Volodymyr Demchyshyn: Government reforms in the energy industry will soon yield positive results


Kyiv, October 2, 2015. Raising the household gas price five and a half times (since April 1, 2015) shortly before the heating season is causing an intense discussion. Some experts estimate that a Ukrainian family will be spending up to 35% of their total income to pay for public utility services in the winter period. Energy expert Oleksiy Khabatiuk emphasized that the average charge will not exceed 14%. The efficiency and timeliness of energy tariff increases were discussed at a round table meeting at Ukraine Crisis Media Center.

Household gas tariffs are closely connected with the price for gas. Olga Belkova, a member of the Ukrainian parliament, explained that the estimated average price for gas in Ukraine is comprised of two components: the price of domestically produced gas and price of imported gas. There are two types of household consumption: direct consumption and through district heating companies. Yulia Tymoshenko, member of the Ukrainian parliament, drew the panelists’ attention to the structure of the new household gas tariff. “The tax included in the household gas price increased eightfold, and the cost of maintaining state oil and gas company ‘Naftogaz’ has increased 11.4 times. The only reform the power sector needs today is liquidation of Naftogaz”, she said.

Aliona Osmolovska, Naftogaz spokesperson, explained the reason for rising household gas tariffs: “Naftogaz had to import 8.2 billion cubic meters of gas to meet households’ needs in 2014. This gas was purchased at an 8-9 higher price than Ukrainian gas, but it was sold at the same low price. In 2015 the situation became more complicated due to hryvnia devaluation. Only in the first three months of 2015 (when the hryvnia devaluated to 30 hryvnia per one U.S. dollar) losses for gas operations amounted to 18.5 billion hryvnia. The deficit is expected to reduce threefold from April 1, 2015 to April 1, 2016 due to the new household gas tariffs”. This process will result in reduction of strain on the state budget and an overall improvement of the macroeconomic environment.

Osmolovska also assured that all the gas extracted in Ukraine (13.9 billion cubic meters) was given for household needs in 2014: “Private producers (including joint enterprises where state is a shareholder but does not hold a controlling interest) extracted 15.1 billion cubic meters of gas. The state, represented by the state gas extracting enterprise ‘Ukrgazvydobuvannia’, can only dispose of the gas extracted by enterprises where it holds a controlling interest. The total volume of gas extraction amounts to 14 billion cubic meters and some amount is used for the needs of extraction enterprises”.

Dmytro Vovk, Head of the National Committee for State Regulation of the Power and Household Services Industry, emphasized the fact that raising tariffs should result in liquidation of cross financing in the energy sphere and leveling prices for industry and households. These measures have been envisaged as part of bringing Ukrainian legislation in line with EU regulations and standards, in particular the ‘Third Energy Package’.

Panelists agreed with the energy expert Sviatoslav Pavliuk that reduction in consumption due to efficiency and modernization will play an important role. An increase in domestic production volumes is also important in this context. According to the Minister of Energy and Coal Industry Volodymyr Demchyshyn, MPs Yulia Tymoshenko and Olha Belkova, it is necessary to reduce gas extraction rent to 29% for ordinary wells and 14% for extra deep wells.

Finally, Minister Demchyshyn said that world experience shows that a rise in tariffs not only supports reduction in consumption but also spurs development in the extraction sphere. For instance, Poland went through Baltserovych’s ‘shock therapy’ and at present consumes 18 billion cubic meters, while consumption in Ukraine amounts to 40 billion cubic meters. At the same time, Polish gross domestic product is three times higher than Ukraine. “I’m sure the direction the Ukrainian government is following in energy policy is the right one and it will yield a positive result very soon,” stated Demchyshyn.