it is, in which case, my children even though in their twenties and therefore no longer juvenile (at least in the strictest sense of the word) would look at who and what I follow on twitter and the websites that I subscribe to and place me firmly in the category of “Sad”. A definition they would apply to me being in their eyes, boring, based upon the tweets and email notifications I get daily from entities like the UN, OSCE, EU, Energy Ministry of Ukraine, Houses of Parliament, RADA etc.

Hmmm – maybe not as fashionable as it could be (possibly even “sad”, but following Lady GaGa is not really me.

Also a thank you to HM Amb Leigh Turner who not only reads this blog frequently but has also decided to follow me on twitter (I can be found under OdessaBlogger on twitter). I must admit to not tweeting very often, although I will do my best to change that, and what I normally do is re-tweet matters pertaining to Ukraine from the enlightened rather than informing you all that I am just going to the shop, which dear children, I would consider a “sad” thing to do.

Anyway, a day or so ago, I received an email notification from the House of Commons website relating to a committee report entitled “Energy and Climate Change – Seventh Report. European Supergrid” and the European policy of trying to connect a grid of both conventional and alternative energy producing nodes.

Of course a good idea although one hopes it will be done in the most environmentally and ecologically friendly way possible when deciding when and where to put cables below or above ground.

Now Ukraine has recently joined the Energy Community on the continent recently and prior to this exported electricity to Poland, is a transit nation for gas and oil, has huge untapped (yet) hydrocarbon reserves both on and off shore and is very much wanting to be involved in the transit of hydrocarbons from the Caspian Sea to Poland and the Czech Republic via extensions to the Odessa-Brody pipeline.

Its first commercial solar farm is now on line and it has a huge expanse of land and coastline available to alternative energy production.

However, amongst my “sad” website subscriptions is one to the Energy Ministry of Ukraine which is quick to send headlines and a few accompanying words, but nothing as in depth as the link above and the results of the ruminations of the enlightened.

There is no doubt that the current administration has a great interest in being an integral part of the European power grid in a far more meaningful way than simply being a transit nation for Russian oil and gas. The EU has offered Ukraine unconditional entrance to any EU projects it wishes to participate in as long as Ukraine picks up its own bills in doing so.

Just as the UK parliamentary committee notes that UK grid is far beyond the “patching up” stage and in need of complete renewal, the same can be said for the Ukrainian system. In a country that is bigger than France and a population only 66% (ish) the size of the UK, you would expect far less NIMBY’s here than in the UK as the country is just nowhere near as congested and has less mechanisms for NIMBY’s to interfere in the strategies of government.

Such mechanisms do exist and are not necessarily circumvented as some would suggest is always the case. It just happens that if there is likely to be a protest against a specific project, public meetings to discuss them are not always that well advertised (but are advertised to comply with the rules) and although held, may take place at 0500 one morning to insure the minimum attendance whilst technically adhering to the rules.

So, what is Ukraine doing about participation in the European Supergrid? I know for a fact from those I have talked to who would undoubtedly know, there is a great deal of interest in involvement to a noticeable level but actions speak louder than words. In the absence of words, or to be correct, the presence of a few words none of which answer the question, actions would speak louder.

Any sign of any action?

Oil summits and strategies in Kyiv

Whilst the Black Sea Shelf/Sea of Azov exploration plot rush continues apace with the majority of the worlds big oil players and Government of Ukraine, an oil summit takes place in Kyiv involving 300 or so interested individuals/parties. More than anything else, you would imagine that market development and transparency (at least to the usual opaque standards of transparency in oil) would be high on the agenda as Ukraine seeks to import more from nations other than Russia in an effort to reduce dependency on Russia and also gear itself to a streamlined and efficient upstream process relating to its own production with foreign partners.

Ukraine is already seeking to transport more product from Azerbaijan (and if you have never been to Azerbaijan, Baku is well worth a visit) to both Czech Republic and Poland. Coincidently (or not) I am in negotiation to sell some real estate of mine to a family from Azerbaijan, the main bread winner working for the oil industry of Azerbaijan and they are relocating to Odessa.

These things take time of course, particularly if the EU follows its plans to buy from Azerbaijan and Turkmenistan as well, reducing its dependence on Russia and goes direct to Caspian Sea producers in a bid to diversify supply chains a. With Ukraine also looking to do the same, the Ukrainian government seems to be offering reduced port fees to make this more cost effective.

One would hope that when Ukraine eventually moves from upstream to downstream in a meaningful way relating to its own production, those fees will remain low to add domestically produced oil and gas to the list of major exports from the nation with agriculture, chemicals, metals, coal, ores and fertilizers.

It will be an interesting commodity area to watch over the next ten years in Ukraine me thinks!