This page has been archived and commenting is disabled.
Lies And Deception In Ukraine’s Energy Sector
Submitted by Robert Bensh via OilPrice.com,
The Ukrainian government has repeatedly claimed it is doing its best to improve the oil and gas investment climate, but official statements are the opposite of the reality, as Prime Minister Arseniy Yatsenyuk is leading the great deception.
According to Prime Minister Yatseniuk, Ukraine has taken a number of important steps to reform the energy sector, and has even achieved success in the formidable fight against rampant corruption, as well as signed open and transparent contracts for purchase of the natural gas from EU member states. Now he claims Ukraine is looking forward to Western companies' investment in Ukraine's gas transportation system.
"I would like to point out where we have succeeded: we have succeeded in overcoming corruption in the energy sector. Billions of dollars, which previously used to flow into the pockets of Ukrainian oligarchs, are now being brought out of the shadows. At present, Ukraine purchases gas under transparent and open contracts with European companies," Yatseniuk recently told a joint press conference with German Chancellor Angela Merkel in Berlin.
Even the President has made misguided and naïve statements this past week in Davos, declaring that “…Ukraine will build new ways for receiving Norwegian gas and gas from Europe, and Ukraine will also produce shale gas."
The stark reality is that these official statements are in no way reflected by government action, and the gas market players in Ukraine recognize the deception as does the energy industry as a whole.
The real story is that while gas has been received from Norway in reverse flows, Ukraine’s current energy strategy, taxation and fiscal regime has forced Ukraine’s current producers of oil and gas to stop drilling new wells and curtail production.
The development of Ukraine’s potential shale gas is even further afield with Chevron announcing its departure from Ukraine and only Cub Energy remaining in the country as an operator with both technical and local expertise in developing the shale. Even if shale can be developed in Ukraine it will be extremely challenging given the highly service-oriented logistical train, which does not presently exist in Ukraine.
In the course of the last year the Ukraine’s private gas producers were doing their best to overcome, if not merely survive, the consequences of the government’s move to significantly increase fiscal and administrative pressure on the industry without any consultations with the latter. The government failed to deliver on its promises, and the only thing it managed to achieve was an undermining of any trust the industry may have had in it.
Ukraine’s current regulatory and fiscal systems governing the energy sector are overly complicated and non-transparent, even without the major political and military conflict with Russia and annexation of the Crimea. The implications have been significant. Since last year, all major oil and gas projects in Ukraine have significantly slowed down at best, and been suspended entirely at worst.
Issue by issue, the lies continue to mount.
Rising Taxation
The government recently raised the tax burden on private natural gas producers twofold (55% of the sales price - for the natural gas extracted from deposits up to 5km, and 20% - for the natural gas extracted from deposits deeper than 5km), instead of implementing long-awaited market reforms. Notwithstanding its own promises for this to be a temporary measure by 1 January 2015, at the initiative of the Ministry of Finance, just a few days before the New Year, Parliament rendered the tax increase permanent--in violation of the Parliament majority’s Coalition Agreement.
It is interesting to note that the practicability of these high rates was based on the calculations and official data of the Ministry of Finance for the old huge fields that had been explored and developed in Soviet times by state-owned oil and gas companies, while the gas producers were deprived of the opportunity to present their own figures and assessments for the new wells drilled on their smaller fields. The government simply brushed the matter aside, stating that the costs and expenses claimed by the investors were inflated.
Most poignantly here, the figures suggested by the Ministry are so wildly out of line with the facts that even state-owned oil and gas companies refuse to acknowledge them. Recently state-owned Naftogaz calculated the economical production cost of natural gas extracted by its subsidiary, Urgazvydobuvannya, up to UAH 5,430 [USD 344] for 1,000 cubic meters (excluding VAT), which is much higher that the data submitted by the Ministry of Finance (according to which the gas production expenses do not exceed UAH 230-240 [USD 14.6-15.2] per 1,000 cubic meters).
Private gas producers have been open about their costs and expenses. Some of them are actually publicly traded companies (JKX Oil & Gas, Serinus Energy, Regal Petroleum and Cub Energy), and their financial data is open, transparent and publicly available. Over and over again investors sent letters to the Ministry of Finance, with a call for cooperation and open dialogue, demonstrating the relevant figures and presenting underlying documents and statistics. For some reasons the Ministry chose to ignore their efforts and declined any suggestions to establish a joint working group on this matter.
Instead of working closely with the industry the Government has already pushed independent businesses out of the gas market by introducing Naftogaz’s monopoly on gas supplies to large industrial consumers. This is because the government has been trying desperately to ensure financial support for the eternally cash-starved Naftogaz. Forcefully redirecting the financial flows from gas consumers in favor of Naftogaz was a small-minded, short-sighted remedy. Such administrative measures shocked the Energy Community, which demanded explanations from Ukrainian officials as such measures completely contradict European 3rd Energy package.
Corruption in the Energy Sector
No need to say that such a state of affairs only encourages corruption in the country. In spite of the Prime Minister’s promises and assurances to the contrary, the energy sector is still the biggest source of corruption in the Ukrainian economy.
Repeated reports by the IMF, the World Bank, and the International Energy Agency (IEA) bring up the issue of corruption in the energy sector. They strongly recommend abolishing price subsidies and cross-subsidization, as well as raising gas prices to a level that will at least cover the production costs of the state producers. Ukraine’s system of gas subsidies for households has long been abused by the gas distribution companies that are able to buy gas intended for households at subsidized prices and sell it to businesses at much higher market prices, with a 200-400% margin. The estimated budget losses exceed hundreds of millions of dollars per year. No need to say that the existing system only further destabilizes Ukraine’s economy and puts enormous pressure on Naftogaz and its subsidiaries, at whose cost these subsidies are cross-directed by the Government.
No Reforms, No Success
It is obvious that the measures and steps taken by the Ukrainian Government have nothing in common with successes and reforms claimed by Arseniy Yatseniuk, as neither doubling tax rates and serving the oligarchs’ interests nor corruption and monopolization of the gas market correspond to the recommendations given by the Energy Community and IMF to Ukraine. Despite repeated announcements, implementation of the reform has been held back by fear of losing the electorate’s support and approval of the oligarchs’ groups. Under the mask of nominal fight with the oligarchs the Government takes populist decisions and the Parliament adopts killing laws. One must admit that the Government seems to be unwilling to undo the money-making mechanisms in the energy sector.
Given the desperate situation in which Ukraine finds itself today, it should have become extremely committed to the proper development of its domestic gas production, as that would introduce some extra volumes of the gas produced, in addition to 20 bcm domestically, into the local market to satisfy Ukraine’s ever-hungry annual consumption of around 53 bcm. This would also allow Naftogaz to save some foreign currency reserves on buying imported gas in lesser volumes, including gas coming from Russia. As a result, financial pressure on the state budget and government (which attempts to plug Naftogaz’ deficit by any means necessary - including loans from state-owned banks, international financial institutions and currency reserves of the National Bank of Ukraine) could have been significantly lowered.
Instead, the government has directed its actions against independent gas producers and the continuing crackdown is severely affecting both the country’s energy independence and its currency reserves. The massive fiscal and administrative burden and lack of investment in the national gas extraction industry will only result in further decline of gas production, worsening of economic conditions and a higher degree of Ukrainian dependence on Russia. Ukraine’s short sighted policy moves ensure that investment in the sector will cease and attracting new capital will become nearly impossible as Ukraine will be viewed as hostile based on it’s treatment of businesses currently operating in the country.
The revenues that the government hoped to generate from taxation of the oil and gas companies with the concomitant politically popular taxation of the oligarchs is proving to be a failure, as its actions are not only killing the independent gas production industry in the country, but are in fact depriving Ukraine of the opportunity to become a strong, energy independent economy. Without implementation of the necessary reforms, the Ukrainian energy sector will continue to be the nursery of corruption and playground for blackmail, which Russia enjoys greatly.
- 11699 reads
- Printer-friendly version
- Send to friend
- advertisements -


We need to find another use for Empty Pipelines...
Tis a good place to stuff the ashes of incinerated dead Ukie conscript soldiers.
I feel terrible sadness for the Ukrainian mothers whose boys will never return.
Yatsenyuk aka 'The Rat' lying.?.... Impossible! Psaki told us so..../sarc off.
WONDERING WHY ZH HASN'T PUBLISHED YET ANY ARTICLE RELATED TO THE ONGOING EVENTS IN NORTHERN ISRAEL ...BIASED JOURNALISM?
Tensions in the North: Not war – yet
Wednesday’s events do not mean a full-scale war is inevitable, but it is now a few steps closer.
http://www.jpost.com/Arab-Israeli-Conflict/Tensions-in-the-North-Not-war...
UPCOMING MATCH:
Zionist/Arab military coalition vs. Iran/Hezbollah/Assad's regime
MAKE YOUR BETS
IMPORTANT NOTE: this event won't be the match that ignites WW3, it will be just a regional conflict, short and extremely intense. Too bad that civilian populations in Arab countries and Iran are not prepared for the type of weaponry intended to use in this conflict...lots of DU ammo (and blame their governments).
Iran are not prepared for the type of weaponry
Dood, The Iranians have some serious weaponry themselves. Those toy boats were a distraction. The Chinese and Russian ballistic anti ship missles and their serious electronic warfare will surprise many including the Isrealis.
Wrap a rag around Hunter Biden and drag him through the empty pipes..
He has to be good for something over there.
I was thinking that Hunter Biden helped right this.
We looted some Ukes.
Hunter was made a Director to bring " Transparency " to the gas industry. Have not heard a word from Hunter nor his Daddy
If you consider siphoning Russian gas meant for Europe as an improving their situation, they are not lying.
Yeah, this is Porkyschenko's and Ratsenyiuks way to lower the Ukies energy cost...problem is that they steal the nat gas for themselves. The Ukraine has among the vilest and most disgusting ruling class found globally.
Yats the Yid
What a gas.
The Ukes he did
In the ass.
section them off and turn them into 'habitats'
Shale gas? Didn't they get the memo?
While costs certainly differ by well depth and reserves, US shale producers can be pretty profitable at $4.50/mcf which is less than $150 per 1000 cubic meters. Many of those US producers are paying royalty rates of 20% and some state extraction taxes. It was Drill Baby Drill that broke the back of the OPEC cartel that had controlled the high oil prices. The US producers cannot profit at $3 for dry gas production.
My guess is that the Gazprom price is still in the range of $6.5 or $7, if they would supply the Ukies. Other Euro suppliers are likely the same. So the corruption is costing them the employment from drilling and producing, a reasonable amount from NG sales as royalties and taxes, and some increase in energy security. If they really got the deal rolling they could possibly supply other Eurozone countries as the pipes are already in place. Chevron was not interested in a small project so it is likely that the reserves are there and can be recovered at competitive costs to other Eurozone suppliers.
These pols learned their tactics and methods from the Russian masters in the old days. They really don't understand very well that capitalist countries can just not play their game. Their country and the population will continue to suffer without any cost to the pols.
Putin is certainly behind many efforts to have fracking banned in Europe, as he supports those efforts in US. Europe is going to find out what the real cost of relying upon a pretend Czar can be.
Pretend this mofo:
http://orientalreview.org/2014/12/25/grandmaster-putins-trap/
Drill, baby, drill. Hey John, who are we bombing next?
"The development of Ukraine’s potential shale gas is even further afield with Chevron announcing its departure from Ukraine and only Cub Energy remaining in the country as an operator with both technical and local expertise in developing the shale. Even if shale can be developed in Ukraine it will be extremely challenging given the highly service-oriented logistical train, which does not presently exist in Ukraine."...
What a difference 16 months makes with Exxon Mobil and Chevron proudly displayed in that Washington foundation retreat that advertised $5 billion U.S. support to that fledgling military junta in Western Ukraine that was waiting in the "wings" to be spawned?!!!
Not a fan of Vicky Nuland's protege the little Neo-swastika walker "Yats" -but this is emblematic of what blood sucking motherfucking scum the U.S. energy giants are!
They have as much blood on their hands as the politicians in Washington that helped make those 25,000 dead and 800,000 and counting refugees in Ukraine possible along with what they've done in Iraq, Libya and Syria!!!
That so-called Prime Minister Arseniy Yatsenyuk is a psychopath. The bloke is clinically insane and I can't believe anyone would ever take notice the rubbish coming out of his mouth.
When the Rat speaks, he is channeling his masters voice, the ugly, potty mouthed and disgusting Victoria Nudelman/Nuland.
Poland's shale gas fantasies have recently be exposed as such. Ukraine has similar fantasies.
Poland is using 'Solar Tech' for energy:
Sunlight grows potatoes. Potatoes make vodka. If you can't drink it, you can rub it, gargle with it or burn it.
This is the second article tonight with the sales gimmick embedded in the middle paragraphs.
OilPrice.com wants to swindle you?
Hey Robert Bensh, why don't you go on MSNBC and say this to the camera?
That's what I thought.
"Yats is our guy"
He's that creepy-looking uncle that no one in the family talks about, is never invited to cookouts, get-togethers, or reunions, and who you refuse to allow your young children to be alone with.
One might expect to see his ugly face on a sex offender database.
Some fun questions for the New Year!
Russia’s Vladimir Putin refers to himself as “Russia’s humble public servant.” This humble public servant’s net worth is:
a) Negligible – after all, he’s merely a humble public servant;
b) On a par with that of Russia’s oligarchs, who often are required to get clearance for important transactions from Mr. Putin himself;
c) Greater than that of most oligarchs, since approval by Mr. Putin for large transactions is a given, and naturally, “palms will need to be greased”; or
d) Quite modest, Mr. Putin preferring to be paid in bottles of Baltika No. 3.
For those that answered (b) or (c), a follow-up question:
Mr. Putin’s extraordinary wealth is the result of:
a) Blatant corruption and quid pro quo deal-making;
b) Skimming from the Russian treasury;
c) A night job working on the KaMAZ truck assembly line; or
d) Generous donations via Western Union from loyal Zero Hedgers.
What is it with the stinking Ukie trolls, that they always criticize Putin while their evil and corrupt oligarchs are robbing and killing them? Who Carez where Putin's money comes from? Let the Russian People deal with it.
Instead of worrying about Putin, the imbecilic Ukie trolls need to eliminate the den of thieves and murderers that are occupying Kiev.
You desperately want to claim that Kiev is more corrupt than oligarch Putin, don't you, Bob?
You silly goose!
I do major business in both countries and Ukraine is more corrupt. Just a fact...
Ummm, I thought corrupt was "Corrupt", NO matter which Government was doing it. Includeing "Your's & Mine".
Dumbass.
^^^ You just called someone "Bob," which means you're actually Amerikan Patriot with a new name. Try to be less obvious next time, and remember I already told everyone who you really are, Roberta:
http://www.zerohedge.com/news/2014-12-17/china-prepares-bailout-russia#c...
Here's a fun question 5e0whatever:
How exactly did you type all of that with Vick Nudelman's hairy balls in your mouth and Yat the Yid's little dick in your ass?
Here's some questions for you.
1 Is it true that the party in the USA that spent the most is the one that won the last 10 elections?
2. Is the debt of the USA over 100% of its GDP?
3.Is the debt of Russia below 12% of its GDP?
4.Have the western bankers fleeced the public for billions of dollars through fraudulent transactions for which there has been no significant accountability?
5. Is it true that Timothy Geitner was a tax cheat up until he got the job as treasury secretary?
I guess power corrupts everywhere but in my opinion the western banks and Washington win first prize by a long long way if success is measured by number of people screwed times how much they were screwed.
Level vs. flow...
Remember Russia? It’s Still Doomed
By Matt O'Brien January 27
Russia's economy is like the sun: if you stare at its smoldering ruins for too long, you'll go blind (EPA/ Mikhail Klimentyev/Ria Novosti).
President Obama might have a future as a credit rating analyst. During his State of the Union, you might remember, he took a victory lap of sorts when he declared that, as the price of its aggression, Russia's economy was "in tatters." Well, S&P agrees: the rating agency just downgraded Russia to junk.
Now, normally I wouldn't pay any attention to what a credit rating agency says about a government. That's just, like, their opinion, man, and often a poor one at that. But this time is, well, different, because if Russia is rated junk, then its companies will be too—which will increase the borrowing costs on their existing debt. It could also trigger earlier bond repayments, which, together with the higher interest rates, could, according to one official, cost them as much as $20 to $30 billion.
And that's $20 to $30 billion it really can't afford. Russia, as I've said before, doesn't have an economy so much as an oil-exporting business that subsidizes everything else. But it can't subsidize much when prices are only $50-a-barrel. That leaves Russia in a world of bad, worse, and Dostoevskian choices. Cheaper oil, you see, means that Russian companies have fewer dollars to turn into rubble…er, rubles, which is just another way of saying that there's less demand for rubles—so its price is falling. But it can't fall too much or Russian companies, who have a lot of dollar debts they can't roll over due to Western sanctions, won't be able to pay back what they owe. Even worse, Russia banks could face a run on their foreign currency holdings, as people try to turn rubles they think will lose value into dollars that won't.
Russia can't wake up from this economic nightmare, though, because they're not asleep. This is their reality. After falling in almost perfect tandem with oil for most of the year, the ruble started free falling in December. In under a week, it went from 55 to 75 rubles per dollar—a 36 percent decline—and the panic got so bad that the bank run turned into an Apple and Ikea run. People decided that if they couldn't ditch their rubles for dollars, then they'd settle for the latest smartphones and assemble-it-yourself furniture instead.
Faced with this catastrophic loss of confidence in their currency, Russia did the only thing it could do: everything. First, it jacked up interest rates from 10.5 to 17 percent to try to get people to hold their money in rubles that would pay them a lot of interest rather than dollars that wouldn't. Then it started spending its $400 billion-ish war chest of reserves to prop up the ruble directly. And when that wasn't enough, it, well, "convinced" exporters to sell their dollars for rubles and made oligarchs bring their overseas money home to pay taxes. In Putin's Russia, this counted as kinder, gentler capital controls. After all, as one official explained, "there were no threats of sending anyone to Siberia."
The result, as you can see below, was a short-lived ruble rally that has since dissipated. The problem, as Lars Christensen of Danske Bank told me, is that the ruble "should" be worth 75 per dollar as long as oil is around $50-a-barrel. What makes that even trickier, though, is that a currency doesn't fall to its fair value, but rather to the point at which it's expected to move up to its fair value. Markets overshoot, in other words, because nobody wants to buy rubles right before they hit bottom. That means, absent Russian intervention, the ruble would probably be trading around 80 or 85 per dollar, and maybe even lower.
So the Russian government can keep spending its dollars and forcing its companies to do so too, but whatever boost the ruble gets will fade away as long as its fundamentals are weak. Low oil prices, you see, are like gravity pulling the ruble down. It took just the S&P downgrade to remind everyone of that, as the ruble fell another 7.5 percent on Monday.
It's an economic catch-22 called "Not Enough Dollars." Russia, you see, hasn't had to just bail out the ruble. It's also had to bail out its banks, including, it looks like, another one on Monday, that have been hit hard by the ruble's decline and declining earnings. And, after it made its companies sell their dollars, it's had to bail them out with new dollars too, so they can pay back their dollar debts, a financial shell game meant to hide how much of its reserves the government is really spending. Finally, though, the government might have to bail itself out. Its budget could go from surplus to deficit now that oil revenues have halved, and it can't borrow what it needs because sanctions have cut it off from international credit markets. It's no wonder, then, that Russia's reserves are already down to $379 billion from $414 billion a few weeks ago. That's a pretty high burn rate.
And it's only going to get worse. Russia's economy, its central bank says, will shrink 4.5 to 4.7 percent this year as long as oil stays at $60-a-barrel. It's under $50-a-barrel now. And its sky-high interest rates will only add to that by keeping people from borrowing. So will its oil-induced austerity, as the government announced it will cut all non-defense spending by 10 percent. But the biggest negative for them, aside from still-cheap oil, is that the EU is getting ready to introduce new sanctions after Russian-backed rebels attacked again in Ukraine. That'll put even more pressure on Russia's companies to pay back what they owe, which isn't easy when the collapsing ruble is making foreign currency debts more expensive and the collapsing economy is making the rest more expensive too by crushing earnings.
Russia, in other words, is doomed as long as oil is cheap and sanctions are in place. It could survive either alone. But together, they destroy Russia's economy and its ability to borrow to cover that up. And unlike, say, 2008, when oil prices rebounded rather quickly, this crisis could last awhile. After all, if you think Putin is going to back down in Ukraine anytime soon, well, think again: he's already pushed pro-peace oligarchs who've lost a lot of money the past year to his outer circle, if that.
The government, for its part, is trying to put a brave face on this bleak economic picture. One Kremlin official went so far as to say that the Russian people are prepared to "eat less" to support Putin. Maybe that's why Putin doesn't allow real elections—because that's not much of a slogan.
OK, but this article and comment thread are about Ukraine. Different country.
Yes, but you see Amerikan Patriot has posted this to show what a terrible, terrible mess Russia's economy is, compared with Ukraine's.
the *sshole is backed. the troll with no opinion of his own. how ya' doin' homeboy? lmao
Bravo! Great find in the Washington Post. /sarc/ As long as we're trying to squeeze the Russians their companies may just decided to default on debt and blame it on sanctions-who could blame them? They'll get by. So will the Russian people. What is described in the artcle as an economy "doomed" doesn't even begin to compare with what they went through in 90-91. They will survive, just as they always have. If anything the sanctions will push them closer to the Chinese that much more quickly. Did the author not know that Russia bought just over 20 tons of gold last month? Apparently they thought that was more importan than spending the money on propping up the Ruble.
Putin must be shitting himself now...from laughter.
Who's manning Vlad's suicide watch tonight?
Who is manning yours?
Do you get paid more for repetition, 'Amerikan Patriot'?
he's back and the lobotomy was not successful. lol
"Lies and deception in Ukraine's energy sector" Didn't Bidin's son and Kerry's cousin or something move into this. It must be heredity
As long as the dollar rules it will producers paying for the free ride of the USA. Some may be tiring of this arrangement.
Gazprom will abandon Ukrainian pipe and will switch to North Stream and 'Turkey Stream' pipelines - that was official statement from Gazprom representative Viktor Zubkov (Chairman of the Board of Directors). Zubkov told that decision accepted by Putin. Current contract between Gazprom (Russia) and Naftogaz (Ukraine) will end in 2019, so EU has to build new pipelines from Turkey until 2019.
they'll be paying RU to take the UE back.
hey mutti merkel show some leadership.
anyone hear from her lately?
she gets autistic under pressure.
DE really blew it.
No longer the prime mover in europe.
Never again. You fools.
One thing is sure this whole mess in first world is a spaghetti bowl of the toxic mixture of energy cum financial plays; all protected by the big nuclear stick in rival camps heading for a military stand-off.
And this new Gordian knot is not gonna be cut either by the US Oligarchy or by the Putin/China axis. If anything it will get worse as all are in denial to protect vested status quo.
These plays only get us deeper into the mire of ethically debilitating limbo which smells blood and gut plays coming back to our continent.
Somebody has to invent a new paradigm.
As that won't occur for another 30 years by the looks of it, we will live in a state of 30 year ideologically fronted war-- which hides the true structural imbalance of the corrupted energy/finance combined thread bequeathed by PAx Americana's sterile ME oil patch plays-- all over a frontline Europe.
Between a rich US led empire, without energy resources in EU, pitted against a renegade Russia which only has fossil resources and no spark of innovation.
Where is our new energy/financial renaissance coming from that is not the product of a new mushroom cloud chain reaction like in Hiroshima?
All it takes is now a Greek or Iranian spark to alight the tinder in Ukraine or in Syrac/ME petromonarchies.
Extremely well articulated summary of current world situation. Question is which monetary/financial system will implode first. Some thought it would unravel with War for natural resources, but in a deflationary cycle, resources are actually plentiful. Instead, it seems the conflict is over preserving an idiological financial system pitting globalism vs. nationalism and possibly religious/cultural differences. In any case, Capitalism as we know it is being challenged from within due to it's fragility and inequality, and threatened externaly due to lack of growth and expansion which is crucial for it's survival. Somehow, Russia is really not the the enemy,simply because not many would consider it as a better alternative . Perhaps we are the enemy and must adjust accordingly
That doofy looking shill looks like Chuckie from the Rugrats with a chrome dome. Try getting a different look Yats!
Ukraine's Energy Sector = Russian Ministry of Defense