Shady oil and gas deals

The theft of fossil fuel resources in Ukraine, reported by The Day (No. 148, Sept. 5, 2007), continues. Volodymyr Pustovarov, the first deputy head of financial-economic questions at Ukrnafta, and Viacheslav Kartashov, the head of the company’s legal department, recently spoke about improvements in this sphere and the main obstacles hindering the development of the state oil and gas industry.

According to Kartashov, after Ukrnafta’s head Ihor Palytsia wrote an open letter to Ukraine’s president, a decree halted the granting of licenses to exploit natural resources to the “required hands” for a mere song. At the same time, an appeal to the Prosecutor General’s Office with a demand to investigate such criminal schemes has not brought any desired results. The prospects are depressing. At issue is the question of gas prices, a painful one for most Ukrainians.

The price of gas for consumers may rise by 180 to 200 dollars for 1,000 cubic meters, which will then be on par with industrial gas prices, Kartashov predicts. The forecast is anything but optimistic. What are the causes? Today’s consumer gas price is much lower than the market one. Without a doubt, credit for this belongs to the legal norm, according to which companies with over 50 percent of the state-controlled authorized fund are obliged to transfer all the natural gas they extract at the regulated price of 318 hryvnias per 1,000 cubic meters. “We do not agree with this. We believe that the state has no right to use such non-market methods, but we are law-abiding with regard to this issue,” says the head of Ukrnafta’s legal department. Pustovarov echoes his words. “This year there are no facts pointing to the supply of gas by Ukrnafta to other consumer categories.”

In the opinion of these two Ukrnafta representatives, the main cause of this dismal forecast should be sought in the actions of the Ministry of Environmental Protection together with its profile companies. Kartashov noted that the situation is also complicated by the fact that the environmental ministry has changed the license for extracting gas at the Sakhalin oil-and-gas-condensate deposit from Nadra Ukrainy to the non- state commercial structure, Heolsoiuz Limited Company, which Nadra Ukrainy established after becoming a 50-percent owner of the authorized fund. “Another part of the fund is owned by people linked to the Infoks Company, Mykola Zlochevsky, and the heads of the Ministry of the Environment,” Kartashov says.

According to the environmental ministry’s normative acts, nothing is preventing the reduction of Nadra Ukrainy’s share in the commercial structure’s authorized fund and the sale of the license to any interested party. As proof of his statement, Kartashov noted that one month ago Ukrnafta received an offer from Heolsoiuz to purchase special permission to the tune of 100 million dollars.

In his opinion, the corrupt actions of officials from the Ministry of the Environment are obvious. Acting in their own interests and those of firms close to them, bypassing existing legislation that obliges them to obtain licenses exclusively by means of bidding, they are actually helping to embezzle state deposits. What will be the outcome? “This will allow them to hide 400 million cubic meters of gas earmarked for sale to the consumer and to pocket the difference. According to rough estimates, this is nearly 50 million dollars a year,” Kartashov explained.

The head of Ukrnafta’s legal department says that the result of these shady gas deals is a deficit of gas in Ukrnafta that is sold at a regulated price. Thus, Naftohaz Ukraina will have to buy gas for consumer needs at the market price.

Along with future problems one should keep in mind already existing ones, Pustovarov says. Rental fees are among the most painful. Ukrnafta extracts every fourth ton of oil at deposits that earlier belonged to the category of hard to extract and exhausted deposits, and therefore had preferential tax treatment. But after they were cancelled in March 2005, Ukrnafta received an additional burden in the form of many unprofitable deposits.

According to Pustovarov, they have frequently submitted suggestions to the Ministry of Finance to improve the mechanisms of rent charging and to restore preferential tax treatment for such deposits. The finance ministry responded by issuing numerous invitations to meetings and conferences. “Despite all the above arguments, the same ungrounded statements and this year’s norms are contained in the draft law on the state budget for 2008,” he explained. The manual control of rental rates must be replaced by a differentiated taxation of oil output. The best argument in favor of this proposal is many years of effective work in the international arena. The sooner our government officials find the true path the better, says Pustovarov. Ukrnafta’s financial results for the first six months of 2007 may serve as an extra stimulus.

Its net profit was 405 million hryvnias, nearly three times less in comparison with last year’s indices. The company’s monthly losses from the exploitation of western deposits total nearly 48 million hryvnias. The question is who wins because of this and what to do next? One thing is clear: the state must solve these problems.

The board of the company has already submitted to the Monitoring Council the question of suspending extraction in order to avoid the losses represented by such deposits. But state officials blocked the adoption of the necessary decision, and the message that was sent is hanging in mid- air. “In order not to impart a political tinge to the situation, the board of the company is going to re-submit this question to the Monitoring Council after the elections,” Pustovarov said in conclusion. They are also planning to appeal to the courts to get the company’s losses reimbursed.

Until the gas issue is legally regulated, another detail should be kept in mind. With its own resources Ukraine supplies the gas needs of only one-third of the population. The question of whose pockets will be hit by the next shady deals is a rhetorical one.