According to the IMF experts, one of the main “diseases” of the Ukrainian budget is inefficient spending in the energy sector. As a result of negotiations with the mission, this year’s funding of “Naftogaz” was cut from UAH 31.9 billion to UAH 29.5 billion, while in previous years the monopolist received state support worth over UAH 110 billion annually. In practice, the reduction of state funding to “Naftogaz” means raising gas prices. These requirements — a 50% increase in the gas price for public utilities and 100% increase — for individual consumers — were announced to the Ukrainian government by the IMF mission.
With regard to structural changes of “Naftogaz” the compromise seems to be reached: although earlier the IMF insisted on its division into several companies, today the official statement of the fund discusses “improvement of corporate management in “Naftogaz””. However, according to the coalition agreement, the comprehensive reorganization of “Naftogaz” with a separation of activities into the production, transportation, storage and supply of natural gas is scheduled for Q4 2015. This suggests that in the short term (3-4 years), both international investors and the Ukrainian government refused to split the oil and gas monopolist. Thus, the implementation of the first item in the coalition agreement on energy sector reform is postponed for an indefinite period of time.
However, “Naftogaz”, with its UAH 103 billion deficit, which is almost twice as much as the Ukrainian budget deficit (UAH 68 bln.), inevitably brings Ukraine closer to default. Therefore, a delay in its reform or radical transformation increases the risk of state insolvency, which entails the devaluation of the hryvnia, capital drain, corporate bankruptcy and mass unemployment.
Taking into account the number of negative factors for the national gas sector, the government has decided to form a reserve of natural gas and fuel oil worth USD 1 billion by getting loans secured by state guarantees. Negative factors include the outflow of investment and the reduction of private companies’ activities due to an increase in the tax burden last year. They also include the complicated nature of future gas negotiations in the EU-Ukraine-Russia format, as well as the potential spread of hostilities closer to gas fields (in Kharkiv and Dnipropetrovsk regions) in case of the escalation of the conflict in the east. According to European practice, a state should have strategic energy reserves for 90 days of consumption. However, it is not only referred to as gas or oil — each country chooses specific amounts of certain energy products it needs.
For Ukraine, which is at war with its major supplier of energy resources (gas, oil, coal, electricity and nuclear fuel for nuclear power plants), it is vital to create a reserve fund of energy supplies. In average, Ukraine consumes 3.5 bcm of gas every month (according to the statistics of the Ministry of Energy and Coal Industry, 42.6 bcm of gas was consumed in 2014). It means that the special reserve fund must be enough to buy 300-400 mcm of gas or 4-7 days of its usual consumption. Further, the question remains over why a reserve fund of coal and oil is not created. It was a shortage of coal in the current heating season that caused the emergency work of national electricity generation.
Under current circumstances, the government initiative to create a reserve fund of gas and fuel oil is an urgent and necessary decision. For this reason, the Parliament should shortly adopt legislation that would regulate creation of energy reserves (structure, number, amounts and logistics) and their use. The category of strategic energy resources includes natural gas, oil, petroleum products and steam coal. The government should take advantage of the global decrease in oil and gas prices. Having large gas storage facilities, so called gas hubs, Ukraine is already able to form strategic reserves. As for coal, the difficulty and duration of the logistics processes should be taken into account and the creation of necessary reserves for the next heating season should be launched as soon as possible. Ukraine already has all the necessary infrastructure to take this step.
Author — Natalia Slobodian, Head of Energy Department (ICPS)