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Energy resources

Although Naftogaz of Ukraine is proposing companies to buy cheap gas, it plans to sell it for a higher price

Although Naftogaz of Ukraine is proposing companies to buy cheap gas, it plans to sell it for a higher price
Despite a coming shortage of gas, private companies were pushed aside from providing consumers with cheaper resources
Photo: Reuters

The national stock-holding company Naftogaz of Ukraine announced a tender for the selection of candidates that will supply raw materials from Hundary. Naftogaz will buy this gas and deliver it to consumers. As earlier, private enterprises cannot import gas from Europe and sell it inside the country.

Who is cheaper?

Naftogaz announced on July 8 the tender for the selection of suppliers. Contenders must provide information about the amounts of gas they can provide, its approximate prices and the date of delivery. “Ukrainian and foreign companies are allowed to participate in the tender. The main criteria for the selection of suppliers is price, the terms of payment and the stability of delivery of natural gas,” the press service of Naftogaz informed Capital.

The potential supplier was given the task of loading the free capacities of reverse-flow gas supply from Hungary at Beregdaroc. Today these capacities are not fully used. At the maximum transmission capacity of this entry point of 15‑16 mn cu m per day, only 9.6 mn cu m were transported per day over the past month. On July 10, the request was submitted for only 5.3 mn cu m

State and monopoly

Engagement of suppliers in the tender for Naftagaz is an attempt to cover the shortage of resources after the curtailment of supplies of Russian raw materials. The renewal of reverse-flow supplies of gas has not replaced Russian gas. In fact, the volume of European raw materials has decreased. According to information of the Ukrainian gas transit company UkrTransNafta, in January-June 2014 the supply of gas from Europe fell by 14% to 0.6 bn cu m compared to the same period in 2013.

However, Naftogaz needs to provide households and heating companies with reliable supplies. “According to Ukrainian legislation, Naftogaz is a guaranteed supplier of natural gas to Ukrainian consumers. If Russian fuel is not supplied to Ukraine, the company is obligated to guarantee the supply of resources, first and foremost, for the needs of the people and municipal heating companies,” the press service of the national joint-stock company reminded.

This means all gas that companies want to deliver to Ukraine from Hungary based on the results of this tender will be purchased by Naftogaz, the company’s press service told Capital.

Don’t let strangers in

Despite the shortage of gas in Ukraine, private companies cannot purchase gas in Europe and sell it to Ukrainian consumers. The energy holding company DTEK earlier announced that it was ready to renew the import of gas from Europe on market conditions and on March 26, 2014 it appealed with such a request to the Ministry of Energy and Coal Industry. DTEK, however, was denied access to the domestic gas transport system. There is no information that any other Ukrainian company managed to gain that access.

Co-chairman of the Energy Strategy Foundation Dmytro Marunych said today there are no legislative limitations to the import of gas by private companies. In addition to that, non-admission of private traders to supplies contradicts the requirements of the European legislation. “I cannot imagine how Ukrainian officials will justify themselves before the European Union in explaining why only Naftogaz of Ukraine has the right to import gas into Ukraine,” said Marunych.

Nevertheless, the informal ban on the import of gas by private companies for re-sale to consumers has not been cancelled. As of September 1, 2014, importing gas to any company but Naftogaz will make no sense as all players will be obligated to pay the VAT for its import. “For this reason, all companies are obligated to participate in the tender; otherwise they will not be able to sell the gas at reasonable prices. Their task is to transport the gas through the border, transfer it to Naftogaz and then it will be cleared through customs without paying the VAT and sold to the end consumer,” Marunych described the scheme.

Bills for supplied gas are paid months later

President of the Ukrainian NGO Union of Liberalization of the Gas Market Oleh Bakulin says the supply of gas from Europe, which is currently being organized, is not lucrative for Ukrainian private companies and consumers. “The majority of private companies supply gas directly to consumers at a lower rate. If they will be forced to sell their gas to Naftogaz, it will set the margin and sell gas to consumers at the ceiling level. This means consumers will not get any beneficial conditions when purchasing this gas,” said Bakulin.

Aside from this, the conditions of the tender stipulate that gas will be paid for by Naftogaz within 10 days upon delivery. Bakulin says that if a private company wants to supply gas to Ukraine, it must buy it from its European partner on condition of advance payment. If gas is delivered to Ukraine from August 1-31 and sold to Naftogaz the shipper can process the documents to September 15, but will not receive payment until September 25. “This means that buying gas in Europe a private company will only receive payment from Naftogaz in two months,” said Bakulin. In conclusion, he said “Who will be interested in lending money to a state-run company for such a term?”

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