Naftogaz CEO Vitrenko: ‘Russian gas is a weapon’

Naftogaz CEO
Yuriy Vitrenko

Yuriy Vitrenko's desk, buried in paperwork, leaves little room for doubt – the winter of 2022 will be hard for Ukraine.

Naftogaz, Ukraine's energy monopoly, will face an uphill battle to provide enough gas for this year's heating season, CEO Vitrenko told the Kyiv Independent. 

He said that this will be the most challenging winter in the company's history.

Ukraine's Energy Minister Herman Halushchenko told CNN on Oct. 11 that "about 30% of Ukraine's energy infrastructure has been hit by Russian missiles" within 48 hours.

The constant attack on the country's energy infrastructure means that Naftogaz needs to continue pouring money into fixing its assets despite recently declaring default on its debts abroad.

The company is also navigating to keep ensuring gas imports, which are scarce internationally. As of today, Ukraine is importing gas from 30 different European companies, with Norway's national company Equinor being the largest contributor. 

It’s a daunting task but Vitrenko said he was ready and his company will fight. 

"We want our country to win as soon as possible, and we need to make our country as strong as possible to make it happen," Vitrenko said.

Energy under attack 

The Ukrainian heating season lasts from October to April. That’s when the central heating is switched on and gas consumption is at its peak.

Ukraine's gas storage capacity is about 30 billion cubic meters but the country had just 13.7 billion cubic meters as of September. That’s just half of what it needs. In comparison, European countries’ reserves are 80% filled on average.

"It's a challenge to ensure that people still have enough heat, gas, and electricity during the war," Vitrenko said. 

The company's employees face massive risks to ensure Naftogaz continues operating its assets despite Russia's deliberate attack on energy infrastructure, especially in eastern Ukraine.

"Our people literally work under fire," he said.

About 50% of Ukraine's gas fields are in Kharkiv Oblast, which was liberated in September after large parts of it spent six months under Russian occupation. Many of Naftogaz's assets were attacked and damaged by Russia, including refineries and heating plants. 

Eight of Naftogaz’s centralized heating plants are under constant shelling, including in Mykolaiv Oblast. 

Russia also destroyed Naftogaz's plant in Sievierodonetsk, Luhansk Oblast.

"We cannot guarantee some plants will operate during the winter, and that's the biggest risk that we're facing," Vitrenko said, adding that the company is producing as much gas as possible. 

Russia attacked gas infrastructure on purpose, Vitrenko said. Missiles rained down on Naftogaz’s refineries — one of them took up to 30 strikes, at times coming from as far away as the Caspian Sea. 

"Of course, it's deliberate," he said. "During sieges, in order to pressure civilians and the state, they deliberately target critical infrastructure, especially when it's cold."

Before Russia's full-scale war, Ukraine imported a third of the gas it uses. In 2021, Ukraine consumed 27.3 billion cubic meters of gas, while producing about 19.8 billion cubic meters.

Now, the country will rely even more on gas imports during the heating season to mitigate this risk, Vitrenko said. And gas is in short supply. However, Norway, Europe’s second biggest gas supplier behind Russia, has been raising production to help the European Union end its dependency on Russian gas. Norway replaced Russia as Ukraine’s chief supplier after 2014.

"We need to back up our colleagues from the power sector. These additional imports will be needed in case the power sector needs gas because coal won't be enough," he said. 

'Russian gas is a weapon'

Ukraine needs to prove its resilience as Russia keeps weaponizing its gas for geopolitical pressure, one of the Kremlin's favorite tactics.

Vitrenko accused Gazprom, Russia's state-owned gas monopoly, of manipulating European energy prices.

Russia deliberately decreased its supplies while Europe was facing a spike in energy prices during a post-COVID recovery period when people consumed more gas.

In order to make Europe sign long-term contracts on its terms, Gazprom kept decreasing volumes and raising prices. 

In July, Gazprom announced that Nord Stream 1, Russia's underwater pipeline to Germany, would operate at just 20% of its capacity, causing the price of natural gas to soar to just north of $2,000 per 1,000 cubic meters. Prices were more than 10 times higher than the average between 2010 and 2020, according to the Financial Times.

For reference, in July 2021, the price of natural gas reached roughly $450 per 1,000 cubic meters. 

But on Sept. 26, explosions hit two of the pipelines connecting Russia to Germany, triggering gas leaks in Danish and Swedish exclusive economic maritime zones. According to climate scientists, the damage has most likely caused the “largest emission” of methane ever recorded.

Several Western officials, including U.S. President Joe Biden, said the pipeline was hit by a "deliberate act of sabotage." Biden also accused Russian dictator Vladimir Putin of "pumping out disinformation and lies."

CNN reported that Russian submarines were seen near the areas where the leaks were discovered.

"There's a term for that," Vitrenko said. "It's called abuse of dominance, and it's illegal in Europe." He added that Europe did not believe Russia was deliberately using gas as a weapon. 

"Sometimes, as often in our life, we understand things only when we experience them directly," he said.

Ukraine learned to get rid of its dependency on Russian gas the hard way, Vitrenko emphasized.

"It was completely obvious that (Russia) used gas to suffocate Ukraine, to destroy Ukraine," he said.

Russia cut off gas supplies to Ukraine in 2014 because it was sure the country wouldn't be able to get enough from Europe. At the time, Ukraine was importing 70% of all the gas it used.

"It was a game changer for us in 2014, and it was a matter of survival: Hundreds of thousands of people would die just because they would freeze," he said.

Conflict with government

In July, the company faced another major problem – Naftogaz declared a technical default on its Eurobond. Vitrenko laid responsibility at the government’s feet. 

"It was not our decision, it was the government that decided on the terms and the process" of restructuring, he said. 

According to Vitrenko, the government made a decision to default, not Naftogaz.

He said the government was working on its own restructuring of the sovereign debts, at the same time as Naftogaz. 

“And the advisors — let's hope they were motivated by their client needs, not by the fees they got basically from the client for the restructuring of the sovereign debt— they insisted, and the government insisted, that we should also start our restructuring, because the government believed, that it would help them to do their restructuring,” Vitrenko hammered. 

As a result, most of Naftogaz’s restructuring failed.

Naftogaz was able to restructure its obligations only under one Eurobond tranche maturing in 2024. At a time when Ukraine is more dependent on loans than ever, a default hurts, by making additional loans even harder to get. 

"Because of the war, our ability to attract financing from the banks and some financial institutions was very limited for obvious reasons," he explained.

"That's why to get that much gas, we needed much more money through loans."

The government did not provide Naftogaz with sufficient financing from the state budget, according to Vitrenko. As a result, Ukraine is still able to import gas, but at higher prices.

"Because of this restructuring and because of us waiting to get this money from the state budget, we could not even get these loans — that's why we were not able to import more gas before the heating season."

Vitrenko said the company is holding talks with the government concerning the bonds maturing in 2022 and 2026 and has since downplayed the notion of a conflict.  

"It's not that we had some disagreement with the government," he said. It was up to the state to decide how much gas Ukraine needed before the heating season. 

Moral dilemma

Ukraine is in desperate need of finances and can’t afford to cause more damage to the ailing European gas market. That’s why it’s forced to continue transporting Russian gas to Europe.

Vitrenko said the transit fees' revenues are negligible, accounting for roughly $1 billion per year compared to $40 billion worth of gas production in Ukraine. It's more of a measure to avoid disrupting the market, he added.

It's also a moral dilemma for the company's employees. 

"It's a problem because many of our people, friends, relatives, and family will die because of the war, and they still need to talk to Russia," he said, talking about Naftogaz employees.

Vitrenko had to talk to Russian President Vladimir Putin on the sidelines of a Normandy Format meeting between Ukraine, Russia, France, and Germany in 2019.

Putin was rational and "not a madman," Vitrenko said. Though he “understood only force,” he knew every detail of Gazprom's business. 

When Putin understands that the other side has the upper hand, he starts behaving rationally and accepts terms, Vitrenko said.

Urgent market reform

Vitrenko said Ukraine's gas market needs to undergo major reform to be sustainable. It needs to stop subsidizing gas so deeply and let prices follow the market. Yet this would hurt consumers, many of whom already struggle to pay their utility bills. 

"It's probably the biggest economic problem of Ukraine, I'm not exaggerating," he said.

Naftogaz calculated that by keeping gas prices artificially low, Ukraine lost $22 billion in 2022. That’s about 20% of this year’s projected gross domestic product of $100 billion. 

Vitrenko said the difference between the market and the subsidized prices leads to inefficiency but there’s "no silver bullet" to fix this.

"People are poor and they just cannot afford to pay the full market prices," he acknowledged, advocating for market prices with direct subsidies for households that cannot pay.

Vitrenko also advocated for a modern, digitized system of subsidies. 

"These registrars are on the regional level, not centralized. They are not integrated, and it's a nightmare," he said.

Vitrenko was adamant this issue has to be solved, if not within the next few months, then at least within a year, because Ukraine is wasting enormous amounts of money. 

"We should spend this money on our soldiers to win faster."