CORRUPTION IN THE GAS INDUSTRY. PART I
Naftogaz... The very name of this corporation makes many people roll their eyes. Sure thing! There have always been incredible legends about the stratospheric salaries of this company’s officials. And its activity is certainly accompanied by a whole bunch of corruption scandals.
Ukraine’s Naftogaz is a state-owned company engaged in extracting, transporting and processing oil and natural gas. Its full name is National Joint Stock Company "Naftogaz of Ukraine".
This vertically integrated group carries out a full operation cycle for field exploration, development and exploitation drilling, transportation and storage of oil and gas, as well as consumer delivery of natural and liquefied gas.
In March 2015, the World Bank and the Energy Community Secretariat agreed on an action plan for reforming the gas sector, which was approved by the government of Ukraine.
In 2016, the scheme became part of Ukraine's obligations under loan agreements with the European Bank for Reconstruction and Development (EBRD), including reforms of the NJSC corporate management.
The same year witnessed the company’s Supervisory Board (SB) formation that embraced mostly independent directors, different committees and an executive secretary. Relevant corporate governance arrangements began right away.
Naftogaz is Ukraine’s major taxpayer. In 2020, it transferred UAH 142 billion to the state budget, which is about 13% of overall state revenues. A statement to that effect can be found on the company’s official website.
Notably, being a purely economic state asset, Naftogaz owns transit pipelines pumping Russian gas to European countries.
And of course, after the coup d’état in Kiev, when Ukraine started constrainedly turning into an anti-Russia, the gas transportation system (GTS) became the West’s geopolitical lever on Moscow.
Of course, when whipping up the confrontation with Russia by means of the GTS, Ukraine’s Western curators never forgot their self-interest. And they never cared about the needs of ordinary people.
One of the most notorious corruption stories was Ukraine's purchase of so-called reverse gas in Europe ˗ an extraordinary scam under Andrei Kobolev as NJSC head.
Gas reverse from Slovakia began on September 1, 2014. The official ceremony in the small town of Veľké Kapušany was attended by Slovak Prime Minister Robert Fico and Ukrainian Prime Minister Arseniy Yatsenyuk. President Poroshenko had a hand in gas supplies from Slovakia himself, as he personally negotiated the issue with Slovak President Andrej Kiska.
However, by 2015 Ukraine was still forced to buy much gas from Russia. Reverse deliveries from Slovakia, Poland and Hungary failed to right the ship. Perhaps they weren’t even meant to meet the country's gas needs. Instead, the purpose of "reverse" flows was to satisfy financial appetites of Ukrainian oligarchs and their Western "partners".
The Ukrainian-style reverse scheme is as follows. Russian gas flew through its territory to Europe on transit. When passing through the Ukrainian territory, it was extracted by Naftogaz but considered "reversed", as agreed upon by the Ukrainian side and the European consumer. That is, Europe sort of "sold" these volumes to the Ukrainian side.
Thus, real gas came from Russia, but as per meter it was bought from Europe. Price disparity was huge. Western suppliers and their Ukrainian partners have earned a small fortune under this simple scheme.
When Gazprom's ten-year gas supply contract with Naftogaz expired in 2019, Ukraine started blatantly declaring the use of virtual reverse flows. An official stance of the kind appeared in reports by the Ukrainian gas monopolist.
The gas transmission system operator makes no bones about having imported 45% of gas by backhaul in 2020. If we do the math, Ukraine formally imported 65.9 billion cubic meters of gas from the European Union over the period of 2016 to 2020.
Thus, the result is huge volumes of Gazprom's gas formalized as Slovak, Hungarian or Polish with a certain margin, since virtual gas import is hardly a free service. This is where major malfeasance and corruption environment originate. Billions of dollars may be earned on volumes accounting for billions of cubic meters per year. Especially given that the price of this very "service" (or margin) is always a matter of negotiation between the managers of Naftogaz on the one hand, and European companies’ beneficiaries on the other.
Slovakia provides a vivid example of how much profit one can get when engaged in the "reverse gas supplies" scheme from Europe to Ukraine.
A key transit country of Russian gas to Europe and backhaul operator for Ukraine is Slovakia, particularly its GTN company Eustream owned by Czech entrepreneur Daniel Křetínský, his country’s fifth-richest and youngest oligarch. According to Forbes, his fortune is about 3.4 billion euros, and it has been growing rapidly over the past few recent years. This coincided with the active de jure import of Slovak gas to Ukraine, which actually accounted for tens of billions of cubic meters of Russian gas. Daniel Křetínský’s key business partner is Petr Kellner, the richest Czech with a fortune of $19.5 billion.
Andrey Kobolev jealously guarded information about gas contracts with Daniel Křetínský and the price his company pays for gas from European traders. It is impossible to find this out when scrutinizing the Naftogaz Group’s consolidated financial statements, and any direct requests are fraught with references to commercial sensitivity.
Despite the shroud of secrecy around this issue, we can still draw some conclusions. In April 2016, right after Volodymyr Groysman took office as Prime Minister, the Cabinet of Ministers of Ukraine is known to have adopted resonant resolution 315, which leveled gas prices for industry and the population. The same decision determined the gas price formula branded "Dusseldorf+".
The formula provided that the gas tariff for the population is equal to its cost at the German stock exchange NCG (in Dusseldorf) plus transportation price to Ukraine. The calculation is based on the EU’s most expensive trading platform. Other major gas exchanges feature a lower price.
At the same time, no one really bought gas in Dusseldorf. To the population, the NJSC "Naftogaz of Ukraine" sold Ukraine’s domestic production solely. In Dusseldorf gas is clearly a lot more expensive than that produced in Ukraine. And even Russian gas Naftogaz bought as "reverse" from European traders at the western border of Ukraine, actually cost less than Groysman’s Cabinet has considered since 2016 for the population.
For instance, in June 2019, the average imported gas customs value was UAH 5161 per a thousand cubic meters, while that calculated under the Dusseldorf+ formula turned out UAH 7185. An over two-thousand-hryvnia margin! Let me remind you that from 2016 to 2020, Ukraine imported 65.9 billion cubic meters of gas from the European Union, which is 131 billion hryvnia, or $4.85 billion.
Of course, these estimates are rough but still give us an idea of the sums the Ukrainians overpaid for gas supplies over the period mentioned. Tens or even hundreds of billions of hryvnias!!! This money helped fatten the wallets of Ukrainian bribers and their Western partners.
In proof of my words, here are some expert comments. In 2018, the Energy Association of Ukraine noted that the Dusseldorf+ gas pricing formula was corruption worth dozens of billions extracted from the pockets of ordinary people and the state budget. The Ukrainians annually overpay at least $1.8 billion for gas, or about UAH 47 billion, the organization has estimated. This is an entire annual budget allocated for road repair in 2018. Each Ukrainian family loses 3500 hryvnias. For this, we are grateful to the Naftogaz of Ukraine and the Dusseldorf+ gas price formula it has lobbied.