Naftogaz head speaks on challenges in the upcoming cold season

18 August, 10:58 PM
Yuriy Vitrenko chairs the board of Naftogaz (Photo:Oleksandr Medvedev)

Yuriy Vitrenko chairs the board of Naftogaz (Photo:Oleksandr Medvedev)

Yuriy Vitrenko chairs the board of Naftogaz – the Ukrainian state-owned company that operates the extraction and distribution of oil and natural gas across the country.

This summer, Vitrenko has to navigate preparations for the coming winter season – amidst the full-scale war with Russia – and negotiate debt restructuring with the company’s foreign creditors. Naftogaz now needs “huge sums of money” to make fuel purchases. So far, holders of Naftogaz’s debt have refused to suspend bond payments by two years.

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The company recently made another proposal to alleviate its corporate debt burden and is now waiting for its creditors to respond. In an interview with NV, Vitrenko outlines why he thinks the new proposal is in everyone’s interests, and how Ukrainians ought to prepare for the coming winter season, which promises to be challenging.

NV: How has the war changed Naftogaz, so far?

Vitrenko: We’re in a new reality. Our priority is to work towards our shared victory and to protect our employees. Some of them were killed on the job, with many still working in active war zones. Much of our assets have become targets for the Russian military. Any nation comes together at wartime, including state administration – our governance is incredibly centralized now.

NV: Do you mean Naftogaz, or something more general?

Vitrenko: Starting with the President, and then down the line to the Cabinet, every ministry, and Naftogaz as well. Even beyond centralized governance, we’re now part of a centralized country, as a whole. No longer is there a difference between society and government. We all share a common goal. Many things are directly controlled by the cabinet. We understand this necessity, and act accordingly.

NV: What has Naftogaz lost so far in the war, in terms of reservoirs and oil & gas extraction facilities?

Vitrenko: We lost much of our refining capacity since Feb. 24, such as the Shebelynka gas processing plant.

NV: Was it destroyed by enemy missiles or simply mothballed?

Vitrenko: Missiles. It’s not operational and won’t be for a while. We also own a minority stake in the Kremenchuk Oil Refinery, which is in a similar condition. Ukrtransnafta (Ukrainian oil pipeline network operator) runs several facilities near Kremenchuk, which were also hit with missile strikes. National security considerations preclude me from elaborating, but our oil infrastructure is badly damaged.

There’s no crisis with subterranean reservoirs; we still have some of those in previously occupied territories. Some of our extraction capacity is tied up in recently occupied areas of the country. The real problem is that large portion of our capacity near Kharkiv is in the direct vicinity – a mere seven kilometers away – from the hotly-contested front lines. Nevertheless, people still work there, under constant shelling. It’s pretty challenging.

NV: How much of our extraction is right next to the front lines?

Vitrenko: Half of it all is in Kharkiv Oblast, with 45% – near Poltava. I really can’t say more, for fear of endangering our employees.

NV: The coming winter is a major topic of discussion in Ukraine. What is Naftogaz responsible for in that regard?

Vitrenko: I’d like to begin by saying we share the same goal with the government and the country as a whole. Naftogaz’s charge is to keep extracting gas wherever it remains possible. It’s not a huge amount, but we’re clear it has to be done. Ukrtransgaz – our natural gas reservoirs division – is ensuring subterranean gas storage facilities operate smoothly and effectively.

We’re pumping gas into the reservoirs, to be used for central heating during the winter. Furthermore, we continue to import and distribute gas across the country. Nearly 90% of private gas companies couldn’t meet their obligations once war broke out, and Naftogaz started to supply almost 100% of all gas consumption in Ukraine.

NV: The ultimate responsibility for wintertime heating is with the cabinet?

Vitrenko: I’m reluctant to start passing the proverbial hot potato of responsibility on this. We’re all doing our part in moving towards the common goal. And while I’m open to discussing our bonds restructuring, the cabinet approved the proposal and determined the exact conditions we’ve suggested to our investors. We can’t always accurately communicate every aspect of this, due to certain media manipulations.

We might differ somewhat on some details, but being a state enterprise, we ultimately act on the government’s directions. Nevertheless, some still chose to paint this as some sort of conflict.

NV: Well, when you say that the government makes these decisions, you effectively absolve yourself of responsibility in the eyes of the public and the creditors. That’s why it can seem as a conflict (with the cabinet).

Vitrenko: Let’s get clear on this: in what way is it conflict, when we point out – correctly – that the government is responsible for the question of suspending bond payments? We’re frank about this being the prerogative of the state. Therefore, the state is requesting a postponement of debt payments – on certain terms – due to the war.

NV: The investors are unhappy because initially, you assured everyone the company will pay the debts when they’re due, which increased the value of your bonds. And then Naftogaz and the government say: sorry, we’re out of cash. Or, more accurately – we can pay, but at the moment we need the money for more urgent needs. That’s why investors refused the request.

Vitrenko: That’s not the case. The crux of the issue is that we had to tell our creditors that we won’t pay them $390 million right now, as they expected. And debt restructuring is a problem! Saying it’s all a matter of communication betrays a lack of familiarity with the issue.

NV: But initially you said the company will pay in full, did you not?

Vitrenko: No, nobody promised to pay these $390 million! In the formal, government-approved report, we accurately said we can use last year’s profits to service our current debts. Now we have to be open about what has changed since.

The full-scale invasion came as a shock to everyone, but our international partners assured Ukraine they would help finance the country’s needs. The expectation was that there would be enough money – including gas purchases.

What happened next? Well, it’s best to ask the cabinet. It’s improper for us to speak for the government. In any case, the state decided to request a wide-ranging debt restructuring, which includes Naftogaz.

NV: Did you know this before June 19, then the cabinet instructed you to amass at least 19 billion cubic meters of natural gas for winter?

Vitrenko: Less than a week prior to that we learned that Ukraine is seeking to restructure its debts, meaning that Naftogaz has to approach its creditors with the corresponding proposal. It was reasonable to expect they would agree, as the only factor at play was the war! All we said was that won’t pay $390 million immediately, and would instead do it in 2024.

Naftogaz bonds, due in 2024, trade at 20-30% of their nominal value, meaning that investors would be getting 70-80% less than they were supposed to. Everyone understands that!

NV: Alright, the creditors refused you once. Your most recent proposal would still see them lose 70-80% of their money. Do you think they are likely to accept? Has something changed?

Vitrenko: Well, now we offer compound interest on two more years’ worth of bonds, which is a boon for the investors. The first proposal suggested postponement of debts payments on bonds due in 2022, while now we’re also including all bond issues, including those due in 2024 and 2026. Essentially, we’re offering the same conditions as the government’s public debts restructuring program. The only difference is that our bonds aren’t guaranteed by the state.

NV: The government is nearing a positive resolution on the question of public debt; do you think it will make things easier for you?

Vitrenko: Those are related, but I don’t expect any friction with restructuring Ukraine’s public debt. The country is at war, naturally there are difficulties with servicing its debt. Ukraine also doesn’t have significant assets abroad which could have been used as payment, meaning that investors have both moral and pragmatic incentives to agree to restructure sovereign Ukrainian bonds.

NV: Government subsidies for Naftogaz are coming back, with everything they entail: hidden budget deficit, inflationary and exchange rate pressure. You previously hailed the end of these subsidies as a major step forward.

Vitrenko: Tell me about it. Once again, I have to reiterate that we need to play by a different set of rules in wartime. I wouldn’t be able to sleep at night otherwise. In the past, I managed to finally do away with hidden government subsidies (of Naftogaz), while present circumstances now force me to accept them once again, and follow the cabinet’s decision to avoid energy price hikes for consumers at all costs.

We have no other choice, if we’re looking to keep prices down and still import enough gas for Ukraine’s needs. We won’t be able to avoid price hikes if there isn’t enough gas to ago around. That’s exactly what previously happened with petrol and diesel fuel – prices were kept low, but there just wasn’t enough fuel on the market. Eventually, we had to uncap the prices.

NV: You said Naftogaz is set to lose UAH 400 billion ($10.9 billion) this year.

Vitrenko: UAH 400 billion is just from the gap between fixed consumer gas prices and market ones – in Ukraine. When it comes to imported gas, the figure is twice as high. And this is how much we’ll need in subsidies, provided all our clients pay in full, which isn’t even close to happening.

NV: Coming back to the subject of the winter season, estimates suggest gas consumption in Ukraine is down 40%. Does this mean we could get by with just domestic extraction?

Vitrenko: We’re currently producing more than we consume – as industrial consumption is sharply down – allowing us to pump over 1 billion cubic meters of gas into reservoirs, every month.

Nevertheless, we’re set to consume more than we produce, come winter. Reserves will be able to cover some of that deficit. However, there are technical limitations on how quickly we can pump gas out of storage. If the winter is cold, we will have to import some gas to cover consumer needs. We either have to buy it now and pump it down beforehand or import it during winter. Our main problem is building up enough reserves to satisfy energy generation needs. Back in March, we were supplying thermal power plants with gas – otherwise, the country would have been left with no generation capacity.

While it’s difficult to make accurate projections in wartime, we expect to need 4-6 billion cubic meters of additional gas imports. Otherwise, we’d be facing major risks: we don’t know what power generation and consumption will look like, whether we’ll be able to get coal shipments, and so on.

NV: Municipal central heating and consumers used up 13 billion cubic meters of gas last year, and it’s likely to be lower this time around. Ukraine extracts around 12 billion cubic meters per year. Why isn’t it enough to cover non-industrial needs?

Vitrenko: Households consume gas by way of heating, boilers, and gas stoves. To ensure a steady supply of gas, it has to be pumped to reservoirs in western Ukraine in the summer and pumped back in the winter. All this pumping back and forth involves inevitable technological losses. Taking these into account, in terms of domestic extraction, we’re still at least 4.5 billion cubic meters short.

NV: How much do we currently have in reservoirs?

Vitrenko: 12.3 billion cubic meters.

NV: The government’s plan calls for 19 billion cubic meters before winter…

Vitrenko: That’s the cabinet’s guideline that would mitigate potential emergent crises.

NV: Is it realistic to expect to purchase 4.5 billion cubic meters, considering that gas in rather short supply in Europe?

Vitrenko: It doesn’t seem particularly likely we’ll be able to get to 19 billion cubic meters before central heating comes online. It would take a huge sum of money to import that much gas. Additionally, there are certain technological limitation on how much we can import and store per day. Theoretically possible, but practically not achievable. Keep in mind that the plan is calling for excess capacity, in case there’s a crisis of some kind. And getting to 19 billion cubic meters is not as important as ensuring we have 4-6 extra billion cubic meters during the winter.

Even if we get that much gas in storage, it won’t solve everything, as we will remain limited by the rate at which we can extract gas for distribution. In wintertime, it’s much better to import gas through pipelines.

NV: Do you think we’ll be able to import gas this winter? Russia’s Gazprom is shutting down gas supplies to Europe, their markets are collapsing.

Vitrenko: Anything is possible, I suppose, but I can’t imagine someone would refuse to pump U.S. LNG we bought, after it was degasified at terminals in Poland, Germany, Lithuania, Greece, or the Netherlands.

NV: How much money did we manage to reserve for gas imports so far? Both Naftogaz and the government.

Vitrenko: A provocative questions. We signed a $300 million contract with the European Bank for Reconstruction and Development (EBRD).

NV: Is it still valid, given that Naftogaz is currently in default?

Vitrenko: We’ve yet to get the money. Firstly, the contract is backed by the government, and the Finance Ministry has still not signed off on that. As we understand, the whole thing is halted while we’re in talks about debt restructuring. Unfortunately, it means we still don’t have the funds to start making gas purchases.

Secondly, the President (Volodymyr Zelenskyy) still hasn’t signed the law that regulates how the state would subsidize Naftogaz, when it comes to compensating for capped consumer prices. After all, we would be buying gas at 10 times the price we’re selling it to Ukrainian consumers, and until this bill is signed into law, we can’t explain to our creditors how we would ever be able to pay.

NV: How much does this bill provide for?

Vitrenko: Initially it was UAH266 billion ($7.2 billion), reduced to UAH180 billion ($4.9 billion), but perhaps there will be an eventual increase after all. This measure, or at least a similar cabinet decree, had to be taken back in April. It would have allowed us to raise funds, backed by a government-guaranteed mechanism of solvency. It’s now August, and the bill still remains unsigned.

NV: How much money does Naftogaz have now to pay for gas? As far as I gather, the government or foreign lenders are yet to provide any resources for that.

Vitrenko: I’m reluctant to give a specific figure. We don’t have the money in our accounts, as it stands. We’ve spent all we had to buy as much gas as we could, and it’s currently being supplied and stored in reservoirs. We’re telling our investors that we need this money to sustain Ukraine’s needs. We are also in talks with the cabinet about government financing of gas imports. Any potential revenue increases, along with existing reserves will go towards future gas purchases.

NV: How much of private gas extraction still remains operational? Would the private sector be able to supplant imports?

Vitrenko: There’s a lot of gas on the market. Private companies used to sell it to our industry, and that demand has since collapsed. We don’t have the money to purchase all this excess supply – at least until the government steps in with additional financing.

NV: What’s the current market gas price?

Vitrenko: UAH45,000 ($1,220) per thousand cubic meters. There’s the expectation that Naftogaz will start purchasing the supply, so the price has been on the rise recently. Currency exchange rate fluctuations also contributed to that.

NV: How are you preparing for winter, personally? Should be people buy heat pumps or gas tanks?

Vitrenko: I have a generator and a stockpile of diesel fuel for it. I can heat my home with either gas or electricity, burning wood is also an option, along with warm clothes and blankets. Every Ukrainian ought to do everything they can to be as prepared as they possibly could, given that there is a war. With how high energy prices are across Europe, we can’t afford to flaunt energy efficiency – it’s a crucial element of Ukraine’s resilience.

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