Interview With Dmitry Firtash on InterTV Kyiv “Details for the Week”

Ukraine is day by day exhausting its gas resources. A couple of European countries have already experienced that. For example, Great Britain has completely exhausted its own gas reserves. Meanwhile , gas consumption in Europe is steadily growing. Gas prices go up as well. Nevertherless, Ukraine has been managing to buy gas at one of the lowest prices in Europe and make money as well on its transportation. And Ukraine hasn’t exhausted its transit potential yet. But it might well be the case that Ukrainian pipelines won’t be needed any more? We are talking with Dmitry Firtash, a member of Coordination Committee of RosUkrEnergo about the future of the Ukrainian gas industry, exclusive to “Details for the Week”

[Firtash] What you said is really the truth. RosUkrEnergo is a normal gas trading company like, for example, Ruhrgas, Gaz de France, Eni. RosUkrEnergo's contractual base is effectively 75bn cu.m. of gas a year. It is a properly balanced company in its contractual relations. And this company has three things that are most important. We have purchase of gas, we have transit of gas, we have sales. We can plan our costs, we can plan our sales. It is a long-term contract to 2028. This makes it possible to plan seriously and specifically with regard to gas pricing policy.

[Firtash] It is necessary to understand that Ukraine is one of the main players on the European gas market. Because Europe receives gas after Ukraine receives it. Consequently, in order to bring gas to Europe and sell it, it is necessary first to provide for Ukraine. We also understand very well the situation that Ukraine, in principle, cannot pay a higher price for gas - not because it is worse than any other neighbouring country. But for one reason, because it has operated to date at low prices. Industry is not ready today to switch immediately to high prices. When we worked out our company's costs and devised our sales strategy, we took into account in advance the market situation - that Ukraine cannot pay normal rates for its gas, and it will be necessary to understand how to deal with this situation. What’s the point in creating debts which will never be paid? So we understood in advance that the price of gas in Europe is growing. As you can understand, oil today costs 100 dollars a barrel, so of course, the price of gas has increased very sharply. We knew this market situation. So we worked out in advance that the price would rise in Europe. In this way, we worked out our average gas sales package. We came up with a gas price for Ukraine. We considered that ours was realistic for Ukraine, that Ukraine could pay this money. We have a sufficient profit margin on our balance sheet to cover our costs, and to pay our gas suppliers and transit providers in different countries.

[Firtash] You know that RosUkrEnergo mainly buys Central Asian gas. This is around 42bn cu.m. of Turkmen gas, around 10bn cu.m. of Uzbek gas, and 9.5bn cu.m. of Kazakh gas. All the rest, we buy from Russia to make it up to 75bn. These are long-term contracts. They all have their price. For example, if we say that Turkmenistan has an average price of 140 dollars this year, Uzbekistan today has an average price of 175-180 dollars, and Kazakhstan 180 dollars too. Russia has 314 dollars at the Russian-Ukrainian border.

[Firtash] I don't think that will happen. There is, of course, another sort of concern. In 2008, Ukraine really needs to determine seriously where it is heading. Why? While the average price of gas in Europe - that is, practically on our border - has grown to 350 dollars, Russia has obtained a unique situation. It can now determine for itself which routes it can use to diversify its gas deliveries. And considering that Ukraine today is more concerned with politics, the state should separate politics from business, and not scare [people] with each new government coming and saying that they will reconsider prices. They are themselves forcing Russia to think about whether Ukraine is a dependable partner for the delivery and transit of gas. Am I right or not? So there is one question. Russia is starting to think about how to build bypass pipelines. It simply wants to distribute its risks in different baskets, in order to be sure that it is not completely dependent. This is actually very bad for Ukraine. What was signed in Bulgaria [agreement on the South Stream project on 18 January] is a problem for Ukraine. It will restrict gas crossing Ukraine by around 30bn cu.m. Ukraine should think about this. Because it is one thing that we are transitting 120bn cu.m. today. It is another that tomorrow we will transit only 60 [bn cu.m.]. And the cost of the transit will be the same. Then it will not be a question of how much we take for gas transit. It will be a question how much money we have at our disposal to pay for the costs that we have.

[Senichkin] Yuliya Tymoshenko recently spoke of plans for building the White Stream gas pipeline. How realistic is this project?

[Firtash] I think that in order to build any pipeline it is first necessary to have a contractual base and to be sure that you really have the gas. Turkmenistan's contractual base is fairly clear. All the gas today has already been sold. You probably heard the Foreign Ministry's statement [see Turkmen Foreign Ministry press release, Asgabat, in Russian 30 Jan 08]. The second issue that I think is problematic is the Caspian. There are five countries in the Caspian, and they still have not divided the Caspian up as a sea. So how are you going to build this pipeline? I'm asking you how you can put anything there? It's impossible.

[Firtash] I think that Ukraine should emphasize two aspects. First, it should understand one thing - that there was a monopoly until a certain point in time. Now when we are discussing this in 2008, the country is losing the monopoly situation. We have to think about how to convince gas sellers to trust us and to place their orders with us, because this is our business. Transport is our business. If Gazprom sells gas, we sell transport. Gazprom earns money in Europe from gas. Ukraine earns it from transport. So we can't lose this. The second thing I think is this. Today it is no secret that there are specific proposals that need to be carried out. These are completing the construction - it is 600 kilometres - of the Bohorodchany-Uzhhorod pipeline, which will allow Ukraine to increase transit by about 30bn cu.m.. In money terms, that's up to about 500m dollars of revenue. If Ukraine's budget today receives 2bn dollars for transit, this decision alone will increase it by around 500m dollars. This contract for the completion of the pipeline can be carried out next year, in 2009. I think this is really the right sort of the project. As for extraction in Ukraine, I think that Ukraine today extracts 20bn cu.m. of gas. Ukraine really needs to think about what to do next. Taking account that it has the Black Sea, the shelf, and there is a company like Chornomornaftohaz [state-owned oil and gas company], these require attention. According to our estimates and Gazprom's estimates, we think that over five years, it will be possible to explore and start extracting another 10bn cu.m.. That's a huge figure. That is practically an additional third of the gas that goes to the population of Ukraine.

[Firtash] Of course, I will answer this question very simply. If you remember 4 January 2006, that was an indicative demonstration when politicians were unable to agree among themselves while business did the right thing. There was a decision and Ukraine received gas, and this did not affect any political statements. So it is necessary to divide this situation. It is necessary to understand that we are delivering gas as we delivered it in the past. We cannot fail to deliver, because we have contractual obligations and we bear responsibility for this.

[Senichkin] So you can reassure European countries?

[Firtash] European countries know us. I don't think that they are concerned. They do not pay any attention because we fulfil all our contractual obligations and have never violated them. The gas business is a very narrow segment. You can't deceive anyone. If you fail to do something just once, then you won’t get a second chance.

Source: Inter TV, Kiev, in Ukrainian 1800 gmt 3 Feb 08