Archive for June 12th, 2017


Unbundling Ukraine

June 12, 2017

The EU’s Third Energy Package has been mentioned before by the blog numerous times over the years.

It is a Ukrainian obligation to meet.

It is an agreement that seeks to create a level playing field and open market across the energy sector.  Ergo, obliged (which it is) or otherwise it is in Ukrainian interests to adhere if foreign investment into Ukrainian energy is to be facilitated and protected in a predictable and regulated manner.

It is also in the Ukrainian interest to adhere to the Third Energy Package as the energy sector is one of the biggest fonts of domestic corruption and criminality – although clearly it is not necessarily in the interests of the corrupt and criminal for Ukraine to meet its obligations.

The more market players, the more diluted oligarch influence.

This being so, energy reform is a hard fought arena requiring political bravery and will to overcome many extremely profitable vested interests.

Ukrainian reform, it is fair to say, is not as swift as it could be.  It is also not progressing at equal pace across the plethora of political, economic and societal arenas.  In short, reform there is – but it is not distributed evenly (or effectively) across policy spheres.

It may therefore be something of a surprise that Ukrainian energy reform is actually plodding along far swifter than many other policy areas.  Indeed international investment in energy in Ukraine there is.  Notwithstanding a continued and significant march by China into Ukrainian solar power, Polish PGNIG has just won 5 of 15 gas tenders in Poltova and Kharkiv.

On 11th June, Draft Law 4493, which first entered the Verkhovna Rada plenary agenda on 22 September 2016 (and after 1200 amendments) finally became law and came into effect on 11th June 2017.

Domestic statute now demands that within the next 2 years (or by 11th June 2019 at the latest) that the electricity market comprise of bilateral agreements, a “day ahead interday market” and a balancing and ancillary market.

It also requires the separation with clear daylight between electricity generation, transmission and distribution companies.

If implemented, regulated and enforced, a major policy success awaits.

The biggest nightmare within Ukrainian energy is of course the infamous Naftogaz (despite its recent successes in Stockholm vis a vis Gazprom).

A behemoth of knotty, opaque grubbiness wrapped up in innumerable subsidiaries with dubious minority shareholders for each, undoubtedly with very questionable contracts with “off-shores” that bring no value added but quite deliberately the opposite – a method of draining capital .

Nevertheless Naftogaz is currently an entity that seems to have at least stopped the rot, if not reversed it, under the stewardship of Andrei Kobolev.

Naftogaz has also to be unbundled with regard to production, storage, transit etc., no differently to the electricity infrastructure.  Indeed much of Naftogaz, both oil and gas interests, can be simply sold off into the private sector.  However undoing longstanding grubby little deals, and deals within deals, designed to stand the strains and fluxes of Ukrainian politics over the past decades will be neither swift nor easy.

External assistance and council will be required.

It appears that PricewaterhouseCooper (PwC) have come out the winners of a Prozoro public tender to provide just that.  For the sake of accuracy, the PwC tender winning office is not PwC Ukraine, but PwC Poland.

For its fee of UAH 10.79 million, PwC Poland has, per tender terms, until 31st December to energetically assist in the unpicking of Naftogaz, and also creation of a plan for polished, newly wrapped and unbundled solutions for Naftogaz to fully meet Third Energy Package commitments.

Having recently mentioned Mr Kobolev as one of a few individuals to have increased in political weight this year, that weight will only further increase if by year end, Naftogaz has been effectively prepared for a long overdue evisceration.

Naturally, for the Ukrainian taxpayer, if it appears that an effective dissection of Naftogaz will manifest, all nefarious vested interests inserted at every part of the current set up will be keen to suck as much capital out  as if possible, with the probable outcome of the taxpayer having to settle the bills.  It also goes without saying that such villainy will have the likely outcome of none of the big fish being fried and sitting in a prison cell for years where they rightfully belong.  As yet no genuinely big fish have been fried and subsequently jailed in Ukraine.  There is little prospect that 2017 will see that change.

Regardless, it appears that reform in the Ukrainian energy sector continues to plod along toward the obligations of the Third Energy Package.  T’will be interesting to see just what the proposed dismembered carcass of Naftogaz will actually look like.

%d bloggers like this: