Merger and hostile takeover

Monday, September 13, marks Ukraine’s Gas and Oil Worker’s Day. Naftohaz Ukrainy (NU), long since written off many books as a dead cert bankrupt, will stage a ceremonious meeting and a gala show at the Ukraine Concert palace in Kyiv this coming Friday. There is also the possibility of Ukrainian political leadership attending — whether a similar event will take place next year is anyone’s guess. One of the possible scenarios has it that Naftohaz Ukrainy, as a natural monopoly, will have been taken over by Russia’s monstrous Gazprom. Gazprom’s CEO Aleksey Miller recently declared that the Russian and Ukrainian sides would start by setting up a joint venture, involving Gazprom and Naftohaz Ukrainy. After that, Gazprom and NU would merge: “We aren’t interested in setting up a joint venture just for the sake of it.” Can this Miller’s statement pull a rabbit out of hat? The fact is that [the Russians] are interested, considering that Ukraine intends to bring its whole gas transportation system to this joint venture, to secure Russia’s gas supplies to Europe (along with Ukraine’s Black Sea gas fields). Russia promises to allow this joint venture to own a rich, albeit undeveloped gas field.

However, the talk about the absence of interest contains an undisguised threat: We’ll build the Southern Pipeline if you turn down the Gazprom-NU merger project. After that your gas transportation system will be for the birds.

Well, this is what the “brotherly” relationship between Russia and Ukraine is all about: the best man wins, with Russia building the South Stream gas pipeline to transport Russian natural gas via the Black Sea to Bulgaria, and further to Italy and Austria. Ukraine has repeatedly stressed the advantages of its GTS and the pertinent upgrading projects, all of them adding up to an effective and less expensive transportation system when compared to the South Stream project. Ukrainian Foreign Minister Kostiantyn Hryshchenko still hopes to talk Moscow into discarding the South Stream project while making the best of the existing Ukrainian gas transportation network: “We must work out long-term joint interests (by transporting a maximum amount of gas using our GTS)… We’re trying to convince the Russians that the South Stream is simply a project they don’t need, that it will amount to large sums going down the drain while producing additional environmental problems.” He also has explanations for potential problems regarding relations with Russia: “Regrettably, the previous government has made every effort to convince those who specialize in Russia’s gas supplies that they can hardly count on Ukraine; now this will take additional efforts and time. I hope we will convince them differently.”

The problem with Ukraine is also that it has to struggle to keep its GTS — and Naftohaz Ukrainy, the key taxpayer over the past decade — while keeping its economy ticking, considering that the price for Russian gas supply seems unaffordable, even with the current 100-dollar reduction. The gas price formula introduced into the bilateral agreement, thanks to Yulia Tymoshenko, is still effective, starting at the unfair sum of 450 dollars.

The impression is that Gazprom decided not to let Ukraine score two points during this political soccer match. Russia’s gas “godfathers” believe that such “generous concessions” as canceling the South Stream project and revising the gas price formula requires adequate moves on the part of Ukraine, namely its Naftohaz Ukrainy being taken over by Gazprom.

Miller unequivocally rejects Ukraine’s argument about the South Stream being unprofitable for Russia: “I must say that new gas transportation projects are in [market] demand. The South Stream’s capacities correspond to European market demand, so we will carry out this project.” He adds that Gazprom’s new gas transportation projects are provided for under new contracts. Russia’s Prime Minister Vladimir Putin echoed him, stating that Russia feels completely satisfied about the gas supply agreement with Ukraine: “Can we make any further concessions? No way.”

Ukraine has no option except demonstrating insistence and optimism. “We hope we will eventually receive good news,” says Ukrainian Ambassador Volodymyr Yelchenko in Moscow, probably counting on the effective outcome of the talks by the Economic Cooperation Committee scheduled for October 26 in Kyiv. The Presidential Administration appears to hare this optimism, considering its head Serhii Liovochkin’s statement: “Ukraine must load its gas transportation system and secure imported gas supplies; these remain the top priorities during the talks.” He also admits that the optimum solution to the problem, in his opinion, is scoring a single, rather than two goals, in the political soccer meet with Russia: “We need a hefty gas price reduction.”