Despite hiding in Austria to escape trial on bribery charges in the United States, exiled Ukrainian oligarch Dmytro Firtash keeps hurting Ukraine – and its natural gas market.
Since the Gas Transmission System Operator of Ukraine (GTSO) was launched in 2020 as an independent network, regional distribution gas companies that belong to Firtash keep pumping gas from the pipeline without paying for it.
It’s called “unauthorized offtakes,” while others think the more accurate description is stealing.
Altogether, these regional gas companies — not all of them belonging to Firtash — owe a staggering $360 million (Hr 10 billion), roughly half the company’s profit last year. Firtash’s share is $326 million (Hr 9 million) alone since he controls so many distributors.
The mounting debt threatens the grid’s finances, Sergiy Makogon, the CEO of the GTSO told the Kyiv Post on May 11. “These tariff revenues are channeled into private pockets, and it’s not right,” Makogon said. “They need to pay.”
It’s not Firtash’s first foray into profiteering from Ukraine’s opaque energy sector. He’s built a career around it.
He and the RosUkrEnergo company that he co-owned with Russia’s Gazprom made billions of dollars from Russian gas sales to Ukraine’s Naftogaz during three presidencies — those of Leonid Kuchma, Viktor Yushchenko and Viktor Yanukovych, who collectively governed from 1994 to 2014. Critics called it theft then, too, through a needless intermediary, while Firtash defended the company’s role as an essential broker between the two nations.
After Russia launched its ongoing war against Ukraine in 2014, the RosUkrenergo scheme disappeared — and suddenly Naftogaz’s fortunes improved. The company went costing taxpayers up to $500 million monthly in losses to generating regular profits. With the gas transit revenue, Firtash bought not only local gas distribution companies, but also gas-intensive fertilizer and petrochemical plants.
Naftogaz CEO Yuriy Vitrenko said he would explore taking Firtash to court to recover the money that went to RosUkrEnergo.
Different entity, same problem
The GTSO replaced Ukrtransgaz as the operator of the country’s gas transmission system in January 2020, working independently from Ukraine’s state-owned oil and gas company, Naftogaz, from now on.
The move, widely known as “unbundling,” was supposed to open a new chapter in Ukraine’s gas market in line with European standards.
Some 80% of the GTSO’s $720 million (Hr 20 billion) profit in 2020 came from international transit from Russia to Europe, while 20% of the state-owned company’s revenue came from gas supplied to local consumers.
However, it can hardly rely on profits because Firtash’s Regional Gas Company, a network of 20 gas distribution operators representing 80% of the market, doesn’t pay for the gas it takes.
There is no legal tool forcing local distributors to repay the GTSO the money they collect, and the grid operator can’t close the pipeline because it would close off access to gas for the population.
“Consumers are already paying, the problem is the money is not reaching us,” Makogon said, which puts the network at risk.
The Regional Gas Company didn’t answer the Kyiv Post’s request for a comment, but according to a report by consulting company CEP Consult published on May 7, 2020, gas distribution companies under the umbrella of Firtash reportedly lost over $42 million in January–April 2020 and could pay only 70% of the cost for gas delivery services.
The losses occurred after the government made gas cheaper to reduce the financial burden on Ukrainian households during winter, a move considered controversial by many market players because Ukraine’s tariffs for gas are already artificially low.
However, Oleksandr Kharchenko, managing director of the Energy Industry Research Center, finds it suspicious.
He said regional distributors were stealing gas from the transmission operator. “They’re basically stealing gas from the operator in a huge quantity,” he told the Kyiv Post on May 12. Kharchenko said companies stealing gas should be prosecuted and a law should be put in place to solve the problem, but he was skeptical of the government’s political will to solve this issue.
Makogon supports a proposed law that would introduce special accounts in which the utility payments from customers will be collected. The mandatory transfers will be made to GTSO.
The GTSO also asked the government to clamp down on unauthorized gas offtakes amounting to 1.1 billion cubic meters of gas in 2020 in a nation that consumes about 30 billion cubic meters of gas per year, the grid operator said. “This is a huge amount, even for a big company like the GTSO,” Kharchenko said.
Expensive network
The GTSO inherited its predecessor’s issues at home and abroad.
If European partners can’t put pressure on Gazprom to ensure bigger transit, the GTSO will need to reduce the scale of the network, Makogon said, especially when local companies don’t pay for the gas they distribute.
“We cannot and should not support this entire system only with money from the local population and we need to deal with this excess capacity,” he said.
The GTSO needs to ensure it can provide the 30 billion cubic meters consumed by Ukraine each year, regardless of debt issues or the amount of Russian gas running through its pipeline.
Ukraine’s future gas transit from Russia to Europe depends on Kremlin-controlled Gazprom, which is currently completing the Nord Stream 2 pipeline from Russia to Germany under the Baltic Sea. That line will bring transit capacity to 110 billion cubic meters annually when combined with Nord Stream 1.
“We need a clear understanding of what’s going to happen after 2024, either from Gazprom or from European shippers,” Makogon said.
While Ukraine has cut its own imports of Russian gas to zero since 2015 after Russia annexed Crimea and invaded Donbas in 2014, it has been lobbying hard to keep the transit worth some $1- $2 billion a year in transit fees.
Under a contract negotiated between Naftogaz and Gazprom in 2019, Russia is obliged to inject 40 billion cubic meters in the Ukrainian pipeline per year until 2024 but this transit might stop if Russia finishes the Nord Stream 2 pipeline, which is 100 kilometers away from completion. The five-year transit deal with Russia is worth at least $7 billion to Ukraine.
One solution might be to reduce the size of the network, too big and too costly to maintain without regular transit fees, he said. “We cannot just sit and wait for our partners while maintaining this costly network,” he said.
Corporate governance
Negotiations between the GTSO and European partners might prove complicated after Ukraine’s Cabinet of Ministers fired former CEO of Naftogaz Andriy Kobolyev on April 28, replacing him with Yuriy Vitrenko, former acting minister of energy.
For Kharchenko, such a move plays into the hands of the supporters of the Nord Stream 2 pipeline because it’s a sign of economic instability in Ukraine. “It sends the wrong signal to our partners,” he said.
Kobolyev was ousted the day after Naftogaz reported it lost $684 million in 2020, its first unprofitable year since 2015. Many believe the decision to replace Kobolyev with Vitrenko violated Ukraine’s corporate governance rules.
