Oleksiy Chernyshov on destroyed infrastructure, gas production, Naftogaz's finances

Naftogaz is currently one of the key companies on which the country's vital functions depend. Recently, Naftogaz-Ukraine has strengthened and acquired new assets, including confiscated ones. We did not raise the issue of Oleksiy Chernyshov's possible appointment to the Cabinet of Ministers, but we did talk in detail about the work of the state oil and gas company.
As for Naftogaz, Chernyshov feels confident. The company's financial position has improved due to a decrease in gas consumption and the absence of imports, payments from municipalities, and a receivable from Gazprom, which lost an arbitration case against Naftogaz.
The most pressing issue today is the state of the underground gas storage infrastructure, which is being deliberately and systematically destroyed by Russian terrorists.
What factors affect the availability of gas from UGS facilities this winter? What will happen after the transit contract with Gazprom expires on December 31? What factors have led to a decrease in rent payments and an increase in profits? What is happening around Ukrnaftoburinnya and the introduction of a corporate governance system in the Naftogaz group of companies? Oleksiy Chernyshov, Chairman of the Board of Naftogaz of Ukraine, answered these questions in an interview with LIGA.net
On the destruction of gas infrastructure by Russia
LIGA.net: Can you tell us how many underground gas storage facilities (UGS) have been put out of commission? How bad is it now and is it possible to restore the equipment?
Oleksiy Chernyshov: Since the first day of the invasion, Naftogaz Group's facilities have been under constant drone and missile attacks. We have been experiencing concentrated attacks on our UGS facilities since the end of March this year, which are quite consistent.
However, this will not affect the stable passage of the heating season and the process of gas injection and storage, which we need for the 2024/2025 season.
Of course, the attacks have certain consequences, but our company, Ukrtransgaz, is constantly restoring and repairing damaged facilities. In addition, we are working on their additional protection.
If attacks on UGS facilities intensify in winter, will it be possible to restore them quickly?
Such risks exist, and we understand them. We have a recovery plan and a certain approach to stockpiling technological equipment for this purpose.
Even though we have reserves – but reserves can also run out – the key is to have air defense to protect our facilities.
In other words, the state's overall preparation for winter, which means heating and light, has three components. Component one is the ability to restore large power plants that generate electricity. This restoration will provide a significant amount of electricity generation.
The second component is additional so-called cogeneration decentralized equipment. It will also provide a certain volume.
The third component is the ability of the air defense system to protect it all. Therefore, I would not consider the issues of generation, restoration, and additional generation without linking them to additional air defense systems.
At present, domestic private gas producers do not pump gas into UGS facilities, but sell it to you for you to pump. Have Ukrtransgaz's foreign counterparties also stopped using gas storage services in UGS facilities?
Today, we are pumping gas from different customers, different producers. In fact, the private segment has the opportunity to sell a certain volume to the market.
They inject the rest into our UGS facilities. We do not buy all the gas from them, but only the amount they offer.
Our total UGS system is 31 billion cubic meters. It is the largest in Europe. Of course, for Ukraine as a single consumer, this is twice as much as we need. Historically, we have always provided storage services to our European trader partners.
Unfortunately, in 2022, the volume of storage by foreigners decreased to almost zero due to the war. In 2023, we managed to find arguments and reassure them, motivating them to pump 2.5 bcm. This is really a lot. At that time, it was worth about $1.5 billion, and it is important to understand that no one provided any guarantees regarding the risks to these companies. I believe that this is the largest "temporary" investment during the full-scale war in Ukraine. It is a sign of trust in Naftogaz and trust in the country from international partners.
This year, we also plan to attract a similar volume to our underground storage facilities. We expect an August spread that may motivate foreign traders to store gas with us. Because only the business component is a motivating factor. Plus, in September and October, European storage facilities are already full.
Could there be gas outages for households next winter?
This scenario is not predicted. Naftogaz has sufficient volumes of natural gas. We will supply households of our consumers, of which we have more than 12 million. And you can see that today gas remains the most stable source of energy in the country.
Naftogaz Group actually controls all segments of gas production, transportation, storage, distribution, and sale. This gives us the opportunity to be a stable supplier and understand the entire chain of energy production. I would also like to remind you that we are also engaged in heat generation.
Currently, we have 9.3 billion cubic meters in the UGS facilities. NJSC [Naftogaz] says it wants to pump 13 billion cubic meters by winter. Then we need to pump about 40 million cubic meters per day. The current injection rate is 22 million cubic meters per day. Will you be able to fulfill your plans?
Let's return to this question on November 1. We had a warm winter last year, so we started injection earlier. We pumped 400 million more cubic meters during this period than in the previous period. Now we are on track with the injection rates. The second half of July, August, and September are always key for gas injection. Now we will pump more than 30 million cubic meters per day.
On gas transit from Russia
The current transit agreement with Gazprom expires before the New Year, after which the Russians will have their hands untied and they potentially can start attacking the compressors that ensure the pumping of gas through our GTS. Are there such risks and is anything being done to counteract this?
Ukraine is in a full-scale war, and there are such risks for all spheres of our life. But we cannot compromise with our conscience on such things.
In many countries, the issue of transit is perceived as quite populist. Our pipeline carries 14 billion cubic meters of gas a year. This is 4% of the total gas consumption by European countries per year. And this is negligible. Obviously, 4% cannot influence either the price or the gas shortage. But we still hear a lot of ruckus from our neighboring Central European countries about the possible termination of transit.
I can tell you clearly that Naftogaz will not extend the transit agreement with Gazprom. We are not negotiating and do not plan to negotiate.
On the other hand, our gas transmission system is one of the state's key assets. It allows our country to be in the major league of the energy business to some extent because the GTS provides a very significant potential transportation volume.
And if we also mention our storage facilities, we realize that this is a certain pole position. Therefore, I believe that strategically, the GTS should work. We have access to the market in the future when Ukraine becomes a gas exporter.
We have no right to stop this system. If we stop it, the European market will reorient to other suppliers in a few years.
That's why we have this dilemma. On the one hand, we cannot work with Gazprom, and on the other hand, our GTS must work and be maintained. Currently, Naftogaz alone transfers more than $1 billion dollars a year to the GTS Operator of Ukraine to keep the system running.
In fact, we are looking for alternative solutions. For example, we have been approached by businesses from Azerbaijan. In particular, SOCAR (Azerbaijan's largest state holding company – ed.). But it does not have a ready-made solution yet. It is too early to talk about it.

Naftogaz has taken over the regional gas companies that belonged to Dmitry Firtash's RGC (Regional Gas Company – ed.) group. Are you sure that Firtash will not seize this business by court action?
I can say that today the Gas Distribution Networks of Ukraine (GDN) company is working steadily and improving its efficiency.
For years, the control over distribution, which belonged to RGC Group, led to gas losses. Now the efficiency of distribution and gas balance is more stable than it was under the previous system.
Perhaps this is not so noticeable because gas distribution networks are already owned by the state. In other words, the state actually performs its function through a state-owned company. And we see that this stabilizes the quality of supply.
Regional gas companies are a new chapter for us. An additional 50,000 employees have joined Naftogaz Group. These people, especially those who work in the frontline regions, repair the networks every day and work hard to make the gas supply sustainable and stable.
Today, we are able to maintain stable supplies. First of all, it is thanks to the employees of regional gas companies and utilities who actually risk their lives and health every day. Unfortunately, we have had fatalities in this regard.
In your opinion, would it be advisable to privatize Naftogaz's businesses in the future, after the war, so that there is no monopoly on the market?
Big business, vertically integrated companies can usually have signs of monopoly. However, monopoly is not a sin, but abuse of monopoly position and violation of antitrust laws are unacceptable.
Certainly, some of the assets of Naftogaz Group in the post-war period can potentially be privatized in the future. Indeed, in most countries, gas distribution is traditionally a private business that competes with each other. This actually affects the quality of services and the price of services, which becomes market-based.
I think that certain non-strategic businesses of Naftogaz Group may eventually be privatized.
What are the prerequisites for this privatization? The first is the end of the war. The second is open, fair, transparent conditions for holding such tenders and auctions. This will probably be the result of the success of some important reforms in quite clear areas. First of all, in the judicial system.
We know that after tenders are held, the courts can cancel them. So are we ready for this? Are we ready to carry out such ‘quality’ privatization? Probably not at the moment. Immediately after the war, on the second day, maybe too early. But it depends on our success in reforming the state during the war. This is the time when the country needs to be reformed.
Given Naftogaz Group's vertical integration from gas production to supply, are you considering adding Odesa Port Plant (OPP) to the Group to process gas into fertilizers?
I believe that Naftogaz still has a lot of work to do to improve the efficiency of the assets that are already part of our group. We are focused on this. We are also focused on the stability of supply and protection of our facilities. As long as there is a war, the acquisition of the business you mentioned gives us additional risks (OPP produces ammonia – ed.).

What is happening now around Ukrnaftoburinnya (UNB, gas production company), which joined Naftogaz Group last year? Are there still hopes that the court will return the company's ability to produce gas at the Sakhalinske field?
The situation around UNB is tragic for the industry. We have lost a significant amount of gas production in the balance sheet. Traditionally, this is about 0.6 billion cubic meters. Unfortunately, the situation is dragging on.
Litigation does not lead to the possibility of Ukrnaftoburinnya resuming production. Moreover, this delay leads to a decrease in future production because production has been stalled for some time. For me personally, this is a tragedy.
The situation with UNB answers the question: are we ready for privatization? As long as we have such a case, it is very illustrative of where we can come to, what kind of situation we can get into.
We had planned that production would start in the second half of the year and the company would return to the game. We have now adjusted our forecast to the fourth quarter. I really hope that they will start production in the fourth quarter.
On UkrGasVydobuvannya
Why did Oleh Tolmachov resign as CEO of UkrGasVydobuvannya (UGV, largest Ukrainian gas producer)?
Oleh Tolmachov is a very professional manager with international experience. And I am glad that I offered him to lead UGV at the time. He made a lot of efforts during his tenure to develop and achieve the results we have.
Oleh is a US citizen. He was thinking about returning to the United States at certain times. Each time we found arguments to continue his work here. But he decided to return to the United States for personal reasons.
By the way, I have already offered Oleh Tolmachov a job at Naftogaz Group, a position that will not require him to be physically present in Ukraine.
Currently, the market price of gas excluding VAT and transportation tariffs is about 12 hryvnias ($0.29) per cubic meter. The population receives gas for 7.99 hryvnias ($0.19) per cubic meter. What losses does this bring to Naftogaz and UGV? When is it possible to discuss raising the tariff for households?
I would like to remind you that there is currently a moratorium on any increase in natural gas prices. The price is set, and it will not change. I have publicly stated this year that we are aware of this and we guarantee the supply of natural gas in the same volumes and at the same prices as determined by the Cabinet of Ministers.
In the future, we have to address the overall liberalization of the energy market, which is a big problem for Ukraine. For example, today, cities supply heat at regulated tariffs, which are also subject to a moratorium.
For your understanding: according to the tariffs of district heating companies, heat costs an average of 1,600-1,900 hryvnias ($39-46) per gigacalorie. We supply them with gas at 6.18 hryvnias ($0.15) per gigacalorie excluding VAT. The tariff of a significant number of companies is 4-5 hryvnias ($0.10-0.12) excluding VAT. This means that under no circumstances can this tariff even cover the reduced price at which Naftogaz supplies gas to DH companies.
This leads to partial payments to us. Naftogaz does not receive the full amount of money for the regulated price. Maybe half, maybe 60 percent. Everything turns into a growing receivable. We have a record receivable over the years.
If we make all prices market-based now, what should be the price per cubic meter of gas for households and the price per gigacalorie from district heating companies?
While the moratorium is in place, it is not appropriate to answer this question.
In 2023, UGV increased gas production, while paying almost half the amount in rent. Why did this happen?
Everything is very simple. For about four months of 2022, we paid rent based on the commercial price. And in 2023, the legislation was changed, and we calculated the rent based on the ISO price (imposed special obligations – ed.). This is the only reason why it is so.
That is, now the rent is calculated on the price of the actual production, but there was a period when it was paid for four months under the old law. Therefore, let's not try to find fault here, because Naftogaz is a national company that acts in the national interest.
On the one hand, the rent is less. On the other hand, taxes are higher, dividends are higher. Therefore, budget revenues are only growing. In 2024, we plan to pay approximately 100 billion hryvnias ($2.4 billion) in total taxes, including rent and all local and national taxes. I would also like to remind you that Naftogaz recently paid 14 billion hryvnias ($337.5 million) in consolidated profit for 2023.
Naftogaz's consolidated result for 2022 was minus 80 billion hryvnias ($2.45 billion). And in 2023, we paid almost 14 billion ($380.4 million) to the budget. We paid 92 billion hryvnias ($2.5 billion) in taxes last year. It is obvious that we are a pillar of the country's budget.
And what is the reason why in 2022 there was a loss of almost 80 billion, and in 2023 there was a significant profit?
The number one factor is that we did not import gas, but consumed exclusively Ukrainian gas. Any gas import under the current ISO is an automatic loss.
Factor number two. We have significantly improved settlements with our consumers, with households. We have significantly improved our settlements with cities. To give you an idea, cities have never paid us more than 50-60% for the gas consumed in previous years. And now there are cities that have paid 100% for gas. This is all thanks to the fact that we started communicating with cities and mayors. Local governments should be respected and their problems should be solved, and we should engage in a dialog.
And factor number three is the improvement of counterparty settlements, which allowed us to change approaches to reserving resources to compensate for doubtful debts.
What factors allowed you to increase drilling volumes and increase gas production?
In 2023, 88 new wells were drilled. There is a significant increase in capital investments in gas production development. And we will feel it in 2024-2025. If we talk about our plans for 2024, please note that it is 13.8 for UGV and 1.1 for Ukrnafta, which is about 15 billion cubic meters in total.
Corporate governance reform in Naftogaz
The Cabinet of Ministers is actively implementing corporate governance reform, which directly affects the companies that are part of Naftogaz. How do you assess this reform? Does it help Naftogaz's businesses operate efficiently and generate profits, or does it bring more problems due to deteriorating governance?
The Supervisory Board of Naftogaz of Ukraine started working in January 2023. This was an important step forward. The first thing I did after being appointed was to ask the prime minister to help create the Supervisory Board. I am confident that this is the best supervisory board in Ukraine, which helps us to make a profit.
Next, we created a supervisory board at Ukrnafta. Now the supervisory board will be established at Ukrtatnafta.
It is also important that we engage international HR companies to help us form supervisory boards of professionals.