Favorov: Artificially lower prices will not solve gas market problems

The situation in the gas market is becoming tenser. The population is on strike, the government is worried and promises to patch things up. According to the Prime Minister, on January 11, during a meeting with the Ministry of Energy, NEURC and NJSC Naftogaz, two approaches to significantly reduce gas prices for the population were developed. The first is the option offered by the Ministry of Energy: the setting of gas tariffs according to the "hub minus" formula + government restrictions on suppliers' margins. Naftogaz proposed the second one: to make all suppliers publish their annual tariff. Kosatka.Media asked Andrew Favorov, trader, about the proposed options, how they might affect the market and its participants, and whether the market needs them at all.

- Which of the government's options do you think is more appropriate in the current economic situation?

- The Ministry of Energy’s option is an extreme case. Naftogaz’s one is softer. But both are unrealistic.

The idea of ​​Naftogaz to oblige all suppliers to publish their annual tariff is relatively neutral. However, it will be pretty complicated and costly to implement it.

Twelve months are too long in the current situation. Companies have to hedge their risks to lock in the gas price for such a long period. Europeans have different financial tools to do so, and on the contrary, we only have to sell or buy gas in advance to protect ourselves from price fluctuations.

But all settlements in Ukraine are carried out in national currency. The purchase price of gas is tied to the dollar exchange rate. Besides, Ukraine is an energy-deficient country, 30% of our gas is imported. Accordingly, all suppliers will have to include the risk of currency devaluation within a year in their contracts.

Another problematic issue is finance. There is a need to issue credit guarantees to purchase gas on a long-term basis for a year in advance. The seller must be sure that the buyer will be able to pay for the ordered volume throughout the entire contract period, regardless of price fluctuations. The bank acts as a guarantor of the terms of the transaction. And its guarantee costs money, a lot, actually. Still, it is unclear where gas supplying companies can find such amounts.

The proposal of the Ministry of Energy is closer to playing on the political conjuncture.

To argue the choice of the “hub minus” formula by the fact that such a price could have been on the eastern border of Ukraine if Gazprom did not have a monopoly in Eastern Europe is, at least, in my opinion, weird. This conclusion has no practical use – it is currently impossible to buy gas at such a price. This is just a theory, divorced from reality. Gazprom will never give up its positions in exporting gas from the Russian Federation, including transit from Central Asia.

Russia did not endorse the Third Energy Package, and I think that Ukraine has no view of success in international courts in this case.

In reality, the price of gas in Ukraine is determined by import parity. And while Mr. Vitrenko worked in the oil and gas industry, as far as I remember, he agreed with this thesis and supported it as best he could. And I agreed with the arguments of, let's call it, "early Vitrenko" – these were the arguments of an expert and, in my opinion, an evenhanded person. As for the current proposal, I believe, this is populism, not related to economic realities.

Let's not forget about the IMF's attention to the Ukrainian gas market. I do not believe that the Head of the Ministry of Energy will be able to convince them that his proposal is relevant in the context of market mechanisms. Cancellation of public service obligations is the liability that Ukraine assumed upon receiving the IMF's last tranche. If we first complied with them and then cancelled them, how can they be serious about such a negotiator? We will lose face in negotiations with the most crucial source of funding for the Ukrainian budget.

As for Ukrgazvydobuvannya, the company does not need a stable gas price; it requires a fair gas price. A stable price in hryvnia below the market level, the price below the import alternative is more likely to harm UGV. The difference between the cost of imported gas and gas of its production is the profit that a state company can invest in capital investments, and a program to maintain and increase production. If there is no profit for a year, there will be no investments in development, and very soon there may be no production either.

- Maybe it makes sense to regulate the profitability of supplier companies?

- The state has no right to restrict the profits of private companies. If the customer does not like the price or service level, he can find another supplier with better conditions. This is a paternalistic attitude towards the citizens of the country as if they cannot figure out what is more profitable for them and which companies will provide them with the best conditions. It is necessary to limit this in some administrative way. As a result, all those companies that have considered entering the retail market are currently reconsidering their investments' rationality.

- What to do?

- The best option is to let the market deal with this situation on its own. Let's remember that in the summer when gas prices were so low that drilling programs stopped and our drillers lost their jobs, everyone enjoyed the market mechanisms.

Now China has the coldest winter in 50 years, and all the LNG gas floated there. Also, abnormal snowfalls in Spain raised the costly part of logistics. And this can happen several times; this is the weather. But we cannot change the country's development vector, stop its movement towards a liberal economy at every momentary price hikes. Otherwise, who will come here with investments, build trading companies, and create competition for regional gas supply companies? If the game rules are continually changing, not a single ordinary person will invest money in it, and we can say goodbye to the prospect of curbing the monopoly of individual companies.

Not sharp populist movements are needed, but painstaking thoughtful work on building the market, on creating opportunities for new companies to enter the market. We will then have average competition and a healthy alternative to both Naftogaz and the regional gas companies.

The state must become an honest, independent, transparent arbiter, controlling the compliance with the market rules by all its participants. This is decided at the level of the Regulator. The Ministry of Energy's task is to create long-term strategies for the development of the industry for decades to come and not to manage market relations manually.

Tags: The Cabinet of Ministers, gas, Naftogaz, Ukrgazvydobuvannya

Read also

Gas market participants owe GTSOU UAH1.6 billion
Vitrenko said the Ministry of Energy had a different solution concerning the gas price
The European Parliament adopted a resolution on sanctions against the Russian Federation