Ukraine's top energy official has met with counterparts in Moscow to discuss the possibility of a merger between the Russian gas giant Gazprom and the Ukraine's Naftogaz. Fuel and Energy Minister Yuriy Boiko held the talks in the run-up to Russian President Dmitri Medvedev's visit to Kiev.
The outcome of the talks have not been disclosed to the press, but authorities in Kiev have made it clear that Ukraine would not let Naftogaz be taken over by Gazprom, with a takeover appearing to be the only realistic option given the difference in the companies' market values. Instead, they said Ukraine would be interested in setting up a venture in which it could retain control over its assets, one that would bring together Ukrainian pipelines and Russian natural gas deposits. Kiev is also seeking to revive the idea of establishing a gas transportation consortium with Russia, they said.
Ukraine's foreign minister, Konstantin Hryshchenko, told the Financial Times newspaper in an interview that his country would not accept Russia's proposal to merge the two gas monopolies if it was, indeed, about Naftogaz's being acquisited by Gazprom.
"We said we would think about it, but it is obvious that there are serious obstacles on the way to a complete integration between the two companies," Hryshchenko explained. "We are not going to cede control over Naftogaz. We are only willing to conclude the kind of agreement that provides safeguards for [retaining] control over the assets that are based in our territory and are crucial to our [national] economic development."
Russian Prime Minister Vladimir Putin announced the merger proposal at the end of April at a meeting in Sochi. Ukrainian officials responded by saying that they would only be interested in a merger that gives both sides equal control over the assets.
Ukrainian President Viktor Yanukovych reaffirmed that point later in remarks to the Ekho Moskvy radio station: "If I had been in Sochi, I would have given my hand to Putin and said, 'OK, it's a deal, provided the fifty-fifty basis.'"
Making such a scheme happen could be problematic, though, since the value of Naftogaz makes up just 8% of Gazprom's.
Sergiy Pashynskiy, a Ukrainian Member of Parliament sitting on the fuel and energy committee, said his country's government seeks to "unite the systems on a parity basis, that is, 50 to 50, or, preferably, 60 to 40 in Ukraine's favour, so as to be able to control the new company as a full-fledged co-owner." The MP said such a merger would become realistic only if Gazprom agreed to bring in some of its deposits. "This is what the cabinet's leaders are trying to achieve," he said.
According to both sides, Putin's proposal has yet to be negotiated in earnest. Boiko just held the first round of talks on the issue with Gazprom Board Chairman Alexei Miller.
"A merger between Gazprom and Naftogaz is an absolutely pragmatic solution," Miller said following the talks. "This idea stems from the common history of development of our gas industries, specifically the common gas transportation system formed back in the Soviet era."
To Ukraine, however, cooperation with Gazprom seems to be primarily about upgrading its own pipeline infrastructure. Prime Minister Mykola Azarov said he was hopeful that talks on the issue would be concluded by July. A source of Kommersant at the Fuel and Energy Ministry elaborated on this remark by saying, "Detailed blueprints for the modernisation of the fuel and energy complex should be submitted to Russia and the European Union by June." According to the source, three financing schemes are currently under consideration: long-term loans to be provided by Russian and Western banks at reasonable interest rates, loans from Gazprom and Western energy corporations on similar terms, and the establishment of a consortium for jointly running the fuel and energy complex with the parties involved to contribute funds as investment in the authorized capital. Yanukovych estimated the modernisation costs at $600 to 700 million and said that officials in Ukraine "are willing to engage both Russia and EU countries with the project."
According to Miller, however, the proposal of a merger announced by the Russian premier had nothing to do with Ukraine's idea of a gas transportation consortium. "The proposed merger is in no way linked with the idea of setting up a gas transportation consortium on a trilateral basis to involve Russia, Ukraine and EU countries," the Gazprom chair said. He explained that Putin's plan envisaged unification on a larger scale, which would be instrumental in increasing Europe's energy security.
Miller again cited Russia's main argument in the talks, saying that the Ukrainian gas pipeline system had been built for transporting Russian natural gas into Europe. "And, as is known, any pipeline is a valuable asset only if filled with gas," Gazprom quoted its chair as saying.
The Russian energy giant will be able to export its gas without relying on Ukraine's transportation services after the launch of an alternative pipeline across the floor of the Black Sea. This pipeline, known as the South Stream, is to begin operating in the 2015.
Miller said that rapprochement between Russia and Ukraine would not result in the South Stream project being put on hold. Yanukovych, in his turn, said the planned launch of the alternative Russian pipeline into Europe was not a troubling prospect to Ukraine. "If that's a way to pressure Ukraine, we understand," he said. "If it's about competition, then we are ready to face it."
The head of the U.S. company East European Gas Analysis, Mikhail Korchemkin, suggested that Ukraine would agree to a merger between Naftogaz and Gazprom only if Russia abandoned its South Stream project. Otherwise, the merger would be just about "transferring a Ukrainian market share to Russia without any real benefit for the Ukrainian authorities."
Mykhailo Gonchar, who heads the Kiev-based research centre Strategy XXI, pointed out that Naftogaz is Ukraine's largest taxpayer, having paid some $3.5 billion into the treasury's coffers last year, an amount constituting as much as 9% of its income. And a merger would inevitably lead to what the expert called "tax optimization." Also, the company's integration into Gazprom would result in the "devaluation of power in Ukraine."
The next round of talks on gas relations between the two countries is tentatively scheduled for May 17-18, to be held during Medvedev's visit to Kiev, his first official trip there as president.
By Natalia Grib, Oleg Gavrish