Andriy Kobolyev took over as CEO of Naftogaz of Ukraine seven months ago. Little was known about him by industry players or the general public. Kobolyev became head of the company in difficult times. Ukraine was in difficult negotiations with Gazprom on the price of imported gas, utility companies and manufacturers were in no hurry to pay their debts and Russia was seeking to prevent Ukraine from receiving reverse gas flows from Europe.

In September, US “Fortune” magazine included Kobolyev in its list of the most influential and important figures in world business under the age of 40. 36-year-old Kobolyev took fourth place for his skills of persuasion.

Kobolyev and the leadership of Ukraine’s energy ministry took a hard line in the negotiation process and lobbied until the last moment to get as good a deal as possible with Gazprom. Ukraine is readying itself for winter. In the last few months Naftogaz has agreed on reverse flows through Slovakia, Hungary and Poland and signed a contract with Norway’s Statoil.

Nearly half a year of complex negotiations ended with the signing in Brussels last month of a "winter package". Europe sighed with relief and Ukraine can be somewhat satisfied about its side of the deal. The Arbitration Institute of the Stockholm Chamber of Commerce will next make a ruling on debt settlement between the parties.

In an interview with "Ukrainskaya Pravda", Kobolyev spoke about the prospects for future negotiations and about when Ukraine can rid itself of dependence on Gazprom.

This could be the winter to try to reduce consumption live without Russian gas
Ukrainskaya Pravda: The “winter package” has been signed. Are you personally happy with the arrangements? Or, as some experts have claimed, you signed only because you had to sign something?

Andriy Kobolyev: Not exactly. My main dissatisfaction in this process lies in the fact that, by and large, we went with the less risky option. We could try for some rationalisation of the economy, reducing inefficient consumption, and we could survive the winter without Russian gas. I’m often criticised for this position, but for the country it would be very useful. The fact is that we need to get rid of a number of myths that have been introduced into the consciousness of Ukrainians for a very long time. One myth is that without Russian gas we will all die. That’s not true. We ourselves must prove that it is not. These agreements, which were achieved were largely achieved...

Ukrainskaya Pravda: … Because of pressure?

Andriy Kobolyev: ...Not so much because of pressure. This is the position of the European Union - Naftogaz and Ukraine should be the solution, not the problem. And if we did not reach these agreements, we would remain a problem that poses a risk of interruption to transit and is causing unpredictability of gas supplies to Europe. In the negotiations we had a very important advantage which we did not have in 2009 in that the president and the prime minister were on the same page. The conflict between these two offices during the last gas crisis cost Ukraine dearly. The attitude of our Western partners depends largely on how much we are willing to solve their problems. There are two problems and risks worth mentioning. First, a sectoral problem, about which personally I was very worried – failure to do a deal would allow South Stream apologists in Europe to openly say: "Look, Ukraine is always a problem, and until we remove Ukraine from the gas supply chain in Europe the problem will not be solved”. We need to understand that in the South Stream PR campaign there is not only Russian money but many stakeholders in Europe. Trust me, a potential $25 billion project generates a lot of interested parties.

But, returning to Europe, their position is the following: "Look, guys, you’re going to court, that's the most important thing. The court can reconsider any prior agreement. So let’s now sign a compromise. You have issues with the price? The duration? Can you find the money for a temporary solution, which will then be reviewed? Does any deal not involve compromise? We are giving you the money - through the IMF, World Bank and EBRD, we already gave you the money, we gave you $3 billion, we’ll give you another $1.9 billion. Let's eliminate the risk."

Ukrainskaya Pravda: We have already heard about the Minsk ceasefire agreement that a bad peace is better than a good war, and that it’s important that peace exists on paper.

Andriy Kobolyev: There is the very important point of guarantees. I am not a great expert on the Minsk agreement, but in our situation, Gazprom has given a guarantee to Europe. They signed the report, and they stake their reputation to Europe that they will not change the price, will not interrupt the transit, and will not attempt to create a crisis.

Ukrainskaya Pravda: Do you personally believe them?

Andriy Kobolyev: Let me answer you this way. In our situation, in contrast to the Minsk agreement, it’s much easier to identify and attribute violations. If they violate the agreement, they undermine their reputation as a reliable supplier of gas to Europe, and we can still work on things that matter like the “big reverse”.

Ukrainskaya Pravda: A recent survey of European experts showed that they are increasingly sceptical of Russia as a reliable supplier. You know personally, because you are constantly communicating with European officials. Is Europe increasingly doubting Russia’s role as a reliable partner?

Andriy Kobolyev: Yes. Moreover, one of the most noteworthy aspects of our entire crisis, I think is the fact that Gazprom had to violate contractual obligations, to reduce the volume of deliveries to Europe, just to make a problem for us. And all of this is very well known. Leading businesspeople are key opinion shapers for European politicians and they are very well aware of what was happening. By and large, one of the key problems of the entire negotiation process, and this is all well known, was a complete loss of confidence. That is, Naftogaz and Gazprom had zero trust after all the events in the crises of 2006 and 2009. If you have two counterparties that must exist together, and between which there is no trust, the easiest option is intermediaries. And several European companies offered themselves as mediators. Namely the big companies that are clients of Gazprom in Europe.

Ukrainskaya Pravda: Why did not you not take this step?

Andriy Kobolyev: We were ready, but Gazprom said no. They are afraid to lose their role in the Ukrainian market. As soon as this position might slip there is no telling where the process will lead. What is more, now that we now have signed the agreement we actually have the opportunity to focus on reforms.

We cannot afford to waste such an expensive resource as gas

Ukrainskaya Pravda: We did not go for the “risky option”. What was the risky option your opinion?

Andriy Kobolyev: The risky option was to not agree to any compromises, and wait for the decision of the Stockholm arbitration.

Ukrainskaya Pravda: How would we get through winter?

Andriy Kobolyev: With difficulty. I'm on Facebook I get a lot of comments that people’s radiators are not hot enough. We have to be very tough to save gas.

Ukrainskaya Pravda: Until the shutdown of industrial enterprises in January? This option was also being considered?

Andriy Kobolyev: No, consider other options. We could achieve efficiency savings of about 25%. Think of the holidays when offices are empty. Why heat an empty room?

Ukrainskaya Pravda: I heard a rumour that in January it was suggested to alter national economic patterns to save gas.

Andriy Kobolyev: No, stopping economic activity is an unwise decision. Firstly, people need to work. These companies make money and bring currency into the country. It would be exactly the wrong decision. The economy can’t shut down just to save gas - this is stupid from an economic perspective.

 

Ukrainskaya Pravda: But businesses can economise through the introduction of technology.

 

Andriy Kobolyev: Industry, buying gas at $400 for the last four years, has already started economising. We have the largest efficiency gap in the social sphere. 25 billion cubic meters of gas are consumed directly or indirectly by the public - this is a very high figure.

 

Ukrainskaya Pravda: Energy Minister Prodan said that Ukraine will buy four billion cubic meters before the end of this year. You told us that it might be possible to go through the winter without Russian gas, but it seems we are going to buy four billion cubic meters…

 

Andriy Kobolyev: Up to four. Look at the numbers. Beginning the heating season we are now able to see how the municipal sector began to work more effectively. There is progress. At similar temperatures we consumed more gas in previous years.

 

 

Ukrainskaya Pravda: How much more?

 

Andriy Kobolyev: Not a huge amount. The launch of heating season was smooth and gradual. Just now many heating companies are coming into normal operating mode. Some heating companies take a month to become fully operational. But the real economy is working.

 

 

Ukrainskaya Pravda: And you hope that we can substantially reduce consumption?

 

 

Andriy Kobolyev: Yes, we will try to reduce consumption as much as possible. Another positive aspect of what we signed is flexibility. What do I mean by “flexibility”? I mean the opportunity to take from zero to a certain agreed amount per day. In fact, this flexibility is really worth the money. This is the most expensive product in the gas business - when you can take as much as you want, especially in winter when gas isn’t plentiful there can be problems. Our task is to try to balance the system in such a way as to minimize the consumption of Russian gas. To do this, we need a very good understanding of how our heating companies can manage the consumption schedule and stay within certain limits, which shall be communicated to them. Limits for industry and heating enterprises have been reduced by 30% compared to last year. The challenge now for this winter is the introduction of new discipline to gas consumption, which many will not like.

 

Ukrainskaya Pravda: Political populism is always an issue. Do you feel a governmental desire to change something this time?

 

 

Andriy Kobolyev: We hope that a coalition will be formed and an agreed element of reforms will be the elimination of subsidies. Those people who cannot afford to pay the full price should receive direct subsidies from the budget. This reform has been talked about for a long time and we very much hope that it will soon be implemented.

 

Ukrainskaya Pravda: Why, then, is nobody taking responsibility for it?

 

Andriy Kobolyev: Because this question is very politicised. I will say from my own experience, many officials are just afraid of this topic. They say it is a sacred subject, and cannot touch it. If someone asks "Do you realise that we have cheaper gas than in a neighbouring Russian region (Rostov)?" officials then reply, "Yeah, so what? That is our policy”. Changes would be unpopular, but I think they have to take place in the near future. Because of the economy we cannot afford to waste such an expensive resource as gas.

 

“Europe would like to see Ukraine as part of the solution, not the problem”

 

Ukrainskaya Pravda: If the winter package was not signed, would Russia have continued to put pressure on European partners regarding reverse supplies to Ukraine?

 

Andriy Kobolyev: I'm not sure that they will cease this pressure even after the deal.

 

Ukrainskaya Pravda: What is the situation with reverse flows?

 

Andriy Kobolyev: We are getting maximum capacity from Slovakia, we get a good amount from Poland, and we have zero from Hungary. Their government decided to cut off gas supplies to Ukraine driven by obvious motivations. But Gazprom has not been successful in putting pressure on European companies on the issue of reverse gas supplies to Ukraine. They have been successful in Hungary, but it was a political decision.

 

Ukrainskaya Pravda: With regard to Hungary, there are good relations between Putin and Orban, and they have a loan for the construction of a nuclear power plant which is funded by Gazprombank. But the Slovak situation isn’t entirely dissimilar. Eventually, with the help of pressure from the European Commission and the threat of the Stockholm arbitration, a solution was found and deliveries began. Can this approach work with Hungary?

 

 

Andriy Kobolyev: We're working on it actively. The Hungarians have promised that gas supplies will be resumed by December. Slovakia is a very good example. We do not have all the things we wanted to achieve in Slovakia. We got a partial solution, and theoretically we could import all our gas through Slovakia. To do this, it is necessary that the Europeans implement their own rules, namely the Third Energy Package. But here we are firm in saying that we will follow the rules but the Europeans should also follow their own rules. It is important to understand that it must be a two-way street. And it is very wrong to think that because Europe is our partner we must be sheepishly beholden to them. Europe has an interest in us and Europe would like to see Ukraine as part of the solution, not the problem.

 

Ukrainskaya Pravda: Who raised the issue of providing gas to territories that are under the control of insurgents in Donetsk and Luhansk. What is your opinion, what should be done? If we do not now provide them with gas, we lose control over the areas. On the other hand, we also have little money and would like to save gas.

 

Andriy Kobolyev: I’m not going to add anything new. I have already said that the issue of these territories will be solved on a political level. Gas pipelines can’t intelligently decide who taps them. It’s a political rather than economic question. If we turn off the gas, maybe Gazprom will supply gas through another pipe and say "We are providing our partners with gas, helping our friends. This is a Russian gas." I think for those people who live in these regions and might want to stay in Ukraine, cutting off the gas would probably be the final argument against the Ukrainian government.

 

 

Ukrainskaya Pravda: Regarding Stockholm arbitration. What is the process and what are our chances?

Andriy Kobolyev: The situation is positive, the case is progressing.

Ukrainskaya Pravda: Why do you believe our chances are good?

Andriy Kobolyev: Because the formula and conditions of the contract which we are trying to revise no longer reflect market conditions. And I think this is obvious. The arbitration case considers market conditions and our main task is to make this argument.

Ukrainskaya Pravda: How long can this drag on?

Andriy Kobolyev: I think a year and a half.

Ukrainskaya Pravda: Current arrangements are temporary. How will gas relations be regulated between Ukraine and Russia?

Andriy Kobolyev: I think that we are expecting negotiations on the summer prices sometime in March.

Ukrainskaya Pravda: Will negotiations be as protracted?

Andriy Kobolyev: I think that they will be just as hard. They can be simple only when we diversify gas supply channels, then Ukraine will be able to choose. And this is also one of Europe’s main questions - why in 23 years of independence we have not created any ways to diversify gas supplies? The answer is obvious. Therefore our task, besides saving gas, is changing patterns of consumption in Ukraine in the next year. The second problem is diversification. There are several things that can be done relatively quickly. Ideally we want to open full reverse flows from Slovakia. But I also think it is necessary to build a new interconnector with Poland, which would open a source of LNG-gas.

Ukrainskaya Pravda: Who will be involved in this project?

Andriy Kobolyev: We have support from Polish operator Gaz-System. From Ukraine, Ukrtransgas will lead. But we should not do this as “business as usual” – a three-year plan, then discussions, then we say that we changed our minds. We have to do this at an accelerated pace. The question is how quickly we can do it.

Ukrainskaya Pravda: What’s the budget and timeframe?

Andriy Kobolyev: The budget is $250-300 million. The timeframe is under consideration. I’m not happy with the timeframes currently being discussed. Yes, in the gas business it takes a long time to plan, but we don’t have that luxury. I heard from the builders very optimistic figures. From “Transgas” I heard a date a year longer than I called for. It is difficult to say. We have been working on the project for some time. If we want to do it quickly, we will likely need to seek means to do so, and the issue of price is not really that big. Every month of delay is a month we could receive a billion cubic meters of gas. If we can find it cheaper than from Russia, for example by $50, then that’s $50 million saved. We can make significant savings so I think it’s better to find the means to do so as quickly as possible.

Russian gas will gradually lose market share in Europe

Ukrainskaya Pravda: Can Gazprom prevent the construction of the Polish interconnector?

Andriy Kobolyev: I don’t think so.

Ukrainskaya Pravda: And how can Ukraine counteract Gazprom?

Andriy Kobolyev: I think in two ways - either via Stockholm arbitration or by the creation of another alternative route for gas supplies to Ukraine. Let's think about the phrase "counteract" Gazprom. What do you mean? They are the monopoly supplier of gas to Ukraine. They have a really strong position. The fact that the price that we have achieved is not linked to any policy concessions I believe is progress.

Ukrainskaya Pravda: The discount is $100 according to Russian Energy Minister Alexander Novak?

Andriy Kobolyev: Gazprom has its own interests in this process. They get discounts on export duties, they earn extra money in Russia without transferring to the Russian budget. This price reduction they ensured primarily to Europe, and not to us. They unilaterally pledged to keep that price in commitments to Europe, this is an important point.

Ukrainskaya Pravda: Tell us the details of contracts with the Norwegians.

Andriy Kobolyev: No comment.

Ukrainskaya Pravda: Why not?

Andriy Kobolyev: It's confidential.

Ukrainskaya Pravda: The idea was yours?

Andriy Kobolyev: Yes. I will say this: it took a very long time to persuade the Norwegians to work with us. The main condition for them, which, perhaps, I can say, was that this is a commercial transaction. Any commercial transaction involves non-disclosure.

Ukrainskaya Pravda: Are you still negotiating with other contractors?

Andriy Kobolyev: Yes.

Ukrainskaya Pravda: Can we expect new deals in the near future?

Andriy Kobolyev: We sign a contract with a new contractor, on average, once every two weeks. All the well-known European companies are interested in supplying gas to Ukraine. Another advantage of the Brussels agreement is that we expect lower prices for reverse flows. This is already happening.

Ukrainskaya Pravda: How much? We talked about 12%.

Andriy Kobolyev: I think so. It will be 10-15%, and this figure is significant. Accordingly, if we will be able to buy gas at an acceptable price from Russia, then most of reverse ...

Ukrainskaya Pravda: You said that new contracts are frequently signed. Why then is there so much interest in the Norwegian contract? It seems to me that it was PR by the Norwegians. They have serious competition with Gazprom for leadership in the European market ...

Andriy Kobolyev: No, on the contrary, they wanted confidentiality. The Norwegians, it seems to me have a different strategy. They look at the behavior of Gazprom in Europe and quietly smile and prepare their own new contracts. There are situations when a competitor behaves in such a way that it is not necessary to interfere. You just have to wait. That’s what the Norwegians are doing.

Ukrainskaya Pravda: Do you think that Statoil has a chance to oust Gazprom? They became the largest player at the end of 2012.

Andriy Kobolyev: In the EU they deliver more gas than Gazprom. This is a fact. To obfuscate this fact, Gazprom adds Moldova, Ukraine and Turkey its list of “European” partners and claims that it is the largest supplier of gas to Europe. But from the point of view of the EU, this is no longer the case.

Ukrainskaya Pravda: Do you think that this trend will continue? Gazprom losing market share.

Andriy Kobolyev: I think that Russian gas will gradually lose market share in Europe. European energy contracts reflect the fact Gazprom constantly creates conflicts with Ukraine. European consumers are switching to other fuels. And after they've invested in other technologies to win them back is very difficult.

I think that when gas consumption decreases in Europe, Russia will suffer the most. Like in September when Gazprom reduced supply to Europe, ultimately they themselves were the ones who suffered.