Who Owns the Gas in Ukraine’s Underground Reservoirs?

Publication: Eurasia Daily Monitor Volume: 6 Issue: 25

The gas dispute that left half of Europe without gas in early January was officially settled by accords signed by Gazprom and Naftohaz Ukrainy in Moscow on January 19 and 20. The clash, however, is apparently not over. Ukrainian businessman Dmytro Firtash, who owns the RosUkrEnergo gas trading company jointly with Gazprom, has said that he is suing Naftohaz in the Stockholm arbitration court over 11 billion cubic meters of gas stored in Ukraine’s underground reservoirs (Inter TV, February 1). Firtash maintains that the gas belongs to RosUkrEnergo, but Ukrainian Prime Minister Yulia Tymoshenko insists that Gazprom passed the ownership rights to Naftohaz. Consumers in the European Union may suffer again.

Tymoshenko and Russian Prime Minister Vladimir Putin agreed to cut RosUkrEnergo out of the gas trade between Russia and Ukraine. They also agreed to solve the problem of RosUkrEnergo’s $1.7 billion debt to Gazprom through a complicated deal in which Gazprom paid Naftohaz in advance for gas transit to Europe in 2009 and Naftohaz paid RosUkrEnergo’s debt to Gazprom from that money, so RosUkrEnergo in fact became Naftohaz’s debtor (Vedomosti, January 22). The problem is that RosUkrEnergo and Ukrainian Prime Minister Yulia Tymoshenko interpreted the settlement scheme differently.

The Ukrainian government decided that Naftohaz became the owner of the gas that RosUkrEnergo had accumulated in the huge underground storage facilities in western Ukraine. By Tymoshenko’s interpretation, Naftohaz bought the 11 billion cubic meters of gas stored by RosUkrEnergo for $1.7 billion, which equals $154 per 1,000 cubic meters, much lower than the $360 price that Gazprom is charging Ukraine in the first quarter of 2009. Ukraine should therefore be using gas from the reservoirs for the time being rather than buying expensive Russian gas. Tymoshenko forecast that the average cost of gas for Ukraine would be $228, based not only on the expectation that Russian gas would become cheaper due to a drop in the world oil price but also calculating that most of the gas used in the first quarter of 2009 would cost Ukraine $154 rather than $360 (Zerkalo Nedeli, January 31).

Firtash refused, however, to let Naftohaz take the cheap gas from the reservoirs. Ukrainian Customs Service chief Valery Khoroshkovsky said that he would treat the gas in question as the property of RosUkrEnergo in accordance with the customs declarations (Inter TV, January 24). Khoroshkovsky explained later that the accord between Gazprom and Naftohaz on RosUkrEnergo’s debt settlement had been signed only by a representative of Gazprom but not by a representative of Firtash, which is a legal requirement of Switzerland, the country where RosUkrEnergo is registered. This, according to Khoroshkovsky, meant that Naftohaz’s earlier obligation to pump this gas to RosUkrEnergo’s customers in Europe remained in force (Ukrainska Pravda, January 27).

Gazprom tried to distance itself from the dispute, leaving it to Naftohaz to persuade RosUkrEnergo to pay the $1.7 billion debt (Ukrainski Novyny, January 30). Tymoshenko accused Khoroshkovsky of being part of Firtash’s team (Khoroshkovsky is indeed a partner of Firtash in several mass-media projects, including Inter TV), and she dismissed him from the Customs Service on January 28. On the same day Ukrainian President Viktor Yushchenko, confirming his reputation as Tymoshenko’s bitter rival, appointed Khoroshkovsky as first deputy chief of the Security Service (SBU). The SBU immediately instructed the Customs Service to prevent the government from confiscating RosUkrEnergo’s gas (Kommersant Ukraine, January 29). Speaking in his new capacity, Khoroshkovsky warned that if the government took the disputed gas, it would violate several laws on property and investment protection (Inter TV, January 30).

The new leadership of the Customs Service, appointed by Tymoshenko, apparently ignored the SBU’s warning, as Tymoshenko announced that her government had given the go-ahead to start pumping RosUkrEnergo’s gas from the reservoirs (UNIAN, January 31). Firtash insists that the gas in question is destined for consumers in the EU. RosUkrEnergo was cut out of the market in Ukraine, but it is still bound by contracts to supply gas to Poland, Hungary, and Romania in 2009. Firtash warned that those countries would not receive the gas that Tymoshenko ordered to be taken for Ukrainian domestic needs (Inter TV, February 1).

RosUkrEnergo already has problems with its clients in the EU. Polish Petroleum and Gas Mining (PGNiG) was considering suing RosUkrEnergo over the company’s failure to fulfill its obligations. RIA-Novosti quoted a PGNiG spokesperson as saying on February 2 that Poland expected to receive 14 million cubic meters of gas a day under its contracts with RosUkrEnergo but was receiving only 7 million.

If Firtash manages to prove that the disputed gas does not belong to Naftohaz and if RosUkrEnergo’s disgruntled clients turn to Ukraine for it, Naftohaz may be in serious trouble. It is unlikely to receive any more international loans to keep it afloat, not only because of the global financial crisis but also because Naftohaz is considered untrustworthy as it even has trouble making payments on earlier loans. Naftohaz can hardly expect Ukraine’s cash-strapped industry or households to pay more for gas, nor will it receive much money from the Ukrainian state budget, which is already running a huge deficit if a recently published report to the cabinet by Finance Minister Viktor Pynzenyk is to be believed (Ekonomichna Pravda, January 27).