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.

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!

Welcoming in 2012 – What to look forward to in Ukraine?

Well, happy New Year to you all.  Welcome to 2012 and I hope it will be a year that brings you all good health and happiness.

What has 2012 got install for Ukraine in 2012?

Well to quote Donald Rumsfeld,  “We know there are known knowns: there are things we know we know. We also know there are known unknowns: that is to say we know there are things we know we don’t know. But there are also unknown unknowns — the ones we don’t know we don’t know.”   As much as that quotation has been used as a source of satire and wit, it is nonetheless a very accurate and honest expression.

There are a lot of known knowns for Ukraine in 2012 and here are a few “headliners”.

The initialing (and thus official sealing) of the AA and DCFTA will occur, though signing and ratification bringing the agreement into effect will not.

Probable elections for a new Odessa Mayor when the current failure resigns early.

Ukraine will co-host the Euro 2012 championships.

There will be a parliamentary election in October.

There are many known knowns, however one that is not a headline event (yet) and the one that will bring undoubted interest when it occurs, is the release of former Ukrainian Prime Minister Pavlo Lazarenko form jail in California after completing a 9 year jail term for doing nefarious deeds with nefariously acquired cash.  Unless he meets an untimely end, he will be released in 2012.

For those of you that read this blog regularly, I have written about him before and his up and coming release, as you will recall.

Another known known is that another Ukrainian former Prime Minster is also in jail entering 2012.  Yulia Tymoshenko sits currently serving a 7 year term whilst also under investigation for other offences as well.

Amongst those offences are alleged nefarious dealings when she set up and directed United Energy Systems of Ukraine.  At the time she was a very close ally to Lazarenko who ultimately as Prime Minister gave UESU a monopoly contract relating to imported Russian gas and turning Ms Tymoshenko into a very rich woman.  It also helped turn him into a very rich man and ultimately helped get him jailed in the USA when he went on the run from Ukraine.

How did they both get so rich?  Well it is all a matter of public record in the USA and the Internet is replete with links to the original US court case material and a subsequent appeal by Lazarenko that did not see him freed.

To cut a long story fairly short, Lazarenko gave Yulia Tymoshenko’s UESU a monopoly contract to act as intermediary for Russian imported gas.  Why did there need to be an intermediary?  Good question.  It had everything to do with tax breaks at the time as UESU was partially owned by UESL which was partly owned by a Turkish national.  At the time, that meant, due to partly foreign ownership, an exceptionally good tax break (one assumes to encourage FDI to Ukraine in the 1990′s) and said tax break automatically drops to the bottom line as profit.

UESU then handed title to the Russian gas to UESL who were ultimately paid by the consumers of Ukraine.  (Russia claims that it is still owed $405 million by UESU for unpaid gas.  For years Ms Tymoshenko categorically denied any such debt, but has since admitted there is a debt but not at the amount to which Russia claims.)

In this mix there is another company called Somolli Enterprises, a Cypriot registered company allegedly opened by Ms Tymoshenko and her husband back in 1992.  I say allegedly to be as gracious as I can to Ms Tymoshenko.  There are sworn statements by a then Cypriot Mayor that they did indeed open this company as he acted as temporary director and met them personally.  This statement was used in the prosecution of Lazarenko in the US.

Somolli Enterprises is a key component in his crimes.  One assumes it is equally key in the forthcoming prosecution of Ms Tymoshenko.  Fortunately for the Ukrainian prosecutors, the US prosecutors have done much of the work when following the money.

Suffice to say, money pinged around UESU, UESL and Somolli so hard and so fast in the laundrette that hundreds of millions of dollars miraculously flew off in different directions via Somolli Enterprises to Switzerland, the US and others.

Nobody knows how much went into Swiss accounts although we do know which Swiss banks were involved.  They were Credit Suisse, Credit Lyonnais, Banque Populaire, Banque CSC Alliance.  Nobody knows to this day how much still sits there.

$20 million went through the US system in the following institutions:  Hambrecht & Quist, West American Bank, Fleet, Boston, Roberston & Stephens, Bank of America, Fenner & Smith, Merril Lynch, Pacific Bank and the Commercial Bank of San Fransisco.

Another $70 million went to an unnamed US bank in Poland and to the European Federal Credit Bank (Antigua).

So we have a known known that Lazarenko will be released in 2012.  We have a known known that Ms Tymoshenko is currently under investigation for her role in these shenanigans leaving a sizeable debt to Russia still owing, and a known known that much of the US investigative material used to convict Lazarenko implicates Ms Tymoshenko in name and deed as far as dealings with UESU and Somolli are concerned.

Let’s move to some known unknowns.  We do not know when Ms Tymoshenko will be tried over this matter.  It may well be after Lazarenko is released.  He is still wanted in Ukraine on international arrest warrants issued almost a decade ago but we do not know if the US will extradite him back to Ukraine upon release.

We do not know if Mr Lazarenko would give evidence against Ms Tymoshenko or if indeed evidence will be sought from him.  We do not know if he will be tried in Ukraine for the same offences he was found guilty of in the US or whether they will be put aside and he will be tried on a long list of other matters that occurred in Ukraine of which he is accused and has been accused of since the international arrest warrants were issued almost a decade ago.

As for unknown unknowns, well this matter stands a chance of becoming a story bigger than any other in Ukraine during 2012 upon Lazarenko’s release and is an event I am probably looking forward to more than any other in 2012 despite my love of football and my interest in policy, process and how the October elections will pan out.

One has to suspect that upon Lazarenko’s release, one way or another, what happens in the video link will be an accurate reflection, quite probably for more people than just Ms Tymoshenko from the Dnepro clan that did so well under Lazarenko’s patronage:

What to look forward to in 2012? – Quite a lot actually, it’s going to be an interesting year!

Gas……Again!

Now, if you are contractually tied to a fairly awful gas deal and cannot (as yet) renegotiate it but are none the less dependent on said gas, what do you do?

Use less gas obviously!

Mind you, when you have signed an agreement that guarantees a minimum quantity each year or face paying a fine to the producer,  you can only go so far.

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!

The death of a State behemoth. A return to Naftogaz Ukraine

I wrote about the break up and partial spin off of Naftogaz Ukraine divisions a few days ago.

As I stated at the time, such a break up is being loudly championed by the investment arms of the IMF and EBRD amongst others in a bid not only to reduce the drain on the public purse that it has historically been, but also so the specific divisions are far more transparent and accountable.

I predicted several divisions of the existing Naftogaz Ukraine will go through the IPO process and the oligarchy will concentrate on buying up the regional suppliers who deal with the behemoth that is Naftogaz.

It would make sense for all those divisions being spun off to be debt free and looking rather healthy, thus some part of Naftogaz Ukraine will have to become a bad asset dump, particularly as Naftogaz Ukraine enjoys a less than perfect contract with Russia for gas. That said Naftogaz Ukraine enjoys a State guarantee, or certainly it did when the contracts were signed.

Now whilst the new government of Ukraine has been trying to renegotiate what is not a particularly good gas contract with Russia to no avail, it will not have escaped Russian attention that parts of Naftogas will be spun off through IPOs. In the mean time Ukraine has said it will continue to honour the existing contract whilst also putting it before an international tribunal for mediation.

It seems the plan is to spin off the attractive parts of Naftogaz Ukraine and ultimately kill off the beast and create something new. One has to imagine that will have ramifications for the existing Russian contract although it seems likely there will be some mitigation by allowing Russia a stake in the replacement entity.

Will this include the GTS (gas transport system) that Russia currently relies upon to transport some gas to the EU? At present it doesn’t seem likely at least bilaterally rather than multilaterally, as Slovakia, Germany and France have all expressed an active interest in the GTS.

Very interesting to watch how this will develop.

The break up of Naftogaz Ukraine

Well, it was called for by the EBRD, IMF and no doubt numerous diplomats and governments behind the scenes in order to add weight to the IMF and EBRD voices.

It seems the behemoth that is the State owned Naftogaz Ukraine is going to be broken up and sold off. To what degree it will be broken up remains to be seen, however it seems fairly certain that the gas extraction division will be one of the first to go just as Royal Dutch Shell, PetroBra, BP, Chevron, CPC etc all line up for Black Sea, Sea of Azov and shale gas exploration rights within the next 6 months.

Cynically, my first though was another oligarchy buy off at favourable prices prior to entering some major projects via a rigged and less than transparent bidding process. It would appear however that I would be wrong. I have been unambiguously informed that this division will be subject to an IPO and aims to raise $10 billion.

The question is where the IPO will take place. London, Hong Kong? Nothing has been said as yet.

Should it be successful though you would expect similar IPOs for other divisions of Naftogaz Ukraine. Production, shipping and supplying divisions would all seem to be reasonable bite-sized chunks.

If Naftogaz is to be broken up and subjected to IPOs, one assumes that the oligarchy will turn their attention to acquiring the regional suppliers dependent upon Naftogaz Ukraine. A wise man would keep their eyes on the likes of Odessagaz and corresponding regional entities to see which oligarchs will buy them and for how much.

The next 12 months activities in the regional gas supplier network will be an indication as to whether breakup of Naftogaz Ukraine and the IPO rumours are true.

Ecology/Environmental planning, registers and protocols

With the almost immediate beginning of the Black Sea and Sea of Azov shelves by the likes of the China Petroleum Company, Shell, Chevron, Eni, Petrobrazilia et al, one has to suspect there will be a State encouraged ISO 14001 styled (if not ISO 14001 itself) environmental policy push amongst the larger industrial companies operating in Ukraine.

One has to expect that the larger Ukrainian industries will also be “encouraged” to at least have an Environmental Policy as well, regardless of whether they follow it or not.

For those in desperate need, I still have several I have written for large industrial companies in the past that achieved ISO 14001 on this very computer and backed up on a thumb-drive. They will of course need to be tailored to any specific company however the framework is there and only tinkering required.

Thus I am available for hire free-lance at discounted rates for all of you Ukrainian environmental bad boys who will soon need a good environmental policy that is ISO 14001 compatible, easy to implement with tried and tested audit and reporting procedures together with emergency contingency plans for dealing any incident.

I can produce them in English, Russian or both. They will be as good, if not better, than any the foreign companies submit and work to when operating here.

Just leave a comment, I will not publish it, but I will contact you and put you in front of the inevitable ministerial interest that will come with increased impact from foreign operations and environmental impact in Ukraine.