Ivan Diуak,
General Secretary, Ukraine National Gas Union

Gas Transport Battlefield

The chief economic threat to Ukraine’s independence today is the low energy security level. Oil and gas industry is one of the biggest budget-forming industries in the country and NJSC NaftoGaz Ukrainy is the largest economic agent operating in the sphere of production, supply and transportation of energy sources. It occupies the dominating position on the gas market and is one of the main producers of gross domestic product in Ukraine. The NJSC NaftoGaz Ukrainy was entrusted an important mission of supplying the national economy with required energy sources, of maintaining competitiveness of oil and gas transportation system and a guaranteed fulfillment of foreign economic contracts. However, the State may loose all of this through the new policy on Ukraine’s gas market. The problems undermining Ukraine’s energy security are subdivided into two groups depending on their domestic or foreign origin.

Domestic battle for energy security

Among the main problems pertaining to Ukraine’s energy security are the following:

• high energy intensity of Ukraine’s GDP; inefficient industrial, household and municipal gas consumption;
• insufficient level of domestic fuel and energy resources supply and significant volumes of natural gas imports;
• high depreciation level of capital assets in fuel and energy complex of the country (in particular, of the gas transportation system);
• necessity to diversify fuel and energy resources supply sources and to form strategic reserves to ensure country’s energy independence.

Apart from that another important problem in fuel and energy balance is excessive consumption of natural gas (especially that it is mainly imported gas) with availability of considerable reserves of domestic coal. In the structure of primary energy consumption in Ukraine 24.3% belongs to coal, whereas the share of natural gas equals 41-45%. On average it’s twice as much as in Europe and trice as much as in the world. To ensure Ukraine’s energy security it is necessary:

• reduce GDP’s energy intensity down to 0.24 kg of equivalent fuel per dollar or twofold through implementation of the latest know-how;
• increase production of electric and heat energy using domestic fuel;
• diversify sources and supply routes of natural gas and oil;
• establish a strategic reserve of oil and natural gas in the country;
• reduce consumption of gas in the country down to 49 b cu/m a year.

The planned wide scale implementation of energy efficiency measures may serve grounds for such optimistic forecasts. Energy efficiency measures would allow reducing demand for scarce energy sources without curtailing industrial production. For example, steel production in Ukraine lags many years behind developed countries. Open-hearth furnaces are still operated in Ukraine, Russia and China only. And the process takes 7-8 times more gas than that of electrosmelting.

Bearing in mind that two thirds of natural gas consumed in Ukraine is imported it is important to secure an alternative to Russia source of gas supply from Central Asia – Turkmenistan, Uzbekistan, Kazakhstan. The long-term contract on gas supply from Turkmenistan was terminated (expired?) in 2006. Pre-election battles of presidential and parliamentary elections in Ukraine complicated the whole situation and nobody in the government paid attention to signing a new contract for after 2006. On top of that negotiations with Turkmenistan were aggravated by accrued debts for already supplied and consumed gas. Russia never missed the chance and bought out Ukraine’s share within its own long-term contract with Turkmenistan until 2028. Even worse, the OJSC GazProm took Central Asia – Center gas pipelines that go from Turkmenistan through Uzbekistan and Kazakhstan to Russia and Ukraine under its control. Thus we have been cut off from Central Asian gas supplies.

This Ukraine’s energy dependence on Russia is the greatest problem in our relations with our North-Eastern neighbor. However, we have a few options of alleviating this pressure at the expense of gas transportation system that currently supports 78% of Russia’s gas export to Europe and Turkey. However, to avoid being ensnared with energy dependency Ukraine needs to pay due attention to the issue. This means energy efficiency, other countries capable of supplying natural gas, increase in Ukraine’s own gas production and alternative energy sources. Unfortunately, the adopted development program for national fuel and energy complex (Energy Strategy of Ukraine until 2030) is being implemented rather insufficiently. So far, Ukraine’s participation in construction of the Nabukko gas pipeline is proceeding at the level of intentions and negotiations. One needs to learn by other countries’ experience. With two thirds of gas coming to Ukraine from Russia, Ukraine consumes 76 bl cu.m of gas per year. And the neighboring Poland restricts its gas consumption by 13 bl cu.m a year. In 2006 as compared with 2005 consumption of natural gas in Ukraine reduced by 2.44 bl. cu.m (from 76.41 to 73.97 bl. cu.m). It must be attributed mainly to industrial sector (1.9 bl. cu.m.) and to lesser use of natural gas for gas industry’s production purposes (574.19 ml. cu.m). However, notwithstanding relatively warm winter in 2006-2007 natural gas consumption by population increased by 908.63 ml. cu.m. as compared with cold winter of 2005.

Seems like we must have drawn a lesson from the gas crisis of 2006. Unfortunately, the interest in Ukraine’s energy security evaporated along with winter frosts.

To settle the issue the President of Ukraine released the Decree of December 27, 2005, # 1863 “On resolution of the National Security and Defense Council of Ukraine of December 9, 2005 “On situation with energy security of Ukraine and the main principles of state policy to ensure the energy security”. Nevertheless the Decree is not heeded. All the energy efficiency measures, shift to alternative energy sources, diversification of Ukraine’s gas supply, creation of fuel reserves at industrial enterprises, all of it stays mainly on paper. In fact, individual ministries and departments actually sabotage presidential edicts. In particular, for the third year running discussions are underway on expediency of reassigning property complexes of oil exploration enterprises SJSC “Nadra Ukrainy” to statutory fund of the SJSC “Naftogas Ukrainy”, which would raise efficiency of the property complexes’ use in the interests of the State. No one speaks openly against the idea, but the things haven’t budged an inch.

It’s long since been time to sort thing out in issuance of special permits on use of mineral resources. Why the most promising plots have been offered to commerical structures that bear no relation to energy security of the State and sometimes are even unable to extract natural gas? Because they constitute an important component in diverse plundering schemes. As opposed to it, the SJSC Naftogaz Ukrainy that saved people from freezing in the winter in 2004 – 2006 received only 9 special permits for new plots and did not succeed in extending 6 other permits issued earlier by Ministry of Ecology and Natural Resources. What can this be if not sabotage on the part of state officials caring of their personal interests above energy security of the whole country?

The battle for Ukraine’s energy security abroad

Russia’s politicians try ever more often to play Ukraine’s energy dependency card to their political ends. The hypothetical threat materialized for the first time on January 1 and 2, 2006, when Russia’s natural gas supplies to Ukraine’s gas system were substantially reduced (by 120 ml cu.m. a day or by 1/4). This could deal a deadly blow to heavy industry and residential sector gas supply. Russia not only stopped supply of its own gas, but also cut off gas flow from Turkmenistan just to produce energy crisis. Russia, as it was said above, signed a contract with Turkmenistan to purchase 30 bl. cu.m. of its gas in 2006 and took under its command gas pipelines of Uzbekistan and Kazakhstan.

According to Russia’s strategists the painful energy crisis at the time of virtually arctic frost was supposed to make the sovereign Ukraine succumb. That was why Ukraine’s officials initiated discussion on necessity to address guarantor states, consignees to the Memorandum on Ukraine’s security after its joining the Non-proliferation Treaty. Item 3 of the documents forbids the guarantor states, and Russia is one of them, to resort to economic pressure to infringe on sovereign rights of Ukraine. Unfortunately Ukraine never used this right.

The OJSC GazProm’s proposals regarding the new gas supply conditions to compensate for Ukraine’s transit services suggested on January 3, 2006 were accepted. Ukraine was offered a choice of either freezing (the temperature dropped down to - 30C!) or accepting the price of $230 per thousand cu.m. of gas, or agree to gas supply though an intermediary RosUkrEnergo. This intermediary guaranteed. This intermediary guaranteed that Ukraine will receive the natural gas it purchased in Turkmenistan, Uzbekistan and Kazakhstan though in practice the gas will be transported by GazProm. Apart from that the NaftoGaz of Ukraine was obliged to form a new company with Russia’s participation – UkrGazEnergo to sell natural gas on domestic market of Ukraine. This allowed Russians an access to gas trade profits without any social obligations born by NaftoGaz of Ukraine.

RosUkrEnergo entered Ukraine as a boss destroying on the way the NJSC NaftoGaz Ukrainy by bringing it to the brink of bankruptcy. The Agreement “On settling relations in the gas sector” signed on January 4, 2006 in Moscow between OJSC GazProm, NJSC NaftoGaz Ukrainy and RosUkrEnergo AG (Switzerland) is fraught with fundamental drawbacks.

Before this, according to the contract between GazProm and NaftoGaz Ukrainy transit payment rate per 1000 cu.m. over 100 km equaled $1.75 and 1000 cu.m of gas cost $80. But actually these were merely barter deals since the prices reflected only cost of gas and transit services and no actual purchases of gas from Russia were made. NaftoGaz Ukrainy provided its transit services for Russia’s gas at the lowest tariffs in Europe and GazProm based itself on these prices and tariffs when supplying gas to Ukraine in exchange for the services provided. From then on the figures kept changing. Transit rate was set at $1.09 per 1000 cu.m. over 100 km and 1000 cu.m. of natural gas cost $50. However, provisions of the contract itself remained the same.

On January 4, 2006 transit tariff reached $1.6 and the gas price - $95. From that moment on the NaftoGaz Ukrainy started to lose profits on transit at the rate of $683.7 ml a year (see the calculation). Ukraine did not receive exactly this much in terms of gas in exchange for its transit services in 2006. The new contract for 2007 signed between RosUkrEnergo and UkrGazEnergo means even more losses for Ukraine. Transit price remains unchanged, i.e. $1.6 per 1000 cu.m. of gas over 100 km. And the price for natural gas keeps growing to $130 per 1000 cu.m. Now NaftoGaz Ukrainy loses $1,934.29 ml (see calculation).

Calculation of NJSC NaftoGaz Ukrainy losses
2006–2007

In Russia it is a widespread rumor that Ukraine purchases natural gas at a very low price as compared with other CIS countries and European states. However, it is not quite so. We are to consider the prices comprehensively. We get natural gas at $130, which is cheaper than for Poland or Germany. However, we must not overlook the fact that price of Ukraine’s services package that includes gas transportation to Europe and gas storage in Ukraine’s facilities is also the lowest. From 2007 gas price for Ukraine rose for almost 40%, since gas price rose in Europe as well. But prices on gas transit did not change. These low prices serve as sort of a payment for Russia’s gas. For example, natural gas transit price over Germany equals $2.7 per 1000 cu.m. over 100 km. and that for gas storage in Western Europe storage facilities  - $24 – 25 per 1000 cu.m. (see the table)

Let us remark, that the hardest blow to Ukraine’ energy security was dealt by creating a joint venture between UkrGaz Energo, NaftoGaz Ukrainy and RosUkrEnergo AG. If before the RosUkrEnergo was an organization in charge of Central Asia’s natural gas transition to Ukraine and passed or sold it to NaftoGaz Ukrainy, then today RosUkrEnergo became a sole gas supplier to our country and through UkrGazEnergo usurped gas market of all industrial enterprises of Ukraine. So, now we have a monopolistic owner of the gas market of Ukraine capable of arbitrarily cutting off industrial enterprises from gas supply. On top of that NaftoGaz Ukrainy has no practical influence on UkrGazEnergo’s operation.

The largest natural gas market in Ukraine was handed over with our own hands to a Russia’s entity and the national agent, NaftoGaz Ukrainy lost its monopoly in energy supply to Ukraine’s enterprises. All of this is fraught with negative repercussions for our economy and energy security of the State itself. All over Ukraine’s independence Russia strived to take Ukraine’s gas transport system, the largest in Europe, under its ownership. And now, thanks to RosUkrEnergo, Russia is as never before close to realization of its objective. With every new day this structure is more and more insistent in imposing its rules on Ukraine’s gas market.

It’s worth mentioning that in January – March of 2006 gas sales to all categories of consumers were performed by NaftoGaz Ukrainy. While purchasing gas from RosUkrEnergo AG on the border between Russia and Ukraine at $95 per 1000 cu.m. the company sold it to industrial consumers at $108.5 per 1000 cu.m. (net of VAT). The profit received was channeled to cover losses accrued as a result of gas sales to municipal heating sector and budget-financed organizations at prices below economically justified level.

Starting from April 2006 and in accordance with decisions taken regarding gas supply CJSC UkrGazEnergo started its operation on Ukraine’s market. NaftoGaz Ukrainy purchased gas for municipal heating and budget organizations at UAH 587.8 per 1000 cu.m. ($116, VAT included) from UkrGazEnergo and sold it to heating enterprises at minimal profit and to budget organizations at a loss of UAH49 per every 1000 cu.m. At the same time starting from November 2006, with unchanged gas sales prices its purchasing price rose to UAH 613.5 per 1000 cu.m. ($121.5 per 1000 cu.m. VAT included). And in 2007 gas price on the border of Ukraine will be $130 per 1000 cu.m. and NaftoGaz will get that gas at $139 per 1000 cu.m. Accordingly the difference between the purchasing and the sales price will rise even more. The losses will again be born by the state-owned NaftoGaz Ukrainy. Meaning, by all of us.

As a result of changes and the fact the UkrGazEnergo is now in charge of supplying gas to the industry, NaftoGaz has now no means to compensate for the above financial expenditures. Over the first half of 2006 the company lost on this activity UAH 3.8 bl.

Loss of the industrial market by NaftoGaz reduced its revenues that formed financing sources for industrial programs of hydrocarbon extraction. Further increase in extraction volumes is only possible with opening and commissioning of new fields, which requires sufficient financing. However, the present situation remains unfavorable.

It is worth mentioning that lack of company’s circulating assets also brings about problems with ensuring reliable operation of gas transportation complex. Overhaul and replacement of gas pipelines and gas pumping facilities are financed insufficiently; retrofit of gas control and metering systems is delayed, etc.

Apart from that the gas resources supply issue got complicated through poor regulation of natural gas supplies to consumers in June and July of 2006. Within the above period municipal heating enterprises, budget organizations, gas transport and gas distribution enterprises consumed 1.8 bl cu.m. of gas for their own production purposes. At the same time contracts between NaftoGaz Ukrainy and UkrGazEnergo on gas supply to the above consumers in June-July 2006 were not signed.

This gas was not purchased, as Naftogas did not have any capital assets to sell gas under unprofitable pricing and pay in advance to Ukrgasenerho for that gas.

In this regard it was asserted that if there are no appropriate contracts with closed JSC URKRGASENERHO this year then the natural gas will be “forcefully” compensated through the domestic produced resources earmarked for the population needs. In this case in the 1st quarter 2007 to meet the needs of the population NAFTOGAS will have to purchase the compensatory amounts of imported gas, but at an essentially higher price. Then NAFTOGAS extra expenses will reach 500M uah. The calculation is as follows: 1.8bn m3 imported gas purchased in 2006 x 587.8 uah./1000 m3 (VAT incl.) = 1,058M uah. The same amount of gas bought in 2007 would cost 1,553M uah. (1.8bn m3 x 862.9 uah./1000 m3 (VAT incl.) = 1,553M uah.).

National JSC NAFTOGAS UKRAINA guaranteed UkrGasEnerho payments in the amount of 750M uah.—enough to pay for the gas used in June-July 2006. Under the gas sales/purchase contract between JSC Rosukrenerho and Ukrgasenerho payments for the July 2006 gas consumption should have been due through 30 August. Ukrgasenerho acknowledged these guarantees but ignored them when deciding on signing of the contract.

Given the paucity of the capital assets due to the lack of the NAFTOGAS UKRAINA financial plan for 2006 and impossibility to attract foreign exchange credit facility the company failed to make timely settlements with Ukrgasenerho.

Despite NAFTOGAS’ appeal to the Ministry of Fuel and Energy and to Cabinet of Ministers of Ukraine to help expedite signing contracts between NAFTOGAS UKRAINA and Ukrgasenerho on natural gas sales/distribution to Teplokomunenerho (municipal heating companies), budget organizations and to ensure production/technology needs of gas transportation and gas distribution companies in June-July 2006, yet Ukrgasenerho did not agree with NAFTOGAS to regulate this issue and filed a suit to Kyiv Economic Court against Ukrtransgas, NAFTOGAS subsidiary.

The State Execution [Bailiff] Service of Ukraine notified Ukrtransgas on 22 December 2006 of an execution process initiated to implement order No. 6/492 of 7 December issued by Kyiv Economic Court under which Ukrtransgas is bound to sign within seven days of notification [12/22/06] an act to certify its gas pump in the underground storage for the June 2006 period in the amount of 2.072bn m3 and for July 2006 (1.912bn m3).

The Kyiv Eco Court decision in case No. 6/492 filed by Ukrgasenerho against state owned Ukrtransgas, under article 85 of the Economic Procedure Code (EPC), became effective 1 December 2006—the date Kyiv Appellate Economic Court resolved to leave intact the decision of Kyiv Economic Court in case No. 6/492 of 24 October 2006. Thus, the foregoing court decision under article 115 of the EPC is binding for Implementation throughout Ukraine.

Currently, given the issue of production and technology [gas?] consumption amount by gas distribution JSCs [oblgases] has not been resolved; and there is no specified under contracts with gas supply JSCs gas [amount] for the specific period of time used by Kalush CHP, Kharkiv CHP-5 and some other enterprises—the gas owned by Ukrgasenerho and pumped out of the storage facilities between October-November 2006—then, the gas amount under dispute is 284M m3.

Thus, we have witnessed changed rules of game on the gas market. Amendments (9 December 2006 and 16 January 2007) to Cabinet of Ministers (CMU) resolution No. 1729 of 27 December 2001     “On ensuring supply of natural gas to consumers” are leading to usurping control over the Ukraine gas distribution system by Ukrgasenerho, which is currently served by oblgases. Actually, Ukrgasenerho claims control over the distribution and transportation systems of Ukraine that are interrelated, and thus become a total gas supply (to Ukraine and Ukrainian consumers) monopoly.

Although, under the charter, 50% Ukrgasenerho is owned by NAFTOGAS UKRAINA, yet it is managed solely by Rosukrenerho. Advised by the Ministry of Fuel and Energy the CMU on 16 January 2007 amended the above resolution that had changed the position of the players on the domestic gas market.

Under these amendments the population of Ukraine will be supplied domestic gas. Gas will be supplied to the population directly by licensed natural gas suppliers under a regulated tariff, i.e. the same oblast-, city- and raion oblgasenergos. Teplocomunenerho (municipal heaters) and CHPs wil get the gas from NAFTOGAS UKRAINA (NU). NU’s subsidiaries produce about 19bn m3 gas per annum. i.e. enough for the population only. The gas paucity for municipal heating and the industry would be covered with the Europe bound transit services gas Ukraine got from Russia at the cost of $50/1,000 m3, plus extra procurements of gas from Central Asian countries. There is no more of that resource today. In the result, NU has to supply the imported gas to all, save the population, consumers. Given Ukrgasenerho is the sole gas exporter to Ukraine then UN purchases gas only from it.

Thus, all budget orgs and the industry will [have to] directly contract Ukrgasenerho—the only entity with foreign economic [gas] contracts. The budget gas funds will be directly transferred to Ukrgas and on to Rosukrenerho. In the result oblgas entities have actually no chance to distribute gas to any consumer except the population.

Under this novelty gas transportation contracts are concluded directly between suppliers and consumers, whilst we have a sole supplier.

It is worth mentioning, that the negative impact of this company may further lead to endangered security of gas main operation and tell on all gas transportation and distribution companies irrespective of kind of ownership. I.e. even on those held mainly by the government.

Monopolization as path to collapse

Until recently some would accuse gas transporters and distributors of pocketing some money and inefficiencies in operating gas pipe lines, of reluctance to invest in gasline upgrading and lack of competition on the gas market. However, monopolization of the Ukraine gas sector may lead to the collapse of gas transportation/distribution companies; layoffs and destruction of the sector; threat of manmade disasters; pricing controls will be lost (some of that has taken place already). Further redistribution of wealth in Ukraine will occur veiled as inefficiency. The sector has undermined its potential by NU’s multimillion borrowing, by arranged system of supplies, by set-offs known by some as “paybacks.” According to Dzerkalo Tyzhnia paper (27 dec. 2006-1 jan. 2007) Ukrtransgas—100 percent state owned enterprise—will also get in financial predicament and will actually not get any funds to maintain the national gas transportation system operation. From now on everything will depend on Ukrgasenerho’s goodwill.

State owned Ukrtransgas (under the resolution of 16 January 2007 on amendments to CMU resolution No. 1729 of 27 December 2001) and other businesses licensed to transport gas for technological and other production needs will  be supplied imported gas purchased from Ukrgasenerho. I.e. gas transporters are deprived of the right to get the money for transportation services and to directly distribute gas to consumers. Besides, a money distribution algorithm is in place to manage distribution accounts that serve the moneys paid by the population to oblgases for consumed gas. Under the algorithm the money is redistributed between gas seller, Ukrtransgas and oblgases. The algorithm is developed by NU and approved by the NERC. Each oblgas has its own algorithm.

Ukrgasenerho contracts Ukrtransgas and licensed transporters to directly transport the gas to consumers.

Thus, under the 16 January 2007 amendments to CMU resolution No. 1729 NU’s enterprises and other entities with NU’s participation (i.e. Ukrgasenerho) the enterprises that procure imported gas are governed by specific conditions of gas supply/transportation to the consumer. As  to other suppliers then transportation/distribution contracts shall be concluded between consumers and gas transporters.

A legitimate question would be—who benefits from this novelty and in whose interest is that? Obviously, it is not in the interest of the state.

State owned NU and its sister companies that used to be monopoly on the national gas market and guaranteed the national energy security are on the brink of bankruptcy.

Rosukrenerho and its partly owned Ukrgasenerho monopolized the Ukraine gas market and became exclusive suppliers of the natural gas. Rosukrenerho co-chair Chuichenko has admitted his company intends to control the Ukraine gas sector assets: “Indeed, we would like to buy small gas fields, but it is just intention. Besides, we look into how to buy gas distribution networks, albeit we have not yet developed either tactics or strategy how to enter this business.”

So, Rosukrenerho via Ukrgasenerho shows who is the master in Ukraine. The government and NU that own the gas transportation and distribution systems, and the underground storage facilities let the Ukraine gas market to a foreign company and have no idea how to tame it. This proves the country loses whatsoever control over gas supplies to the country. These structures get many billion incomes feel masters on the gas market and have a major impact on the energy security of Ukraine. With every passing day the state gives in its energy security positions to the unfair organization. Maybe this is to someone’s good? Do not officials understand where Rosukrenerho leads us to?

In January 2007 Russia’s president Putin told German chancellor Merkel in their Sochi meeting “Russia will expedite transport network building to directly supply resources to consumers.” The Kremlin energy charter/strategy for 2020 approved in August 2003 stipulates Moscow’s course to establish “an energy state,” i.e. to use its energy resources as a main toll to strengthen the geopolitics might of Russia. One of conditionalities to transform Russia from energy source into “the energy state” is its will to participate in developing a global energy strategy. This conditionality stipulates control of gas and oil mains in Russia neighbor countries which will help it dictate energy prices. Russia has succeeded in this to a degree. Gasprom already controls gas and oil mains in Central Asia, Armenia, Moldova, the Baltics and even in Finland. Only Georgia, Azerbaijan and Ukraine retain control of their gas transportation systems.

During the January gimmicks between Moscow and Minsk the latter was forced to sign a 50% sale of Beltransgas to Gasprom in exchange for cheep gas ($100/1,000 m3) for the next four years. During this term Gasprom will buy out annually 12.5% Beltransgas shares worth of $625M. Starting 2011 Minsk will purchase the gas at regular European cost minus transportation services cost, whilst Gasprom will have become owner and corporate manager of Beltransgas. This joint venture will allow Gasprom control all gas directions throughout Belarus and prevent gas main turn off should there be another row with Lukashenko.

Gasprom also intends to penetrate generators and distributors in European countries. However, Germany and France agreed to establish their own energy alliance without Russia. The EU opposes Russia’s capital infiltration into European energy enterprises. Even NATO in December 2006 given, Russia’s expansion on the European energy market, decided to establish structures responsible for NATO European allies energy security, i.e. of all Western/Central European states.

Russia in its turn does not ratify the 1991 European Energy Charter that stipulates free commercial transit of energy resources through the territory of third countries. Gasprom insistently stakes on its own financial resources to retain its indisputable monopoly over the cproduction and supply of energy to Europe.

Russia aims to control gas transportation system

As to Ukraine, Russia has never veiled its intention to grab the Ukraine gas transportation system and its underground storage capacity, which we have denied for 15 years. To find solution a couple of years ago a Russian-Ukrainian consortium began to manage and develop the Ukraine gas transportation system. One of priorities was to build the Bohorodchany-Uzhhorod gas main. The preparatory work on this was done to start the main first line construction. However, all appeals to Russia to start construction has failed on deaf ears—Russia needs control of the entire Ukraine gas transportation system—not a construction of a new main. Besides, Ukraine needs to submit to the Verkhovna Rada the agreement of 18 August 2004 for ratification.

However, after the 4 January 2006 agreement between Gasprom, NU and Rosukrenerho Russia’s aim to grab Ukrainian gas distribution companies has become realistic. The next in the line are transit lines. At a recent press conference in Moscow Putin said Russia would allow Ukrainian companies to develop natural gas fields in Russia in exchange for a gas transportation consortium to manage the Ukraine gas transportation network.

For years Russia has denied anyone entry to its gas deposits but to control Ukraine’s network it is ready even for this. Provided these issues are resolved on a corporate and expert—not government—level, added Putin. Indeed, on a corporate level no Ukrainian company will be within the same weight bracket to talk on square foot with “non-state” Gasprom. Instead, the fate of Ukraine’s national  treasure—the gas network—will be resolved by some experts, and not by the legitimate representative of the people of Ukraine—the Verkhovna Rada and its government.

We are experienced with this corporate “cooperation” with Gasprom. We must be aware that under the Russia law everything produced in Russia for potential export is to be given over to Gasprom, the Russian gas network monopoly. We encountered that in 1992. Ukrgasprom’s 4,500 workers worked on the Urenhoi gas field, the largest field in Western Siberia with dozens of drilling wells and 1,700 units of equipment. After the USSR we suggested establishing a joint venture with Gasprom to develop and operate new fields. All legislation stuff was cleared, local authorities okayed this, but when it came to finalizing JV documents with Gasprom the answer was—No Ukrainian leg here! Gasprom made it clear that even in case of JV it would not be allowed to transport gas to Ukraine—But you may cheat the tundra with it! There was a clear writing on the wall—transportation cost from the Far North through 4000 Russian pipes would be that high that Ukraine would have to pay extra for thus produced gas. And to make it sour for the author of this article to establish gas development JVs in Russia Russian president Yeltsin signed a degree under which Ukrgasprom property in Russia was transferred to Gasprom, actually confiscated to the good of Russia.

So, some desperadoes should think twice as to the establishment of a Ukraine-Russia gas transportation consortium wherein Ukraine’s producers will have access to Russia’s gas fields. We tried it once, no need to experience it again.

Furthermore, we must be cautious given Gasprom’s unambiguous status as a shadow pocketbook of Russian authorities. In 1997 Gasprom got a foreign loan to urgently compensate pension arrears in Russia. The 2005 results show Gasprom’s non-production expenses three times that for production development. Moscow Carnegi Center expert Shevtsova says directly that “Gasprom is the core of the Russian state that implements the Kremlin will. It is not just a company. It is closed, opaque, non-subservient, except its political masters. It functions as a special service (Dzerkalo Tyzhnia paper of 3 February 2007). Therefore, behind the wings games with such partners are apt to serious loss. The sooner Ukraine gets to market/transparent gas prices with Gasprom the sooner we will get rid of the key dependence factor on the Kremlin. On the surface, large supply and transit of hydrocarbons is purely economic issue, as Putin put it, and yet this has always been—USSR or Russia politics—a wagon to the foreign policy engine.

Energy security is everyone’s business. Without it no development or prosperity of the country and all of us. So, at long last, we must get this security. We should terminate Rosukrenerho activities, which Gasprom uses as a key instrument to set control of the Ukraine gas transportation/distribution system. Vice premier Kliuev said Ukraine would reject Ukrgasenerho services also. This should be done now to stop fleecing Ukraine. We should get back to talks with Gasprom on the 2005 prices. The intergovernmental agreement in effect through 2013 was not canceled. The parliament has ratified the main instruments, so Ukraine has everything in hand to struggle for price positions in the Stockholm Arbitration Court, specified as arbitrator in disputes.

Being aware that Ukraine is artificially led to the trap with the payment of losing the state control over its gas mains on 6 February 2007 the parliament enacted an important law under which the law on pipeline transportation was amended to reflect the ban on whatsoever method to alienate the Ukraine gas transportation system, and which was endorsed by 430 deputies out of 439 in the session. This is a vivid example that Ukraine energy security issues are so important that not a single parliamentary faction risked to nay the motion. Given this unanimity Ukraine will no doubt withstand energy or any other fronts.