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John Daly

John Daly

Dr. John C.K. Daly is the chief analyst for Oilprice.com, Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European…

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Ukraine's Corruption Plagued Naftogaz Loses Monopoly

Ukraine’s government has had enough of state firm Naftogaz Ukrainy’s scandal ridden business practices and abolished its monopoly on imported gas sales inside the country.

The Cabinet of Ministers stipulated the change in its 3 October government decree No. 939. Prior to the decision, while other companies could buy gas abroad, only Naftogaz Ukrainy had the right to sell imported fuel in the country.

The decree invalidates an earlier one, No. 163 issued on 5 March 2008, which established Naftogaz Ukrainy’s monopoly over natural gas sales in Ukraine. The government of then Prime Minister Yulia Tymoshenko issued the decree to limit gas supplies to Ukrainian consumers from the Russian company RosUkrEnergo (RUE) and its subsidiary UkrGazEnergo solely through Naftogaz Ukrainy.

On 11 October 2011, a Ukrainian court sentenced Tymoshenko to seven years in prison after she was found guilty of abuse of office when brokering the 2009 natural gas contract with Russia, a charge that Tymoshenko strongly denied.

Putting a positive spin on the decree, an official in the Ministry of Energy speaking on condition of anonymity said that the decree was in fact adopted within the framework of Ukraine's commitments made in 2010 to the European Union to reform its natural gas market.

How wild and woolly were Naftogaz Ukrainy’s business practices?

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Well, on 8 June 2010 the Arbitration Institute of the Stockholm Chamber of Commerce ordered Naftogaz Ukrainy to return 11 billion cubic meters (bcm) of gas to Switzerland-registered RosUkrEnergo (RUE) and provide it with an additional 1.1 bcm of gas as compensation. The Centragas company, which is a shareholder of RosUkrEnergo, said in a press release, "This ruling confirms that the gas in question was taken by Naftogas in breach of its storage contract with RUE, and that Naftogas will return 11 billion cubic meters of gas in storage in Ukraine to RUE on the same terms as before the expropriation." The ruling followed an earlier decision issued by the Stockholm arbitration court on 30 March 2010 obliging Naftogas Ukrainy to pay RUE a $200 million penalty for various breaches of supply, transit and storage contracts.

And the shenanigans continue. In August Naftogaz Ukrainy claimed that an appraisal provided by U.S. oilfield services giant Halliburton justified the $400 million that it paid for an offshore rig in 2011, from a UK intermediary company, which previously had acquired the same rig for just $248.5 million from Norway’s offshore operator Seadrill. The discrepancy between the prices prompted widespread accusations of corruption on a grand scale, charges which Naftogaz Ukrainy and energy minister officials dispute. Observers believe that the fracas might well impact Ukraine’s upcoming parliamentary elections set for 28 October.

And newer opportunities have recently emerged for yet more creative accounting by Naftogaz Ukrainy, as in August the Ukrainian Cabinet of Ministers approved Naftogaz Ukrainy raising a $3.656 billion loan from China Development Bank to fund projects to replace natural gas imports with coal extracted in Ukraine. Ukraine’s Energy and Coal Industry Ministry and China Development Bank on 13 July  signed a protocol on cooperation in using coal instead of natural gas as fuel, with the loan going to implement several projects to transfer national thermal energy facilities to using coal-water fuel, and construct plants for the gasification of lignite and coal.

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Certainly Brussels is casting a careful eye on Ukraine. Brussels, In April the European People's Party believes that Ukraine will be attractive to foreign investors when democratic standards and the rule of law in the country are respected. EPP Group President Michael Schneider said in an address that the best way for regions in Ukraine to attract foreign capital and investment is for Ukraine to fully apply and respect democracy and the rule of law. “Investors need trust and confidence in the administrative, political and judicial system of the country or region they invest in," Schneider concluded.

So, given Naftogaz Ukrainy’s track record, the government’s recent decree is hardly surprising. What remains to be seen is whether it will have any real impact on Naftogaz Ukrainy’s kleptocrats, or whether they will see both the Chinese loan and the EU’s increased interest as simply an opportunity to rip off both Beijing and Brussels.

Only time will tell. For Kiev, the choice is increasingly stark – let Naftogaz Ukrainy continue to plunder the country’s energy sector, or make reforms acceptable to the EU.

By. John C.K. Daly




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