Yuriy BOIKO: “I would export some of the gas”

There is no doubt that Yuriy BOIKO, ex-chairman of Naftohaz Ukrainy, is one of the most successful and influential managers in Ukraine. At one time he was the architect of Operation “ Reverse” on the Odesa-Brody oil pipeline. In this context, his stance on the gas deal signed by Naftohaz Ukrainy and Russia’s Gazprom is striking. While the Parliamentary Committee on Fuel and Energy has recommended that the deal be condemned, the former head of Naftohaz Ukrainy warns against this.

“To a significant degree you were the one who established the current system of gas relations with Russia. What concessions did Ukraine have to make in order to secure the low gas price? Was reversing the Odesa-Brody oil pipeline one of them?”

“When we had an agreement with Russia to obtain gas at 50 dollars in exchange for a $1.09 rate for the transit of Russia gas across Ukraine, there were reciprocal concessions: we offered them cheap transit, they offered us cheap gas. The Odesa-Brody reverse operation has nothing whatsoever to do with this because Russia has other companies to deal with this. Their Transneft is absolutely independent of Gazprom. As for this pipeline, some people say we had a choice: to use it in the original or the reverse mode, but this is not true. There were two options: either the pipe lies idle and rusts away or it is filled with Russian oil (they had a shortage of transit facilities at the time, but not now). At the time, the market price of oil shot up almost twofold, and Russia had to transport it by pipelines, tankers, and even railway tank cars. Had we not chosen option no. 2, the pipeline would still be rusting away.”

“But even now we can’t make the Russian companies bow out.”

“You are wrong. When Russian fuel minister Viktor Khristenko came the last time, he said bluntly: ‘Tell me when we should go.’ Everybody kept quiet because there was no alternative.”

“But TNK-VR Ukraine chief Oleksandr Horodetsky said recently that Ukraine had no alternative but to use Russian oil in this pipeline.”

“It is true, today we have no alternative. The Baku-Tbilisi-Ceyhan oil pipeline has taken over Caspian oil, and the Americans have invested heavily in this transit route and will never relinquish it to anyone else. Last year this pipeline was filled with seven million tons, while the installed capacity is 50 million. It is a competitor of the Odesa-Brody line. Once it started being built, I understood that we had no prospects because they will first fill this pipeline and bring it to the projected capacity, and only then will they get back to our pipeline. So what is happening? Kazakhstan has been stepping up its oil production by 10-12 million tons a year. The Baku-Tbilisi-Ceyhan pipeline will be filled to capacity in three years’ time. Only then will Odesa-Brody’s turn come. Only then will we be able to use this pipeline in the projected mode. Now there is nothing to pump through it, and nowhere to boot. All talk of us pumping this oil through Poland to Gdansk is groundless. The main problem is that land in Poland is private property. It is very difficult to buy it up in order to lay a pipeline. A joint venture was set up 18 months ago to deal with these matters. But I am sure that what they have done so far is nothing more than empty declarations, bragging, and pipe-dreaming.”

“Ex-minister Serhiy Yermilov said that after Itera left the Ukrainian market there was an idea to make Naftohaz Ukrainy the operator of Turkmen gas. Why was this not done?”

“Itera would have never left the Ukrainian market if we hadn’t pushed it out. Itera used the Ukrainian market as a vacuum cleaner, sucking money out of the most promising enterprises. And the situation with the transit of Turkmen gas through Uzbekistan, Kazakhstan, and Russia is very simple. In November 2002 Uzbekistan signed a general agreement with Gazprom, to which it granted all rights to transit any gas. I personally spent two weeks in Uzbekistan trying to conclude a contract. This was in early December 2002. When we failed, we came to Gazprom and said: either you make a contract for us or we will cut off your gas on our territory. And we struck a deal very quickly. All the talk that we could do without intermediaries is speculation in which some of our leaders have been indulging their entire lives.”

“You are answering my next question: who proposed Eurotransgas as the operator?”

“It was Gazprom, because they had an agreement on the transit of Turkmen gas. I will answer the next question: Eurotransgas had been transporting gas from Turkmenistan to Ukraine for two years at 70 cents per 1,000 cubic meters per 100 km (and we had no problems at all), while Ukraine charged the Russians $1.09 for transit. Itera carried out transit for 41% of the gas, Eurotransgas for 38%, and Rosukrenergo for 37.5%.”

“What can you (or cannot) say about Eurotransgas?”

“Eurotransgas transported to us the CIS’s cheapest gas for two years.”

“Did you know that Eurotransgas was transformed into Rosukrenergo? How did all this come about?”

“I not only knew about it but also personally signed an agreement with Rosukrenergo in July 2004. There was no transformation. A company was established by Gazprombank and Reiffeisenbank with the chief purpose of investing in Uzbekistan and Kazakhstan’s gas transportation system, because this was a major bottleneck in the transit of Turkmen gas. In April 2003 the Turkmenbashi [President Saparmurat Niyazov] signed a contract with Russia’s Gazprom and sold all the gas to the Russians for the next 25 years. When we saw that we would be left without gas in 2007, we began to seek the possibility of buying Turkmen gas and suggested setting up a company to develop transit via all the five stages of the Central Asia-Center gas pipeline from Turkmenistan to Ukraine (with an installed transportation capacity of 62 billion cubic meters a year, it now conveys 40 billion). Rosukrenergo estimated it would take about 400 million dollars to reach this capacity and two billion dollars to secure the contracted 80 billion cubic meters. This is why the banks came in.”

“But why does the company not include Ukraine if it is called Rosukrenergo and you signed an agreement with it?”

“Because we never had anything to do with the transit of Turkmen gas. That is not our territory. Gas is being transported across the territory of Russia, Uzbekistan, and Kazakhstan by a company that has an agreement with Gazprom.”

“Is Gazprom suggesting today that we buy part of this company?”

“Gazprom can only sell its own share in the company. If Reiffeisenbank makes an offer, we could accept it if it meets this country’s needs.”

“Why is the Jan. 4 agreement so vague about the supply of Turkmen gas to Ukraine? It says nothing about the 40 billion cubic meters that Ukraine allegedly bought from Turkmenistan.”

“I cannot agree with you: it mentions in clear-cut terms 41 billion cubic meters of Turkmen gas, 7 billion of Uzbek gas, and 8 billion of Kazakh gas.”

“The 41 billion refer to the gas that both sides hand over to Rosukrenergo?”

“No, they hand the gas over to us so that we can sell it, because the agreement was signed with us.”

“Does this mean that all Turkmen gas is part of the batch that Rosukrenergo will be delivering to Ukraine?”

“Our balance of gas is 75 billion cubic meters, including the 20 billion that we produce and the 55 billion that Rosukrenergo delivers to us at 70 cents per 1,000 cubic meters. The point is that they take 40 billion cubic meters of Turkmen, 8 billion of Kazakh, and 7 billion of Uzbek gas and thus form our balance.”

“But, as a result, we receive 34 billion cubic meters according to the contract with Rosukrenergo.”

“No, all the 55 billion cubic meters go to this country under the contract and form the overall balance.”

“Officially, Ukraine is supposed to receive $2.5 billion for transit after the rate was raised to 1.6 dollar per 1,000 cubic meters per 100 km. Does this take into account the five billion cubic meters that Ukraine has already made available under the bond agreement?”

“This is a totally incorrect interpretation. Ukraine has never given five billion to anybody. When Tymoshenko was vice-prime minister, Yushchenko the prime minister, and Bakai the head of Naftohaz, Ukraine ran up a $1.5 billion debt to Russia. Then this problem was settled: we signed an agreement in August 2004. Under this deal, when we transported Russian gas through our country, we were to receive gas and hard currency as payment for transit (85% and 15%, respectively). To tell the truth, we were never paid this currency: it was written off as payment on the debt. So when this amount was paid to us five years in advance, we paid it back the same day and thus discharged the debt.”

“But somehow it turned out that up to then Ukraine was annually receiving about 30 billion cubic meters for transit, but afterwards it was approximately 25 billion?”

“Ukraine was never receiving 30 billion cubic meters as payment for gas transit, at the most 26 billion, and the remainder (15 percent) was to be paid in hard currency.”

“Can you confirm that $2.5 billion is the true amount that Ukraine is going to receive? And to what extent will Ukraine’s overall gas balance shrink or grow as a result of the Jan. 4 agreement?”

“The only change is that industrial gas will be 30 percent more expensive.”

“Will supplies be reduced?”

“No. The real outcome of this agreement is a 30-percent hike in the price of industrial gas.”