Ukraine, other officials cite progress in implementing energy reforms

Ukraine has made significant progress in reforming its energy systems after Russian gas giant Gazprom cut off its supplies in 2014 after the country missed a payment, but continued international support will be essential for it to continue improving its production and transportation systems, speakers agreed at a June 19 Atlantic Council forum.

Reforms that Naftogaz, Ukraine’s national oil and gas company, instituted in the wake of Gazprom’s cutoff already were having a beneficial impact when a Swedish arbitration tribunal rejected Gazprom’s take-or-pay claim on May 31, allowing Naftogaz to not pay $34.5 billion for contracted gas it did not receive, Naftogaz Chief Executive Andriy Kobolyev said in a keynote address.

Measures included diversifying supplies, ending price subsidies, and spinning off transportation operations so that the national energy company would be more focused and transparent, he explained. “A lot of US diplomatic pressure helped free us from Gazprom,” Kobolyev said. “Once our first European supplier, Statoil, approached us, the gate was open and there was no turning back.”

Naftogaz Chief Commercial Officer Yuriy Vitrenko said, “We’ve proved that companies like Naftogaz don’t have to pay political prices.” He continued, “We’re already seeing fruits of reforms. Our gas production increased by 5%.” More needs to happen now with private producers, some of whom stole their licenses under the previous regime and haven’t developed them, he said.

“Despite populist objections to higher prices, we’re slowly making progress. At the same time, we realize that making a painful move from hidden subsidies to visible production targets lets us get more money into the national budget,” Vitrenko said.

Robin Dunnigan, deputy assistant secretary for energy diplomacy at the US Department of State’s Bureau of Energy Resources, confirmed that Ukraine has come a long way since 2014. “It hasn’t purchased gas from Gazprom since November 2015 because of its reforms. Looking at its domestic production, there could be a 30% increase over the next 5 years,” she said.

“The tribunal’s decision means Gazprom will no longer be able to set prices politically,” said Bud Coote, senior director at the Atlantic Council’s Global Energy Center. “It also will help Ukraine’s domestic producers, who will start to receive prices previously reserved for imports.” A significant question is how the reforms will affect negotiations for a new transit agreement between Russia and Ukraine in 2019, he added.

“There’s no doubt that continued support from the international community will be essential,” said John Herbst, director of the Atlantic Council’s Dinu Patriciu Eurasia Center. “Ukraine is at a pivotal point in its history with young reformers working hard for change.”

Dunnagin said, “It will be necessary for international financial institutions to remain involved.” She continued, “Broadly, I believe that the Trump administration would like to remove barriers to energy trade. Ukraine’s becoming more competitive fits into this.”

Contact Nick Snow at nicks@pennwell.com.

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