U.S. Urges Ukraine to Overhaul Gas Sector, Prevent European Cut
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_x93u7alwtQ
By Ewa Krukowska
Nov. 18
Bloomberg
The U.S. urged Ukraine, the transit country for most Russian natural gas to Europe, to overhaul its energy industry and avert reductions in fuel supply.
“Ukraine needs to begin work immediately cleaning up their energy sector,” Richard Morningstar, the U.S. special envoy for Eurasian energy issues, said at briefing in Brussels today. “We’re working together with our European friends to promote energy sector reform in Ukraine and to increase transparency. We’re also working hard to avoid another gas shut-off.”
Ukraine, forced to seek an international bailout last year to avoid a default, ships about 80 percent of Russian gas exports to Europe. A dispute with Russia in January left more than 20 countries without gas for almost two weeks. Another cutoff is in “nobody’s interest,” Morningstar said.
The European Union, the International Monetary Fund and other lenders said earlier this year that further financial support for Ukraine’s gas purchases would depend on “continuing reform” of the sector. Countries including France and the U.K. called yesterday for a “strict conditionality” on the next installment of IMF loans for the east European state.
The European Bank for Reconstruction and Development yesterday delayed a ruling on a $300 million loan package to help Ukrainian state energy company NAK Naftogaz Ukrainy pay for imports of Russian natural gas as the country didn’t meet “some requirements.”
IMF Loans
The Washington-based IMF earlier this month decided to delay disbursement of the next $3.4 billion portion of its $16.4 billion loan after Ukrainian lawmakers failed to rein in social spending ahead of presidential elections. Ukraine’s Foreign Minister Petro Poroshenko said yesterday he expects the IMF mission to return to the country by year-end and hopes the lender will release the next round of funds next month.
“We need to send a consistent message to Ukraine that they must once and for all reform their energy sector,” Morningstar said. “We need to work with them to reform their energy sector to make it more efficient, to create a better investment climate, to make the system more transparent, to take the steps with respect to Naftogaz to make it a more transparent, efficient company.”
Naftogaz, which operates the pipeline network that ships gas to Europe from Russia, has a 33 billion-hryvnia ($4 billion) budget deficit, Ukrainian President Viktor Yushchenko said last month.
External Financing
Russia’s Prime Minister Vladimir Putin said last week gas transit through Ukraine may halt if the former Soviet state can’t keep up payments. The country’s Ambassador to the European Union Vladimir Chizhov said today in Stockholm that Ukraine will need external financing to be able to pay for its gas supplies next year.
“I really believe that Russia does not want to have another gas crisis,” Morningstar said. “It clearly is not in their interest to have it. On the other hand, there are contracts, countries ultimately need to be paid and we’re working very hard, certainly in the short term, to ensure that Ukraine makes the payments.”
Ukraine also needs to improve its business and political climate to attract international investors to its energy sector, Morningstar said. The recession has been aggravated by political infighting before Jan. 17 presidential elections, with Yushchenko, Prime Minister Yulia Timoshenko and pro-Russian opposition leader Viktor Yanukovych competing for the post.
“I’ve spoken to companies who said we’d love to be in Ukraine, we have projects lined up to develop gas production in Ukraine, but we can’t do it; we’re not going to go there because of such a difficult investment climate,” Morningstar said. “The political paralysis needs to be eased and the appropriate steps need to be taken.”