Gas Consortium: Best Organized Privatization Project

The Razumkov Ukrainian Economic and Political Study Center presented its report, “Gas Transport System of Ukraine: Prepared to Cooperate?” with somewhat unexpected findings. Its experts believe that polling the interests of the current Eurasian gas market operators indicate the situation being controlled by transporters rather than producers. Ukraine, therefore, should be aware of its unique potential (there are varying estimates of what the Ukrainian GTS is worth, but the Razumkov Center insists on $13 billion).

After analyzing the pros and cons of the consortium models submitted, the RC experts agreed that none answered Ukrainian national interests. As for the concession project, they stated that it was not feasible for the Ukrainian state and for any long-term investors, because it lacks positive international experience; also because the current Ukrainian legislation leaves much to be desired, and because no strategic investor will be satisfied with the short GTS concession term. There are negative findings also with regard to the construction of a new Uzhhorod-Novopskov-Oleksandriv-Hai gas pipeline (as the first stage of the Bohorodchany-Uzhhorod line). The experts believe that the new pipeline could prove a competitor for the Ukrainian gas transport system which is not under full payload (with 30 billion cubic meters capacity reserve). This and the actual gas-supplying monopoly allows the monopolist to dictate the rules of the tariff game. At the same time, construction costs are substantially higher than those of upgrading the existing GTS.

After a comparative analysis of the natural gas transport upgrade options in Ukraine, the experts arrived at the conclusion that privatization was the best choice, noting that it can have an adverse effect on the social realm (as tax concessions and other privileges heretofore subsidized by gas transit will have to be cut short, and there will be personnel reductions). However, given a civilized and transparent privatization policy, such unwelcome consequences could be avoided. Slovakia is cited as an example, where the state was left with the controlling interest. Another compulsory condition, according to the Razumkov Center experts, is keeping the gas consortium peripeteia public knowledge.

This apparently presents the biggest problem. Suffice it to say that none of the top-level executives took part in the discussion (with vice premiers and ministers on the official guest list), thus surrendering the negotiating battlefield to the opposition. The latter was quick on the uptake, also for political purposes.

The Day wrote not so long ago about a gas burial site in Belarus. Experts proposed drawing conclusions from the conflict between Russia’s Gazprom and Belarus, among the consequences of which was damage done to Belarus as Russia’s Union state, also to the Baltic States, Germany, and Kaliningrad oblast of the Russian Federation. Volodymyr Saprykyn, Director of the Center’s Energy Programs Department, believes that the conflict is a graphic example worth being studied by Ukraine.

There were also negative overtones to be heard in what Friedrich Ebert Foundation’s Regional Bureau Representative Vasyl Andriyko had to say. He quoted from Russian President Putin’s reply when asked whether Gazprom could be restructured as a natural monopoly. “This system was sired by the Soviet Union and only we are in a position to keep it going. Even with regard to the part of it outside Russia.” Does not this quote signify the gist of the gas consortium ideology being formed with Russia playing the dominant role? According to Mr. Andriyko, Gazprom has become one of the owners of gas companies in a number of European countries. (During the aforementioned Day’s round table statistics were quoted whereby Ukraine would have to cope with Russia as both gas supplier and consumer). Razumkov Center experts further believe that the European Commission, while insisting on its energy market liberalization concept, is not trying to obstruct this Gazprom policy, counter to some expectations.