Ukraine gas chief takes on Russia’s Gazprom in race with winter

Bloomberg 04.09.2014

Andriy Kobolyev, 36, faces the daunting task of keeping Ukraine warm this winter.

With tensions rising daily between Russia and Ukraine, Kobolyev, chief executive officer of Ukraine’s state gas company Naftogaz, must try to negotiate a continued flow of gas from its Russian supplier OAO Gazprom (OGZD), weed out graft and corruption, and find alternative supplies from the European Union. Perhaps most painfully, he may have to raise energy prices for Ukrainian consumers.

“This winter is going to be very difficult,” said Kobolyev after traveling to Slovakia to ceremonially start the first flows of gas from the EU into Ukraine.

There is little time left for Ukraine to prepare for the winter months as its troops fight a pro-Russian insurrection in the eastern provinces. Russia, which normally supplies more than half of Ukraine’s annual gas consumption, cut deliveries on June 16 after a dispute about prices and unpaid debt.

“Kobolyev has been tasked with an extremely difficult mission that even one of Ukraine’s most experienced negotiators, who had led the country through previous gas wars with Russia, would find daunting,” said Emily Stromquist, a Eurasia analyst in London. “If supply disruptions continue than a slowdown in industry and blackouts seem all but inevitable.”

It was thanks to Kobolyev’s no-nonsense business approach that the talks on reverse gas flow, which had stalled under former Ukrainian President Viktor Yanukovych, finally succeeded, according to Tomas Marecek, the chief executive officer of Slovak gas pipeline operator Eustream AS.

Modern Professional

“We like to deal with Mr. Kobolyev,” Marecek said in interview in Prague. “He is modern, professional, and thoroughly European. He understands how the gas market works.”

The Slovak pipeline is only a partial solution to Ukraine’s gas woes since it has a capacity of only 10 billion cubic meters a year, well below the 25 billion cubic meters per year the country needs to make up for Gazprom’s lost supplies.

As for reaching a new accord with Gazprom on better price and renewed supplies at time when Ukraine and Russia stand on the brink of all-out war, Kobolyev isn’t optimistic despite EU sponsored talks.

The Russian company is prepared to switch off even transit gas destined for the EU in order to put pressure on European nations into agreeing to new pipelines that bypass Ukraine, he said.

“It might happen that there won’t be any Russian gas in the winter,” said Kobolyev, who has a crop of blond hair and baby-blue eyes. “In the wider context of the military conflict, I’d say the probability of such a scenario is quite high.”

Consumer Prices

With supplies from Russia unlikely to resume, Kobolyev sees the biggest potential in raising prices for consumers, in some cases more than tripling costs, forcing people to use less gas. Until this year, Naftogaz has bought gas from Russia or produced it domestically and then sold it to consumers for a fraction of the cost -- a politically expedient practice that has made Ukraine one of the least energy-efficient countries in the world and drained the state treasury.

About one third of Ukrainian households pay 30 hryvnia ($2.40) a month for unlimited gas use. Kobolyev wants to raise that price to 100 hryvnia before winter arrives, even though it’s going to be extremely unpopular for the government.

“It may sound surprising, but most people in Ukraine can afford to pay higher price for gas,” he said. “Anyway, the current consumption is too high, so people should learn to save gas.”

Kiev Born

This isn’t the first time that the Kiev-born Kobolyev has worked for Naftogaz, a company created in 1999 by consolidating Soviet-era gas assets. He started his career as a consultant for PricewaterhouseCoopers LLC from 2000 to 2002 before joining Naftogaz, where he worked in various positions until Yanukovych’s election in 2010, after which he decided to leave.

He spent the following three years providing investment banking advice at a small Ukrainian firm. Last year, to his surprise, he was invited to apply for the CEO of Naftogaz and won the post.

The company had been used as a vehicle for personal enrichment by so many for so long that it is now saddled with debt and has become a burden on the budget, Kobolyev said. It’s facing a loss this year of more than 100 billion hryvnia, which will have to be covered by the state -- an amount the nearly-bankrupt country can little afford.

“Naftogaz used to be the milk cow of the Ukrainian budget,” he said. “But, as always, if you milk your cow too much and don’t feed it, it gets sick. Everybody was just taking from Naftogaz in all these years, and now it’s almost dead.”

Meanwhile, the interruption of Gazprom supply means that Ukraine’s vast underground gas storage, which has a capacity of over 30 billion cubic meters, is only half full, another reason for Kobolyev to worry about the impending winter. Yet the executive is stoic.

“We have no other option but to reform,” he said. “That makes my decisions quite easy.”

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