Interview with Olexander Kharchenko. Part 2: About radioactive unicorns, the Nord Stream 2 and why Ukraine does not need negotiations with the Russian Federation

Earlier, Kosatka.Media published the first part of an interview with Olexander Kharchenko, in which he assessed the PSA in Ukraine, as well as commented on the weak opportunities to attract foreign partners in production.

We publish the continuation of the conversation – about the failure of the 20/20 Strategy and the new plans of Naftogaz, as well as about gas transit, the construction of the Nord Stream 2 and cooperation with the United States.

Do you think that the 20/20 Strategy was just “failure” in the full sense of the word?

Yes, definitely. Moreover, when it had been written, I was sure that it would fail. I told colleagues that there had been no chance of its implementation in the parameters in which it had been written many times. The strategy was written in the format of unicorns, which do not understand that they are farting with beams of hard radioactive radiation and because of this the decaying air gives a rainbow. The strategy was not feasible initially. Because of several reasons. Firstly, 5 billion cubic meters reduction in consumption was included in it, and secondly – physically there was no access to fields that would ensure production growth.  

Regarding the reduction of consumption – 5 billion cubic meters can be reduced exclusively in the housing and public utilities sector. There are no other reserves for a major reduction in consumption. The private sector is running along this road as fast as it can, using the same “warm loans” – after all, everyone feels such a need with their own wallet. But apartment buildings are a big headache. According to various estimates, it would be possible to reduce up to 6.5 billion cubic meters by virtue of high-rise building, but Ukraine is absolutely not ready to do it. For us, this is a mega-difficult task. And only on condition that it will be very actively developed at the highest level – both in the government and in the Verkhovna Rada –any chances to move this lump will occur. Otherwise, let's take as a constant that we burn 30 billion cubic meters and the same amount we will burn for a very long time. This is one aspect of the story.

The strategy was written in the format of unicorns, which do not understand that they are farting with beams of hard radioactive radiation and because of this the decaying air gives a rainbow.

The second aspect is actually production. Production is extremely complicated because there is nowhere to drill physically. Back in the Yanukovych period, almost 80% of living more or less explored fields were handed out. Licenses are issued, but they are sleeping. It is not legally possible to pick them up, even if they are not used. It is necessary to start a criminal case, carry out the seizure of assets, and then prove that it is illegal – and this is difficult, because good lawyers work there. Most of what can be drilled quickly and efficiently is virtually without access. And I have great suspicions that this is a mixture of corruption and Russian influence, because the Russians worked very well at the time to freeze production in Ukraine. And the current situation in the industry is partly their job, I think.

Before the first competitions were held, 4 years had passed. And this is just a competition! In order to really do something that gives results – seismic, paperwork – you need another 3 years. We have an official paperwork process – 36 months, sorry guys! And this has not changed yet.

The 20/20 Strategy plane could not take off quickly from the very beginning.

But you can’t say that during the program’s work nothing has moved on?

Let's be honest – the Groysman government has not done anything to ensure progress in the production sector since 2016. And only in the last 4 months something changed because stars aligned.  

By the way, attention (!), the increase in UGV production was not the biggest part of the Strategy. It was assumed that private producers will raise their production. But the private did not cope with this task, while the UGV somehow climbed. Prokhorenko really performed labor feats and miracles, but this did not advance him anywhere. You can accomplish feats, but these exploits, roughly speaking, close other people's mistakes. Not even mistakes, but someone else’s corruption and direct sabotage.

What was "achieved" is the results of work of Prokhorenko. He removed corruption at the highest level of the UGV and achieved at least sufficiently significant operational results. But he could not execute the entire program initially. It was impossible.

First of all, there were no additional licenses that would make it possible to drill and raise from 2015 to 2018 at least a couple of large - 500 thousand daily production rates - wells. For all this time, one "millionaire" was raised, now it continues to give somewhere around 800 thousand, which is very good. But in order to complete the program planned, there must be many such wells. But they are no such of them physically. Therefore, the situation was clear a long time ago.

What do you think about the new UGV production strategy, which was introduced by Favorov last week? In particular, about the shift of focus from “cubic meters to profitability”.

I am not ready to give an estimation now. But I sincerely believe that in implementing any strategy, the new government should do its homework. The government in the broad sense: the Cabinet of Ministers, the Verkhovna Rada, and the President.

It is necessary to determine the so-called owner policy. Let us pose a direct question: “And what exactly does the government want from Naftogaz and UGV?” Favorov presented only one possible option: to proceed from the fact that a state-owned company is the same business as any other, and therefore make any production decisions in terms of economic efficiency. “Where it is profitable, there we work, where it is not profitable, we do not”. This is a normal business approach, and any businessman will do just like this.

But other approaches are possible. It is possible to put energy security of Ukraine at the forefront, for example. Like, we don’t care how much drilling costs, you have to drill a maximum and drill a maximum until you transfer Ukraine to self-sufficiency in gas. One can approach from the other side: to say that the most important task of Naftogaz is to provide the cheapest gas for the population. And do whatever you want, but ensure the population with the cheapest gas in Europe. Is a socially oriented approach possible? Yes.


Actually, the issue of transit does not bother us. It bothers the Europeans.


In Ukraine, all these years the task was the same – to steal the maximum. There was no other task for the management of enterprises. Kobolyev somehow managed to fight back to the point where, from the task of "stealing the maximum", they switched to "supporting a commercial enterprise". In other words, commercial approaches were introduced, corruption and financial schemes were moved away, and so on. It cost him a lot. In the literal sense of the word. But this fight continues.

In fact, it turns out that all of the above mentioned were demanded from Naftogaz: both increase production and reduce dependence on imports and, at the same time, keep prices low for the population. Can it be called a specific task for NJSC?

The task should be formulated in specific documents. And moreover, when the task is posed, the tools for its implementation should be provided. Set a goal to expand production, then give where it can be done. And when they said to expand production, and they showed, I’m sorry, the middle finger to the licenses. So... sorry, where are the wings? It can't fly without wings! No, take off like that...

The state should set the task and provide sufficient tools for its implementation. Otherwise, it is impossible.

So, the presented strategy for the transition "from cubic meters to profitability" may be useless if the government does not like it, as Naftogaz does not solve anything on that issue?

Management gave birth to the idea, coordinated it with the Supervisory Board as the governing body in the company, but then a new government will come and it must make a decision. Naftogaz’s Supervisory Board does not have any formal authority to approve the company's strategy, as well as the financial plan. Therefore, the government must either delegate these powers or competently realize them.

Presenting a strategy is the very first step. Next, NJSC must come to the government and either prove that their new strategy has the right to exist and the business approach is consistent with the state vision, or hear something else, then to accept the task and carry it out.

So, it is important for NJSC to have the government who will share their vision. In light of this, what do you think about Kobolyev’s candidacy for prime minister?

This is a political process that I know little about. If I could make forecasts of such a level, I would speak with you, as Favorov says, “on my island not far from the helipad...”

Regarding Kobolyev’s usefulness as head of government for NJSC... I’m not sure... my life experience shows that the “sitting point” largely determines the point of view. If Kobolyev – I emphasize, if I do not really believe in this version (I think not) – is appointed prime minister, then very quickly his point of view on what Naftogaz should do will change. For just a couple of months.

The most important thing that Ukraine should achieve is the failure to implement Nord Stream 2 project. Everything else is minimal.

Let's continue about the changes in the government. How do you think they can affect transit arrangements with the Russian Federation? Will there be a chance to agree? What has Ukraine to give in to sign a transit, and is it worth making concessions?

In general, I am absolutely sure that Ukraine is minimally interested in any negotiations with Russia. They are not important for us. The most important thing that Ukraine should achieve is the failure to implement Nord Stream 2 project. Everything else is minimal.

Why? Because it is not Ukraine that buys this gas, but Europe. We have little influence on this – let them buy, the more the better. Our task is to offer them a level of transit service that will interest Europe as much as a buyer of Russian gas to transport this gas through Ukraine.

What is special Ukrainian GTS can offer Europe?

Starting from the price, and ending with swap options. Flexibility, forward deliveries, the ability to quickly book additional volumes, or vice versa, long-term fix the price of large volumes. In fact, our GTS constantly shows the flexibility and technical efficiency. Gazprom, actually, uses us as a backup – volumes jump up/down constantly. We are already technically ready to fulfill such European requests.

Now the question is: what do we need for the GTS to work stably and be comfortable? First, we need to prevent the Russians from politically getting around us – I mean Nord Stream 2. Everything else – let Europeans agree. For our part, we are ready for any European conditions for ensuring transit: to implement European legislation as much as possible, and also to hand over half of the system to them.

This is our business proposal to the Europeans – to create an international business consortium that generates 2.5 and more billion dollars a year. This is part of the price of Europe abandoning Nord Stream 2. If we create a consortium, then Europe itself should let it decide how it will agree with Russia. Under what conditions they will buy gas, by and large, we do not care. We have not been buying gas from Russia for 3 years already – we provide transit and at the same time pump backwards. When Ukraine will work in the European legislative field, we simply by swap will take gas from the transit pipe and give it to Europe upon purchase. Thus, we will also begin to save some of the money. Actually, the issue of transit does not bother us. It bothers the Europeans.

Our strategic interest is to prevent the Russians from implementing the Nord Stream 2 political project, because it will simply kill our transit completely. From my point of view, it looks like this.

But what if Nord Stream 2 is built?

And if it does, then we will literally lose $2 billion a year. Understand that Nord Stream 2 is a political decision of the Russian leadership, it is not a business project. It has no relation to any commercial transactions. To prevent this from happening if Nord Stream 2 is launched, we are losing transit. There is a direct connection, no options.

Is it realizable to stop Nord Stream 2?


Political influence?

Yes, this is a political influence. And only American. I do not agree with the form, but I agree with the content of Zelensky’s statement that, apart from Trump, no one wants to stop it. Not "cannot", it is important, but "does not want to”. Because the Germans will not do this.

Do you think that there is still time for the States to take some measures, some kind of draft law, and thereby stop Nord Stream 2?

I once joked that the ideal situation for us is when 93% of the flow is laid, and at that moment it is somehow closed. So, now 60% has been laid, and we need another two months for the US Senate to vote.

And yes, there are chances that they will vote for it in September. But we still have to fight for this. Although, believe me, there the opposition to Nord Stream 2 is the strongest.

Let's touch on the issue with the Americans and their plans for the sale of LNG. Does Ukraine need supplies of American liquefied natural gas?

Actually, this is an interesting option. And for Ukraine, and for the States.

Europe, until recently, was not the LNG market for the United States. They supplied expensive, much more expensive than ours gas to Asia. And, actually, they did not look at Europe because of high competition, both with the Norwegians and with Gazprom. Now the United States has come up with the bright idea that in the summer, when there is an off-season in Asia (there are no gas storage facilities in Asia, but in Europe), it makes sense at least at some price to sell gas to Europe. Because otherwise in the USA there is no place to put gas – there the prices sometimes go to minus, so gas is simply burned with torches.

At the same time, Nord Stream 2 practically eliminates the possibility for the USA to trade LNG on the European market. Firstly, because the Russians will lay down their bones, but they will offer such a price that it would not be profitable for the Americans to send a tanker. Secondly, Gazprom has already done everything to control the gas supply infrastructure – it bought interconnectors along the western coast of Germany and the Netherlands. And in fact, in a situation where Nord Stream 2 works, many LNG terminals will no longer have the technical ability to transfer gas to the network. In the Russian Federation they will say that they comply with all European rules, that everything is competitive and so on, but at the same time, in fact, Europeans will not get access to pumping gas from LNG terminals. Democratically, LNG shipments will be blocked.

The Ukrainian LNG terminal is such a legend that people came up with who would like to steal something else.

See the list of Gazprom’s holdings in Europe – a very instructive read. Gazprom owns dozens of interconnectors. For example, Romania, which has really developed its own production in recent years, is currently discussing gas supplies through Ukraine with Ukrtransgaz. And already made a pilot pumping from Romania to Poland, and from Romania to Bulgaria. Do you fancy a hook? This is because, on the other hand, Gazprom does not allow them to pump out – it has closed the interconnectors and does not allow access. The picture is very simple.

Regarding the supply of American gas to Ukraine. Do we need an LNG terminal?

We do not need it at all. The Ukrainian LNG terminal is such a legend that people came up with who would like to steal something else. It is not needed either technically or physically, in any way. Building it in Odesa is such a blue fantasy!

Firstly, Turkey flatly refused to allow tankers with LNG to pass through the Bosphorus, and I do not think that its position can be changed even by using maximum resources. And on the other hand, technically, why do we need it? There is an underloaded Polish terminal, underloaded Klaipeda (terminal in Lithuania – ed.), there are many underloaded terminals on the coasts of France and Spain, and there is a draft terminal in Croatia. We don’t need to build anything! Let us at least start buying LNG in volumes that will load the same Swinoujscie (Polish terminal – ed.). While it is not exist, it makes no sense to talk about own terminal.

Tell us, what about the arrangements for creating an interconnector for the LNG terminal in Swinoujscie? As far as we know, the Poles on their part of the border are already increasing the volume of patency and expect reciprocity from us.

There is a game called: “Gas system (Polish gas transmission system operator) wants to download money from Ukrainians in order to improve the gas pipeline infrastructure in Poland”. Therefore, there is such a big discussion on the construction of an interconnector between Poland and Ukraine. This interconnector is needed in Poland. They have gas supply problems in two voivodships, and they need a trunk pipe to solve them. To do this, they came up with this project, which costs 200 million euros.

Technically, we do not need it at all, because we are not loading the capacities that we have for pumping out from Poland. And in the future 5 years we are very unlikely to need it. But the Poles really want to implement this project. And what it will lead to is still completely unknown. On the one hand, 100 million euros is not so much money so as not to come to an agreement with the Poles if the situation becomes critical, and on the other hand, not so small as to take it and just spend it.

Why are the Poles so valuable to us? The fact that they also have strained relations with Russia?

The Poles are our main ally in the fight against Nord Stream 2. And one of the main allies in ensuring energy security, in terms of gas purchases. In the fight against the Stream, they have done a lot. And I would say that in Washington, at the government level, they have done more than the Ukrainian government in the past three years. Incomparably more. And you need to agree on the interconnector. And I think this issue will be settled in a couple of months. In some form.

Now it seems that our main gas strategy is to pump gas to the UGSFs to the maximum in order to survive the winter. But are there any more far-sighted ideas of what will happen next after this winter? What will we do without transit? How will this affect the reverse?

To pump gas to the maximum in underground gas storage facilities is not a strategy, this is a specific tactical situation. Since we know for sure that Russia will stop transit, we need to be prepared. To be ready, we need 20.3 billion cubic meters guaranteed by January 1.

Regarding the reverse, I will say this – it is highly likely that in the winter it will stop. Indeed, without the transit function, the Europeans themselves will lack gas – this is a given. Additionally, the price will increase, then actually we will not want to buy it. Therefore, it is important for us to pump so much gas into the storage facilities that we can safely go through the heating season.

But what will happen next? It will be determined by the situation, which will develop. Because Russia needs to sell gas. And then we again run into the question – will there be a Nord Stream or not. If not, the conversation on transit will be completely different. If so, then we are losing transit, and with it $2 billion a year.


Tags: gas, Naftogaz, Nord Stream 2, hydrocarbon production

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