Cabinet, Naftogaz in tough talks on household gas prices

Ukrainian Prime Minister Volodymyr Groysman threatened
to fire Naftogaz CEO Andriy Kobolyev in case the company does not lower natural
gas prices for households as of May. “Either Naftogaz sets the price below UAH
8.55 per cubic meter from May 1 and reports on that by Apr. 24, or I initiate
the dismissal of its head,” Groysman told journalists at the weekly Cabinet
meeting on Apr. 17.  The possibility to reduce gas prices for households
emerged owing to a decrease in EU-based prices for gas, which resulted in
Ukraine’s retail prices for industrial consumers falling below household
levels. Pointing to these lower industrial gas prices, the Cabinet approved an
Apr. 3 resolution obliging Naftogaz to set household prices at the industrial
level.

However, Naftogaz press service claimed the state
enterprise is unable to reduce natural gas prices because it is required by law
to hike them as of May. It referred to another Cabinet resolution, approved in
October 2018, that prolongs imposing public service obligations (PSO) on
Naftogaz and foresees a 15% price hike for gas that Naftogaz sells to suppliers
for households since May 1. To resolve the situation, Naftogaz suggests that
the Cabinet amend the October resolution instead of issuing a new,
contradictive one. The October resolution was adopted as a compromise with the
IMF (following more than a year of negotiations) and is among the cornerstones
of Ukraine’s cooperation with the fund.

Later on, Ukraine’s Energy Ministry explained to
Interfax-Ukraine that Naftogaz won’t violate the October resolution if it
reduces gas prices in May, as required by the April resolution. “The
legislation does limit the number of Cabinet acts that regulate PSO,” the
ministry said.

Currently, Naftogaz has published a wholesale gas
price for supplies to residential consumers at UAH 6.23/cm in April and UAH
7.18/cm since May (without VAT). For large industrial consumers that prepay for
gas, the company offers it at UAH 5.99/cm in April.

Alexander Paraschiy: It looks
logical if Naftogaz starts selling natural gas to households at the price it
has set for industrial consumers (which is the price based on the cost of
imported gas, meaning such an operation won’t be loss-making for Naftogaz).
However, the government’s decrees look contradictive indeed, which puts
Naftogaz management under the risk of criminal penalty in case it goes ahead
with the price cuts. Another concern of Naftogaz is that under the October resolution
on the PSO, the company has to sell PSO-related gas not directly to households
(except for those of one region), but to private gas suppliers. This limits the
ability of Naftogaz to control the final price for households in most regions
of Ukraine.

The Cabinet is unlikely to change its October decree
on PSOs unless it gets IMF approval. At the same time, Groysman wants to appear
as a public advocate, shaken by Volodymyr Zelenskiy’s emergence on the
political scene and himself preparing for the October parliamentary elections.
Given the Cabinet has significant leverage over Naftogaz (with unilateral power
to dismiss its top management), the state enterprise will have little choice
but to obey Groysman’s demands. Though, such decision may demand additional
regulations from the government.