How Firtash got $94 million from Vitrenko this October

Mark Savchuk

Head of Civil oversight Council of NABU

This article is an investigation about the amount of gas Dmytro Firtash's Regional Gas Company obtained (at a preferential price) IN OCTOBER this year due to a change of management at Naftogaz.

In March 2021, Naftogaz (headed by Kobolev) signed a contract with "ЙЕ ЕНЕРГІЯ" on gas supplies at a fixed price (7.40 UAH per cubic meter). "ЙЕ ЕНЕРГІЯ" is a company that is controlled by Dmytro Firtash, and such a contract allowed Firtash’s RGC group to offer a fixed annual tariff for the population at a price of 7.99 UAH per cubic meter (because Ukrainian Government has imposed a requirement on gas suppliers to offer "annual gas contracts" to the householders.) It should be noted that 7.99 UAH per cubic meter is much lower than market price (around 35 UAH). Thus, the government, de facto, is subsidizing the household market via a government owned company — Naftogaz.

Immediately after his appointment as Head of Naftogaz, Yuriy Vitrenko criticized the contract developed by the previous management of Naftogaz. Vitrenko said that although it was impossible to instantly terminate the contract with "ЙЕ ЕНЕРГІЯ" due to penalties, Vitrenko himself would look for an alternative solution, to fight Firtash!

Because there was a reasonable suspicion that part of the gas meant for the household market was resold to the non-household market at market prices (this allowed Firtash to pocket additional profits in the process). He said it himself in one of his posts.

"The predetermined volume meant that in certain periods the suppliers received more gas than the population consumed. In this case they could resell some of the volume on the non-household market, earning abnormal-profits and at the same time distorting pricing in the industrial consumers' market due to "additional" volume being sold."

The parameters of the contract between Naftogaz and "ЙЕ ЕНЕРГІЯ" are not secret, but just in case, here I am giving a screenshot of the contract itself with the monthly consumption volumes of the RGC group with Firtash.

What is the core of this contract? From May 1, according to the decision of NEURC (National Energy and Utilities Regulatory Commission of Ukraine), all gas suppliers were obliged to switch all their consumers to contracts with a fixed annual price. The RGC group was obliged to do this as well, but couldn’t deliver (or at least convinced the Office of the President that they couldn't). Therefore, Naftogaz was to become the gas supplier for all household consumers of the RGC group. RGC group would simply act as an intermediary (i.e. buying gas from Naftogaz and then selling it to consumers).

It was these calculated volumes of consumption that the RGС group used to supply all its household consumers, and according to Yuriy Vitrenko, Firtash resold some of the gas at a non-household market at market prices (much higher than household prices) — 15-20-25 UAH per cubic meter.

Note! — from May to September, the RGC group DID NOT breach the limits of concessional consumption. Gas supplied according to these contractual volumes was sufficient for all household consumers.

This entire article relates ONLY to gas for domestic needs (household market).

On September 23, the Cabinet of Ministers of Ukraine passed a Resolution No. 1187-р that gave the go-ahead to Naftogaz to create a so-called "balancing group".

What is a balancing group?

To put it simply, this is a "common pool of gas" that the gas supply companies get gas from (and is filled by state owned Naftogaz), at a fixed price (7.40 UAH per cubic meter).

Frankly speaking, this decision was not an alternative to the contract with "ЙЕ ЕНЕРГІЯ". Vitrenko stated that this allowed him to avoid direct contracts with companies controlled by Firtash. But this is not true because the contracts within the balancing group were formed by Naftogaz directly with regional gas supply companies (most of which are owned by RGC Group which is controlled by Firtash).

Why was the reason for creating balancing groups ?

Initially, there was an opinion that this was a necessary step in order to enforce a ban for the RGС Group to re-sell the gas through the direct contracts with regional gas supply companies.

However, Dmytro Firtash's gas empire can’t be controlled. Because, he owns both regional gas supply companies and regional gas transport companies at the same time. Firtash's system is closed and NOBODY knows exactly how much gas was sold solely on the household market. Firtash's supply companies can bypass the formal ban to sell the gas bought from Naftogaz by a subsidised price ONLY on the household market, and eventually sell the gas on non-household market (at market price).

So what is the real reason for establishing a balancing group?

The reports of the ACTUAL gas shipment to the RGC group for October shed the light on this question. I’ve constructed this table by using the data of the Gas Transmission System Operator of Ukraine (they are not publicly available, but most of the market players have them, and they are quite easy to check).

As you can see from the contract screen-shot above, RGC considered 350 million cubic meters of gas (in october)to be more than enough for the needs of their household clients and therefore agreed to them in the contract. So, according to Vitrenko's logic, 350 mln cubic meters was more than enough for the household clients of "ЙЕ ЕНЕРГІЯ", even leaving "some volume of gas" as leftovers so that Firtash could sell it on the non-household market at market price.

However, already in October, after introducing the balancing groups, the RGC enterprises actually got not 350 mln cubic meters, but 490 million cubic meters of gas at a subsidized price. Despite the fact that it was an ordinary October (no sudden drops in temperature), and the heating season started more or less on schedule. Again — it was an ordinary October.

A logical question arises. If, according to the parameters of the old contract, (in Yuriy Vitrenko’s opinion) "side" volumes of gas that were not used by the population could be supplied by the RGC group to the non-household (to be sold at much higher price), then what happened in October, after the "increase" of the household consumption by almost 50%?!

Most likely, these volumes were supplied by Firtash's group to his own chemical factories or to other clients at a more or less market price (that is much higher than 7.40 UAH per cubic meter).

The old contract (that existed before the introduction of balancing groups) would not have allowed them to do this because the maximum volume that Firtash could take for the alleged needs of household consumers was strictly limited by the contract with "ЙЕ ЕНЕРГІЯ". 350 million in October and not a cubic meter more! With the introduction of balancing groups — these restrictions no longer exist! How convenient :)

Let's calculate how much extra profit Firtash could get by reselling the gas he has received from Naftogaz (at subsidized price 7.40 UAH per cubic meter) to a non-household market at real market price.

Actual 490 million cubic meters minus 350 million (initial volume in the contract) is EXTRA 140 million cubic meters Firtash got from Naftogaz in October alone!

In October, according to the Energy Exchange, the cost of gas for legal entities in Ukraine ranged from 30 to 35 UAH per cubic meter with an average price of about 33 UAH per cubic meter.

Excluding VAT, this amounts to 27.5 UAH. Let's even imagine that Firtash had some additional costs in selling his gas "off the books". Hence, lets just say that he could sell this additional gas at 25 UAH per cubic meter.

(25.00 — 7.40) * 140,000,000 = 2,464,000,000 UAH.

Two billion four hundred sixty-four million UAH. At a rate of 26, that's $94 million of EXTRA PROFITS. And this is in October alone!!! We have the whole winter ahead of us!

Not bad at all!

The only question is: Does the Office of the President know how much they gave Firtash in October, or was Yuriy Vitrenko the only one who saw this amount?