Naftogaz of Ukraine vs.
Gazprom of Russia

Naftogaz of Ukraine, a national energy company, was founded on the premise of service to its customers and loyalty to its shareholders - the Ukrainian People.

In a time of great peril where our country is threatened and invaded by an aggressive neighbour, Naftogaz is subject to economic and energy policy pressure as well as deception from Gazprom.

At Naftogaz, we will continue to defend our interests before courts of law. We have won decisive victories over Gazprom in recent commercial arbitrations which we now will enforce. In parallel, we will diversify our energy supplies and work towards sustainable energy independence.

We draw inspiration from Ukraine’s long history of oil and gas production, tapping the energy stored underground as well as developing new sources to continue to fuel our economy, light our streets and heat our homes.

Naftogaz has come a long way from the Soviet era mismanagement and post-independence pillage of assets. Following the Revolution of Dignity in 2014, the current leadership team was brought in to move Naftogaz from making losses to making profits and from engaging in undue practices to championing transparent operations and alignment with European law.

Now, the people of Ukraine can take pride in the achievements of their national energy company: Naftogaz has freed Ukraine from a total dependency on Russian gas imports, delivered victories in the Stockholm arbitrations, become the biggest net contributor to the state budget, reformed corporate governance, and brought unprecedented transparency to the business.

Naftogaz will continue to stand up to the major challenges presented by Gazprom’s aim to terminate gas transit through Ukraine and its attempt to stall the EU-led trilateral negotiations. We remain resolute in our commitment to market reforms, European integration, and the pursuit of justice in line with EU and international law.

A reliable transit partner

Ukraine’s No. 1 energy company, essential for Ukraine and European energy security.

As a national energy company, Naftogaz is a vital component of Ukraine’s public assets. It is the largest state-owned enterprise – and, since 2016, the largest single net contributor to the country’s treasury. Since Naftogaz’s inception, our mission has been to serve the people of Ukraine – they are our customers and they are ultimately also our owners.

At a time when Ukraine is facing Russian aggression, and Russia is using energy as a weapon, Naftogaz has become the core pillar of the country’s national security, a strategic state asset essential in preserving Ukrainian sovereignty.

Credit: Valik Chernetskyi on Unsplash

As an integrated energy company, we work hard to convert the country’s natural resources and our extensive transmission infrastructure into sustainable prosperity, providing light and heat in Ukrainian homes.

Naftogaz is a reliable transit partner that has never failed to deliver on its contracts, as opposed to Gazprom, which has halted supplies of natural gas to Europe on several occasions. As part of a wider misinformation campaign, Gazprom has tried hard to shift the blame to Naftogaz, but the rhetoric simply does not match the facts.

Every leader in the transatlantic alliance has acknow- ledged the importance of preserving the transit through Ukraine as a matter of national security as well as rational economics. Naftogaz’s unmatched storage capacity can be further leveraged to smoothen out supply fluctuations in the European gas market.

Defending Ukrainian independence

It has been a long journey from the days Ukraine was a leading gas supplier to Europe, through Soviet mismanagement and the post-independence pillage of assets, to the present - defending Ukraine’s interest in the face of the belligerent Kremlin.

We draw inspiration from Ukraine’s long history of oil and gas production. In the early days of the Soviet Union, Ukraine was its largest natural gas provider. For over three decades (1924 - 1958), the fields of Western Ukraine accounted for almost all Soviet natural gas production. However, further development of the industry was impaired by the Kremlin’s ruinous policies to subjugate and weaken Ukraine as a sovereign nation.

Historic image
Credit: Naftogaz of Ukraine

The year 1991 marked the end of Ukraine’s formal subordination to Moscow, however, achieving true economic, military, and cultural independence has been the task of an entire generation. The transition from planned to market economy, in Ukraine’s case, materialised into a state captured by oligarchs. Indeed, the colonial policies of the Kremlin have not ceased to this day.

Our predecessor – the State Committee on Oil & Gas – vertically integrated the entire sector, and Naftogaz emerged from its Soviet past naturally positioned to become an efficient national company. However, it quickly became a target for both oligarchs and Russian interest.

In the 1990s and early 2000s, the company was spiralling downwards, its operational and development priorities were neglected, and its core assets were viewed by competing interests as opportunities for embezzlement. Naftogaz could no longer guarantee economic sovereignty for Ukraine and welfare for the Ukrainian people.

The situation went from bad to worse when Russia waged an undeclared war on Ukraine in 2014. While the Kremlin’s aggression has cost our country dearly, it has mobilised society, focused the minds of our political leaders, and given Naftogaz a fighting chance to reclaim its identity and focus once again on its core mission – serving the people of Ukraine.

Girl with Ukranian flag
Credit: AFP

Long before the Soviet Union, many European homes were kept warm and many European businesses relied on Ukraine for the energy to grow and prosper.

Oil production in Western Ukraine was first recorded in the 14th century. By the 1820s, the Pre-Carpathian region became the largest oil-producing region in Europe.

Naftogaz of Ukraine today

A frontline battleground for European energy security, a company resolute in its commitment to market reforms and European integration.

The annexation of Crimea, the downing of the MH17 commercial flight, countless cyberattacks, meddling in internal politics and the continued war in Donbas are all events that are widely recognised as evidence of Russia’s aggression towards Ukraine and Europe. However, the broader gambit of hybrid weapons deployed by Gazprom – the Kremlin’s arm masquerading as a commercial enterprise – appear more difficult to spot. They include Gazprom’s blatant disregard of international arbitration decisions, their evasion of EU competition and energy legislation, and their launch of various politically motivated infrastructure projects designed to divide the European Union and circumvent Ukraine.

Credit: Nord Stream 2

Ukraine is facing a high risk of transit revenue loss upon expiration of the current contract between Naftogaz and Gazprom at the end of 2019. All other things being equal, the loss of those revenues could lead to grave consequences:

  • The state-owned energy sector will revert to loss-making instead of contributing to the national budget.
  • Ukraine’s GDP will shrink by up to 4 percent, which will cause the deterioration of economic conditions for the people of Ukraine.

Inadequate preparation for the post-2019 no-transit scenario could even lead to energy shortages for Ukrainian customers during the winter heating season.

Mom and two childs watching an iPad
Photo by Alexander Dummer on Unsplash

The continuation of market reforms is therefore paramount for unlocking Ukraine’s potential and achieving sustainable energy security. Slight progress has been made in the area of energy efficiency, but the pace and scale of this advancement is woefully insufficient to meet our present challenges.

Furthermore, the “leakage from the system” into the hands of oligarchs is an ongoing problem, albeit decreasing. The actors who work to delay necessary changes and undermine Naftogaz’s reform efforts are doing Moscow’s work, even if unwittingly. Should the anti- reformers prevail, backsliding on policy will begin and wholesale reversals will no longer be outside the realm of possibility.

The complex situation is further aggravated by the Kremlin’s well- funded disinformation campaigns, aiming, for example, at weakening the West’s understanding of Ukraine.

What’s next for Naftogaz?

Our European journey continues. Naftogaz will defend the rule of law and hold Gazprom accountable.

Following the Revolution of Dignity in 2014, Naftogaz has demonstrated that it can succeed when it is led by a professional management team that puts the country first.

The new team has refused to be intimidated by Gazprom and has not caved to the pressure from homegrown vested interests. The team is guided by a few core principles: integrity, accountability to the people of Ukraine, operational and market efficiency, transparency, and reliance on the rule of law. The team has rejected old customs and backroom deals in favour of publicly defending Naftogaz’s interests in the pursuit of European integration and in service of its mission to deliver security and prosperity to the Ukrainian people. In this context, our priorities for the future are to:

  • Compel Gazprom to comply with the decision of the arbitration court in Stockholm, particularly through enforcement of the payment of USD 2.56 bn plus interest. Given Gazprom’s refusal to abide by the final and binding awards, this may require concerted efforts and a significant amount of time. However, Naftogaz will stay the course as long as Ukraine’s political leadership continues firmly on the path of market reforms and maintains its commitment to the rule of law. The victory in the arbitral court has demonstrated to the people of Ukraine how national interest should be defended on the global stage. Collecting what Gazprom owes us will serve as proof that respecting the “rule-based world order” brings tangible benefits to society. While Gazprom continues to treat the arbitration decision as a negotiable issue, it is not. The decision is final, legally binding and we will use all legal means necessary to enforce it.

  • Secure a new transit contract for Ukraine under EU rules. We will continue to take part in the trilateral negotiations chaired by the European Commission. Under no conditions will we compromise our standing as a reliable partner for Europe. We are confident that Ukraine’s transit infrastructure is both unique and indispensable to European energy security. We will also work closely with the EU’s Competition Authority to assure that competition law is firmly applied to Gazprom.

  • Design a credible plan B to counterbalance Gazprom’s destructive tactics. We will push ahead with the new arbitration to recover the costs that may incur should Gazprom block transit through Ukraine. We do not want to be overly litigious, but we must use the available legal means, first and foremost provided under the current contract between Naftogaz and Gazprom, to defend our interests and to hold Gazprom accountable.

  • Drive the energy reform agenda in Ukraine in order to develop an efficient gas market across all segments and protect Naftogaz from political meddling and graft. We have no interest in “window dressing” to hide attempts by corrupt politicians and oligarchs to divide Naftogaz or sell out Ukraine’s national interests to Russia. We will not be satisfied by solely ticking boxes that highlight form over substance. For reforms to succeed, thoughtful sequencing is key. First, in 2019, a truly independent and competent Regulator should adopt European secondary legislation and best practices in the gas transmission and distribution sectors. Secondly, the parliament and the Cabinet of Ministers should bring corporate governance of state-owned enterprises in line with OECD guidelines, and modernise ownership rights over the gas transmission system to allow for effective partnerships with international energy majors as well as unbundling compliant with EU rules. Thirdly, production licences should be fairly auctioned in an environment of maximum transparency.

Following these steps, Ukraine will by 2020 be in a position to honour the commitment to its international partners: (1) phase out price controls in residential tariffs and (2) finalise the unbundling of the Transmission System Operator.

Photo of cars with high exposure
Photo by Calik Chernetskyi on Unsplash

Call to action

Safeguarding European energy security

At this critical moment, we call on the international community to stand together with Naftogaz in upholding the rule of law, rejecting Gazprom’s reckless and unlawful practices, and defending fair competition.

We call on the Ukrainian government and elected representatives to reaffirm their commitment to transparency, market integrity, and continued harmonisation with European practices. Lastly, we call upon the Ukrainian people to reject the empty promises of demagogues and populists, and instead, hold their government accountable on the energy reform agenda. On our side, Naftogaz will continue to defend our country’s sovereignty by diversifying energy supplies and working towards sustainable energy independence. Ukraine will restore its rightful place in the European energy architecture as we continue to reform the company, unbundle production from trading and transit in accordance with European laws, and invest in alternative energy projects. In the long run, the decarbonisation of Ukraine’s economy is both inevitable and necessary in order to deliver a forward-looking economy and a cleaner environment for the generations to come.

EU flags
Credit: artJazz, GettyImages

Naftogaz’s contribution to countering climate change

In accordance with the commitments undertaken by Ukraine under the Association Agreement with the EU and the Paris Agreement on Climate Change, a national greenhouse gas emission allowance trading scheme is to be implemented in Ukraine. Naftogaz and its subsidiaries strongly support Ukraine in this effort and have entered a partnership with industry partners and the World Bank to implement a pilot greenhouse gas emissions monitoring, reporting and verification system.

Being one of the most important actors in the Ukranian energy sector, Naftogaz promotes energy efficiency through the introduction of energy efficient technologies and processes.

Credit: Naftogaz of Ukraine

In 2018, Naftogaz, the European Bank for Reconstruction and Development (EBRD) and the Ministry of Environment and Natural Resources of Ukraine agreed to work together to reduce methane emissions in Ukraine’s gas supply chains. Addressing methane leaks in gas supply chains will make an important contribution to the rapid decarbonisation of the Ukrainian energy sector. Oil and gas sector methane emissions in the EBRD regions are estimated to be nearly 60 bcm per year, nearly 40 percent of the regions’ total greenhouse gas emissions.

To further support the reduction of greenhouse gases, Naftogaz’s subsidiary Ukrtransgaz has taken an active role, and uses mobile laboratories to constantly monitor the tightness of shut-off valves, pipelines and other GTS equipment to eliminate natural gas leaks in GTS equipment. In 2017, Ukrtransgaz began operating a mobile compressor station which minimises the amount of natural gas that is leaked into the atmosphere during repairs on the pipeline.

Credit: Leonid Andronov, GettyImages

The results of Naftogaz’s efforts have been significant. Due to energy saving measures implemented under the Energy Efficiency Program for 2015-2020 and the Energy Saving Programs of its subsidiaries, Naftogaz was able to save 232.3 kilotonnes of oil equivalent (ktoe) in 2017, thereby saving as much as UAH 1 981 million (including VAT).

In accordance with Naftogaz’s corporate strategy, activities in the field of renewable energy and energy service contracts have been expanded. The subsidiary Naftogaz- Energoservis was created to develop an energy service that will allow consumers to reduce the use of natural gas due to renewable energy, alternative fuel and increased energy efficiency projects.

About the author

Following the Revolution of Dignity in 2014, Naftogaz’s new Chairman of the Executive Board invited Yuriy Vitrenko to formulate a defence strategy in the “gas war” waged by Gazprom and then to lead the implementation of this strategy.

Among Mr. Vitrenko’s most important achievements has been the successful arbitration against Gazprom under the rulings of the Arbitration Institute of the Stockholm Chamber of Commerce; the diversification of gas supplies shifting imports from Russia to the EU; and strong leadership on the market reform agenda.

Yuriy Vitrenko - Executive Director of Naftogaz
Yuriy VitrenkoExecutive Director of Naftogaz

He brought the level of corporate governance at Naftogaz closer to international standards and led the development of a competitive wholesale gas market in Ukraine. These initiatives have set the stage for stronger integration with the European Union.

Before taking up his present position at Naftogaz, Mr. Vitrenko served as a Chief Executive Officer of the investment company AYA Capital, a Chief Operating Officer at US rooted private equity fund Amstar Europe, an Associate at the investment bank Merrill Lynch’s London office, and a Senior Consultant at Coopers & Lybrand/PricewaterhouseCoopers (Kyiv office).

He holds an MBA from INSEAD (France, Singapore) and a Bachelor’s and Master’s Degree with honours from the leading Ukrainian university, KNEU.

Yuriy Vitrenko’s efforts have had a decisive effect on:

  • Ensuring Ukraine’s energy security and demonstrating Ukraine’s reliability as a transit corridor to the EU, despite illegal supply interruptions by Gazprom
  • Decreasing the cost of imported gas threefold and increasing transit revenues by a factor of 1.2
  • Turning Naftogaz into a profitable company that now provides 1/6 of the state budget revenues

It is widely recognised by the international community that the turnaround of Naftogaz has underwritten Ukraine’s economic recovery. If it was not for the extraordinary efforts of the new team,

  • Ukraine’s state budget could not have been balanced
  • The country’s GDP (all other things being equal) would hardly have grown in 2016-2019 following the 2014–2015 recession