Ukraine’s state oil and gas company NAK Naftogaz Ukrayiny is celebrating, but its not what you might think. Naftogaz is celebrating its freedom from Russian natural gas – not a small feat considering Ukraine’s problematic history with Russia.
In an open letter on its corporate website on Friday, Naftogaz said ”Today is the first anniversary since Naftogaz stopped importing gas from Russia.” The company also offers a web link that clocks the number of days it has gone without importing Russian gas.
“It is an important milestone for independent Ukraine, as just three years ago gas was a major symbol of Ukraine’s political and economic dependence on its northern neighbor,” the letter says. “This dependence, being maintained through manipulating volumes of supply and prices for Russian gas, forced Ukraine into political and economic concessions.”
“In less than two years of work and with the help of our Western partners, international financial institutions, coordinated efforts of the president, the government and the parliament, we have managed to achieve an important result: the attempts of the Russian leadership to use gas for political pressure on Ukraine are not efficient any more,” the company says.
“The gas dependence on Russia is eliminated. Naftogaz and the rest of Ukrainian importers now have access to alternative gas sources and can choose among dozens of suppliers.”
However, Ukraine remains a major route for Russian gas to EU members. About 40% of Russia’s gas sales to Europe flows through Ukraine.
Russia has halted gas flows to Ukraine during winter twice in the past ten years due to various contract disputes, Bloomberg reported. The second time, in 2009, lasted for three weeks and forced some eastern European countries to ration the commodity.
Naftogaz adds that independence from Russian gas imports had also helped the company turn a profit. In two years, it was transformed from one of the most unprofitable companies in Eastern Europe into the biggest contributor to Ukraine’s state budget, it says.
Weaning itself from Russian gas has also led to gas market reform in Ukraine, as well as reform of the company’s corporate governance.
“During the three years of fight on the energy front, Naftogaz has become self-sufficient and ceased to be a burden on the state budget; a free European gas market is being formed in Ukraine; customers get gas and heating in time with no need to make political concessions to Russia,” Naftogaz says. “Ukraine was able to increase its defense budget by several times and protect itself instead of having to finance wasteful gas cross-subsidies.”
Russia for its part has lost gas market share in Europe which equates to losing geopolitical leverage in Europe, particularly over former Soviet-republics. Adding to Russian President Vladimir Putin’s gas market share woes will be U.S.-based LNG projects earmarking EU gas markets.
European LNG demand is rising as domestic natural gas production is falling. Europe’s LNG imports climbed by 16% in 2015 compared to a year earlier.
The first U.S. LNG shipment to Europe was shipped in late April followed by another in July, marking a new era for energy on the continent. New supplies of American LNG will cause problems for Russia’s state-owned gas company Gazprom, whose grip on Europe (its most important market) is now at stake.
As winter sets, Ukrainian gas stores are at their lowest level since 2014. Naftogaz may benefit from framing itself as a victim of Gazprom, Philip Howard, a professor of sociology, information and international affairs at University of Oxford told Bloomberg News.That’s because it will need sympathy if it gets in a bind, like running out of fuel.
The World Bank agreed in October to provide $500 million of loan guarantees to Ukraine to cover imports of natural gas, the country’s Finance Minister Oleksandr Danyliuk said. The guarantees will be extended to Naftogaz which will use them to borrow money from commercial banks that will be spent on gas imports.
However, despite Naftogaz’s year long break from Russian gas, Ukraine and Russia are about to meet in Brussels with EU officials to discuss the resumption of gas supplies to Ukraine, the EU Commission Vice-President for Energy Union Maros Sefcovic said on Friday. A three way meeting is scheduled to take place this week, Reuters reported, citing Sefcovic.
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