July 11, 2008

Ukraine’s Fuel Minister Insists on Transition Period Before Change in Gas Prices

Ukrainian Fuel and Energy Minister Yuriy Prodan says Ukraine will insist on a transition period of three-four years before Ukraine and Russia fully switch to market prices in gas relations. He notes that the price of gas and gas transit rates for next year will be set during negotiations. He describes the financial state of the national oil-and-gas company Naftohaz Ukrayiny as "balanced". Prodan says the government intends to attract loans to pump 14bn cu.m. of gas into underground storage facilities. The following is the text of report, entitled "[Prodan] Naftohaz has no current debt to Gazprom", by Ukrainian business daily newspaper Delo on 9 July; subheadings have been inserted editorially:

Fuel and Energy Minister Yuriy Prodan told Delo that Naftohaz Ukrayiny will take out a loan of 8bn hryvnyas [about 1.65bn dollars]. The state company will use the funds to pump 14bn cu.m. of gas into underground storage facilities.

[Delo] In October-November the state promises to conclude negotiations with Russia regarding long-term gas supplies. What transition period will Ukraine insist upon to fully switch to market prices?

[Prodan] The optimal transition period would be 3-4 years. But this is the subject of very serious negotiations with the Russian side. We have already reached preliminary agreements that state there won't be any sharp increases in the price of gas. And in my opinion this is a very good start to the negotiations.

[Delo] Previously you stated that Ukraine is not satisfied with 400 dollars per 1,000 cu.m. of gas in 2009 as was stated by Aleksey Miller, head of Russia's Gazprom. What price is acceptable for our country then?

[Prodan] These matters have to be resolved during the negotiations. This may mean a stable increase in the price of gas over the next 3-4 years, starting with Central European prices, excluding transit costs (in this event the price of gas for Ukraine in 2009 will be 240-260 dollars per 1,000 cu.m. of gas - Delo). Maybe there will be another approach.

Gas transit rates

[Delo] Will tariffs be discussed for transiting gas through Ukraine and storing fuel in national underground storage facilities in the negotiations with Russia?

[Prodan] The decision reached by the committee for economic cooperation between Ukraine and Russia states that concluding long- term contracts on gas supplies to Ukraine and transiting gas across the country is a priority activity. This is also the subject of our bilateral negotiations.

[Delo] In an interview with Delo, the head of the parliamentary committee for fuel and energy complex, Mykola Martynenko, said the optimal price to transit gas is 2.7-3.2 dollars per 1,000 cu.m. per 100 km. Do you agree with this price?

[Prodan] I don't want to name concrete numbers. Without a doubt, we will take into account experts' estimates, but a final decision will have to be made during the negotiations.

[Delo] What is the breakdown of Ukraine's debt for used gas that was stated by Russia's Prime Minister Vladimir Putin?

[Prodan] We should start with mentioning that Naftohaz Ukrayiny does not have any current debt to Gazprom. But questions do remain about old reciprocal debts between UkrGazEnergo, RosUkrEnergo and Gazprom-export (a Gazprom subsidiary - Delo). The Ukrainian side is prepared to take part in resolving these issues to somehow regulate the debts.

[Delo] Former head of Naftohaz Ukrayiny Evhen Bakulin said that Ukraine's overall debt to Russia is 2.5bn dollars. Is that really true?

[Prodan] Possibly. Bakulin has access toe documents of UkrGazEnergo and RosUkrEnergo. Unfortunately, I haven't seen these documents. As a result I have no information about the sum and breakdown of the debt.

About Naftohaz Ukrayiny

[Delo] Information surfaced that the National Security and Defence Council is initiating the reorganisation of Naftohaz Ukrayiny. Was this issue discussed by the government?

[Prodan] I haven't seen the company's official documents. It is possible that the issue is not the reorganisation of Naftohaz Ukrayiny, but rather dividing the company's activity into gas extraction, transit and supply. But at the same time everything will remain within the framework of one company.

[Delo] What's the financial state of Naftohaz Ukrayiny today?

[Prodan] I think it's balanced. Today, the company's proposals are being examined to prepare changes to the state budget that will allow the company to function normally. Another issue is drawing up a loan to finance pumping gas into underground storage facilities, which is very profitable at the moment. We need to pump 14bn cu.m. of gas. We're in need of about 8bn hryvnyas to do so (Naftohaz Ukrayiny already sent loan invitations to 12 banks - Delo).

Pipeline plans

[Delo] How are the preparations going for the experimental pumping of 40,000 tons of oil through the Odessa-Brody pipeline?

[Prodan] We already have political agreements with Azerbaijan regarding the purchase of raw materials. Now they will shift to the level of agreements among economic agents. Today, contracts have already been signed with the Polish company Orlen (oil recipient - Delo) to supply oil in the framework of a test pumping to a Czech oil manufacturing plant in Kralupy, as well as with the Slovak company Transpetrol (which transports oil across the Slovak Republic - Delo).

[Delo] What volumes of oil are planned for transport via the Odessa-Brody pipeline and in what direction in the future?

[Prodan] We should make sure we do not lose our profit from the oil pipeline transit while working in the reverse regime. As a result, we need to pump no less than 9m tonnes of oil annually. It's realistic to handle this volume: 5m [tonnes] can be supplied for processing to the western Ukrainian Drohobych and Nadvirna oil refiners, and another 3.5-4m tonnes will head westwards. The mentioned Orlen can be among buyers, for instance.

[Delo] What is the government planning to do with Ukrnafta that has been failing to hold a board meeting?

[Prodan] There are two options: to wait for the approval of the private shareholders (the financial and industrial group Pryvat owns a 42-per-cent stake - Delo) or introduce legislative changes.

[Delo] What changes exactly?

[Prodan] This could be a law that allows a board meeting to be held with a quorum of 50 per cent plus one share. Or the law could provide this possibility if the board meeting wasn't held two or three times earlier. In terms of paying dividends, they can be automatically divided among shareholders if they own equal stakes in the company.

Uranium enrichment

[Delo] What will Ukraine's stake in the International Uranium Enrichment Centre in Angarsk (Russia) be?

[Prodan] Possibly, our stake in the project will be 10 per cent, although we'll determine the exact quantity of shares after agreeing the issue with the project's other participants - Russia and Kazakhstan.

[Delo] Previously you spoke about the necessity to diversify uranium enrichment by means of other options besides taking part in the centre. What are the other possible approaches?

[Prodan] Uranium can be enriched with the help of world leaders such as Eurogif, Urenco or Tenox. We'll approach whoever is cheaper. Today, believe me, there aren't any difficulties in this regard. Uranium can be enriched in several countries. At the same time, Ukraine's participation in the International Uranium Enrichment Centre in Angarsk may mean economic profit for our country. As project participants, we can rely on dividends from the centre's activity. In short we'll be making money.

[Delo] How much investment is planned this year for the Novokostyantynivske uranium ore field (in Kirovohrad Region)?

[Prodan] We plan to invest 250m hryvnyas in the company's activity on this deposit.

The Fuel and Energy Ministry plans to extract the first tonne of raw uranium towards the end of the year.

[Delo] Are any joint projects planned for extracting ore at the Novokostyantynivske field?

[Prodan] There are certain proposals for joint activity. But we're not considering them at the moment. Now we are planning to develop the field using our own means. It is a 100-per-cent state- owned property and a fairly attractive investment. We can invest budget money, take loans and get profit there. Why should the state refuse such prospects, something that is economically profitable?

On nuclear plants

[Delo] The service life for the first power generating unit at the Rivne nuclear power plant will expire in 2011. Soon we'll have to renew service lives of other power-generating units at nuclear power plants. Is the ministry ready for this?

[Prodan] Today, detailed blueprints have been put together for two power generating units at the Rivne nuclear power plant and two units at the South-Ukrainian nuclear power plant. We have no doubt we'll be able to extend their service lives. These projects are being financed in full.

[Delo] Earlier you said the type of reactor that will be installed at the third and fourth power generating units will be determined in the autumn. But many experts say beforehand the Russian manufacturers will win the tender.

[Prodan] We have organised an absolutely open competition and will examine all the proposals we receive. Of course, the Russian proposal may be more attractive economically. There is a reason for this since the power generating units at the Khmelnytskyy nuclear power plant were built based on Russian reactors. But we need to examine alternative proposals that may be less appropriate and profitable. Invitations to compete in the selection of a reactor type were sent to companies in the USA, Russia, Korea, the Czech Republic and France.

[Delo] What's the situation with the 12-per-cent stake in [Kiev energy distribution company] Kievenerho? Earlier in an interview with Delo, the president of the Energy Company of Ukraine, Volodymyr Zynevych, said the company is no longer owner by the Kiev authorities.

[Prodan] Based on my information, these 12 per cent are owned by private companies. I wrote several appeals to Kiev mayor Leonid Chernovetskyy, requesting him to inform me who stands behind these shares at the moment. I also sent appeals to the Prosecutor- General's Office and the Security Service. They have been working on this issue for as long as four months, but no answers are available yet.

Originally published by Delo, Kiev, in Russian 9 Jul 08; pp 8, 9.

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