Andriy Kobolyev, CEO of NJSC Naftogaz of Ukraine, took part in the program on 1-st National TV Channel

September 16, 2014 – Andriy Kobolyev, Chief Executive Officer of NJSC Naftogaz of Ukraine, took part in the ...

September 16, 2014 – Andriy Kobolyev, Chief Executive Officer of NJSC Naftogaz of Ukraine, took part in the program on 1-st National TV Channel.

See the video below and the text of the interview.

Andriy (CEO Naftogaz of Ukraine Andriy Kobolyev), let's discuss today's ratification of the Association Agreement with the European Union. As far as I understand, its major focus is trade, however, nevertheless does the agreement also pay particular attention to the gas sector? Does it envision any reforms for the sector?

— Of course, the agreement surely means introduction of so-called energy package. Partially it has already been introduced, partly the Association Agreement will urge us to complete the process. Ukraine is anyway getting closer to the introduction of the Third Energy Package, but the Association Agreement obliges to introduce the second one. At the same time, the third package is envisioned with another agreement — the agreement on energy co-operation, which in practice is implemented very slowly by many countries, it’s being a long-term process.

— Are these second and third packages about the rate of our integrity with the European gas system?

— They are rather about the level of transparency of the gas market, its diversification, equality of rights of different market participants: both consumers and suppliers. We believe that the implementation of the Association Agreement will help us to solve the problem with one well-known market player, who is the least transparent and the most problem-making — Gazprom.

— I see. What will Ukraine offer and what will it insist on at the forthcoming trilateral gas negotiations?

— I cannot tell everything, but our position hasn’t changed. Our agreement with Gazprom should firstly be commercial, which means there should not be any unilateral decisions on the part of Russia. Russia should not be able to change the price unilaterally, at their own unfounded wish, as that would be incorrect and unacceptable. Secondly, the agreement should envision correspondence to some objective elements of the modern gas market. Gazprom sells its gas to Europe at prices that are lower the ones for gas sold to us. We demand this be taken in account. Thirdly the agreement should take in account amendments into the transit contract, which is currently inefficient and does not allow either Naftogaz of Ukraine or Gazprom to effectively fulfill the function of gas transit.
— So as far as I understand, Ukraine is again suggesting revision of the gas price formula?

— Yes, that part is included.

— But if Russia rejects that idea again, what could be a compromise for Ukraine? Before the consideration of the case at the SCC (Arbitration Institute of the Stockholm Chamber of Commerce (SCC)? Earlier, some intermediate, transitional price had been discussed.

— Intermediate price is currently being agreed. If Russia is ready to discuss the final price, we are then open for respective negotiations. Unfortunately, we do not see any Russia's desire for that. According to preliminary information we now have, the September 22 meeting is likely not to take place.

— Who is not satisfied with the date this time?

— This date is inconvenient for the representatives of the European Commission, which, as we know, Russia had been informed about long ago. We are currently trying to clarify this issue, but it seems that the meeting will be suspended for some time.

— What transitive price would satisfy Ukraine at the beginning of the heating season?

— The price we consider fair and objective one. We would suggest Gazprom and the European Commission start out from the European gas market price. The price assessment there is based on market principles. It would be rather objective to base on it. That price, of course, would be temporary. We will set the final price as a result of the court hearings.

The Europeans have called the corridor of USD 350-380 per thousand cubic meters. Does the temporary price you are talking about gets within the corridor You mention, or it depends more on the price of the reverse flow gas we receive from our western partners?

— The price must be based on the prices at the European gas hubs. For example, in summer, the price can reach the level of USD 260-270 per tcm. In winter, it will be higher as usual. It may reach, for instance, USD 380 per tcm depending on the season. Thus, we would offer, which actually meets the ideas of the European Commission, to eye the seasonal price. Ukrainian gas market has a huge advantage, it has enormous underground gas storage facilities (UGS). As a country that has such a huge asset as UGS, we are not too much interested in acquiring great amounts of gas in winters. It is much more expedient to procure them in summer at a lower price and use that gas in winter.

— Does Ukraine correlate the issue of debt repayment to Gazprom with the expected agreements on the transitional prices? The size of the debt itself is questionable.

— Of course. The debt issue is in the package. That is also a matter of principle for Ukraine. We have to achieve consensus on all the issues. Then the agreement will be able to last for long and give certain stability for the gas market in Europe. That is our goal.

How serious is the possibility of Russia's attempts to exert pressure on the Europeans by possible termination of gas supplies to the EU? Can the limitation of gas supplies to the countries that deliver gas to Ukraine be a Russia's hint to possible total termination of gas supplies to Europe?

— That is already taking place. That is not a possibility. That is really happening. Gazprom is doing that already. It may not often say that, but that is anyway happening. The examples are Germany and Poland, which were limited in gas supplies. As a result we had lower gas supplies for two days.

— You mentioned only decrease in gas supplies. But I am asking You about total termination of the supplies to the European Union. Can Russia take that step in order to make the Europeans be more manageable opening the way for direct pressing on Ukraine?

— Termination of gas supplies to Europe has already taken place. Twice actually. So that is possible. We believe that though total termination of gas supplies to the EU is unlikely, it remains possible. From the economic point of view such a development would be too painful for Gazprom, first of all Gazprom, as this company has spent years to create an image of a reliable gas supplier to Europe. Such actions would put an end to its whole image. We hope such events are unlikely, however, taking in account all irrationality in current actions of our Russian colleagues, everything is possible.

— Reverse gas flows from our western partners started in March. Gazprom immediately started to limit gas supplies to those countries. Today we are counting on receiving the volume of gas we need thanks to the reverse gas flows. Are these hopes not in vain?

— You are not exact. The reverse gas flows to Ukraine started not even this year. It all started in 2013, for instance, through Poland and Hungary. However, it stands to mention that the volume was not as high as today. This year new reverse route was opened. That is Slovakia, the Vojany-Uzhhorod gas pipeline, which in fact tripled our abilities. That route is the most important one from the point of view of price as the distance from the major markets, where this gas is taken from and where it is bought is lower than in Hungary. The gas pipeline on the route is more powerful than the one in Poland. Gazprom limited gas supplies to Germany and Poland and that in no way affected gas supplies through Slovakia.

— But will it affect? Cannot Gazprom limit the supplies to Slovakia?

— It cannot if we speak about Slovakia itself. The only way it may affect the situation on the Slovakian route is considerable limitation of Russian gas supplies through the North Stream, Belarus and Ukraine. That would be an option that we call unlikely, however, it is possible.

— How much reverse gas are we still planning to add to our UGS facilities before the heating season, or, may be, before the year end?

— Before the end of the season, we plan to acquire 6 more billion cubic meters of reverse gas. That amount of gas has already been included into the expected balance. That is not the full load for the reverse flow route. That is a little less. Of course that gas is very important if we fail to find a compromise with Gazprom and face the necessity to get on without Russian gas this winter.

— Will this gas [the reverse one] help us to survive without the Russian one?

— Of course. In general we planned 26 billion cubic meters. Of them 6 billion cubic meters are expected from Europe.

— Are there other sources? Just in case something goes wrong.

— Unfortunately only Gazprom would be the solution. Unfortunately too little has been done over the years of Ukrainian independence to diversify gas flows. Gazprom has always been the major gas supplier to Ukraine. Thus, I fully agree with an expert saying that it is very important for us to manage to dispense with the Russian gas using only the gas flows from Europe. That will be hard, that will demand significant economizing, however, that is important.

— How much gas is there in our UGS and how much we need?

— There are 16 billion cubic meters. It would be comfortable to start October with 20 bcm.

— Is it possible?

— No it is impossible. Our monthly reverse gas flow capacity is a billion. I mean we plan to add certain amount of gas by the end of September and hope to somewhat suspend the start of the heating season thus, receiving one more bcm into our UGS.

— Do You remember about the SCC? How long will this proceedings take: a year, two years, several months? When should we expect the ruling and what is the progress now?

— The SCC is not a prompt case. We expect that the whole process will take not less than 1.5 years. Nevertheless the SCC has a speeded-up procedure that envisions introduction of certain intermediate conditions, requirements that allow us not to hold off until crisis if one is really possible. Theoretically, either Ukraine or Naftogaz of Ukraine may refer to seek such a procedure. We are currently studying its expediency.

And now let's get back to the issue of the forthcoming heating season. According to the plan of Naftogaz of Ukraine, Ukrainian enterprises will have to cut gas consumption by 30%, while the state-financed enterprises and institutions, as well as the population — by 10%. What does that mean for people? Insufficient heating of housing and insufficiently warm water in winter?

— You have not mentioned such an important category of consumers as district heating companies. They will also get 30% less gas. That first of all means the limitations for the heating season. Secondly that means reduction in temperatures of the heat carrier that is delivered to apartments. They often say that the level of heating temperatures in Ukraine is much higher than the one in Europe. We consume too much gas. We have a problem of inefficiency. This season we won't improve everything, but we will have to introduce certain changes to help ourselves to succeed. What do I mean? I am talking about peak consumption. For instance, the temperature is very low, thus, much energy carriers is needed. I do not mean gas only. For instance, we consider buying heating oil for Kyiv. I mean partially gas will be replaced with heating oil.

— Is heating oil more expensive or cheaper than gas? It is more expensive than coal, but how expensive it is in comparison with gas?

— If we take the price for imported gas, and Ukraine pays the price of imported gas, the prices are almost the same.

Let's discuss the temperature regime. Some schools, kindergartens have informed parents that the temperature this winter will be +16 centigrade. Is that the temperature everyone should count on? Actually speaking, how will pre-school and other educational establishments be heated?

— I believe this information is premature. Firstly, as far as I know, the final change of norms for temperature regimes has not yet been approved as the issue is still being considered. Kindergartens, schools, hospitals will have their own regime. How to make it possible is still being studied. Anyway I consider it premature to spread information about +16 centigrade.

— What is the norm?

— +24 centigrade.

— You mentioned that Ukraine has always had higher heating temperatures than Europe. What are they in Europe then?

— The issue is regulated in some other way in Europe. There it is done through the pricing mechanism. In Europe people have the advantage — an opportunity to receive a service. In fact everyone decides by him/herself how much he/she can pay to get temperature he/she would like to have. But according to our researches, for instance, Germany sets the temperature at +16 centigrade.

— Taking in account warmer winters than we have?

— In Germany? I don't think so, I believe winter temperatures there are the same as ours.

— Let's speak about the situation in Kyiv. According to some reports, Kyivenergo has cut its debts by 18% however, hot water is still not delivered to some houses. Does that mean that Naftogaz of Ukraine will be so serious about strict repayment of debts? Will it be same strict not only with Kyivenergo, but also with other district heating enterprises? Or will it in fact provide Ukrainians with heat and hot water? What is the compromise?

— We really insist on full repayment of debts. District heating enterprises really have enormous debts.

— What is the total debt throughout Ukraine?

— The total debt is UAH 10 billion. That is the debt of only district heating enterprises. This year we will return the mechanism at which a part of funds received by district heating enterprises will automatically redirected onto the accounts of Naftogaz of Ukraine as payment for gas.

— Do people have to get ready for high tariffs for the heating gas this winter, or that will be suspended for the next year?

— I think that is not a question of nowadays. We are discussing it with new commission that has recently been established. We are discussing both the gas price and the price for our services. However, we have not yet received any answer from them.

— What about the antiterrorist operation zone? How is the heating issue settled there?

— The issue is also under discussion. Nevertheless we did our best to repair gas distribution networks. Approximately two thirds of damaged networks were repaired. Gas is delivered there sufficiently. At the same time, we cannot control the territories that are not controlled by regional gas enterprises. The question is still open. That is responsibility of local authorities. That is the risk of new accidents. We will try to find certain compromise with the locals we hope that the endorsement of today's law will somehow settle the situation and allow us to find certain compromise to on the one hand provide the population with gas and on the other hand to do that without accidents.

Public Relations Department
National Joint-Stock Company «Naftogaz of Ukraine»

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