Ku­biv trav­el­ing to China to save $3.65 bil­lion en­ergy sec­tor loan

Kyiv Post - - Business - BY JOSH KOVENSKY [email protected] China kept its place as the world’s third big­gest in­ter­na­tional in­vestor from 2014 to 2015, trail­ing only Ja­pan and the United States. China could be­come the top out­ward in­vestor in com­ing years as Bei­jing puts up te

Ukrainian of­fi­cials risk los­ing $3.65 bil­lion in Chi­nese loans tar­geted for Ukraine’s en­ergy sec­tor, with Econ­omy Min­is­ter Stepan Ku­biv ar­rang­ing last-ditch meet­ings to save the deal while on a trip to Bei­jing.

The credit line — ini­tially agreed in 2012 un­der Pres­i­dent Vik­tor Yanukovych for coal gasi­fi­ca­tion projects — is be­ing of­fered by the sta­te­owned China Devel­op­ment Bank. But the agree­ment has lan­guished since the EuroMaidan Rev­o­lu­tion that drove Yanukovych from power on Feb. 22, 2014.

While the state-owned en­ergy gi­ant Naftogaz has pro­posed projects for the money, gov­ern­ment min­istries have failed to ap­prove them, one of the loan con­di­tions. Ku­biv will meet with of­fi­cials from the Chi­nese state bank at a con­fer­ence in Bei­jing next week in a bid to make a June pro­posal dead­line for the cash.

The meet­ing fol­lows warn­ings from the Ukrainian Em­bassy in Bei­jing. One let­ter from Ukrainian Am­bas­sador to China Oleh Dy­omin to Ku­biv warned that los­ing the loan would “neg­a­tively im­pact the en­tire spec­trum of Ukraine-China co­op­er­a­tion on in­vest­ment.”

Naftogaz blames var­i­ous gov­ern­ment min­istries for the de­ba­cle.

“Naftogaz has done as much as it could,” said An­driy Suprun, head of Naftogaz sub­sidiary Vu­glesin­tezgaz, which is over­see­ing the projects. “It’s not only an eco­nomic is­sue — it’s an is­sue of build­ing a long-term re­la­tion­ship.”

The money would al­low Ukraine to up­date its gas and coal en­ergy in­fra­struc­ture, po­ten­tially sav­ing hun­dreds of mil­lions of cu­bic me­ters of gas an­nu­ally worth bil­lions of dol­lars.

China would gain rights to sell con­struc­tion ma­te­ri­als for the new en­ergy plants and pos­si­bly strike profit-shar­ing agree­ments for ex­port­ing gas to Europe.

Dz­erkalo Tyzh­nya first re­ported on the de­lay in Jan­uary 2016. Af­ter the dead­line was ex­tended in De­cem­ber, Reuters wrote about the is­sue in April.

Loan agree­ment

In 2012, Ukraine signed the loan agree­ment with the China Devel­op­ment Bank on coal gasi­fi­ca­tion projects in Yanukovych’s Don­bas po­lit­i­cal base.

“Coal gasi­fi­ca­tion is a Chi­nese tech­nol­ogy,” said Gen­nadiy Kobal, direc­tor of en­ergy con­sul­tancy ExPro. “They wanted to sell equip­ment for the project and ex­port the tech­nol­ogy.”

The agree­ment cre­ated a Naftogaz sub­sidiary called Vu­glesin­tezgaz to over­see how Ukraine would use the cash.

The agree­ment was dis­carded in part due to Kyiv’s loss of con­trol over parts of the Don­bas be­cause of the war Rus­sia launched in 2014.

The Chi­nese gov­ern­ment kept the loan avail­able, but on four con­di­tions: that the money be used for en­ergy-re­lated projects, that it be guar­an­teed by the Ukrainian gov­ern­ment, that Naftogaz be the bor­rower, and that Chi­nese com­pa­nies sup­ply 60 per­cent of the project’s needs.

“It took quite a lot for the gov­ern­ment, for the min­istries, for Naftogaz, for my­self, to re­al­ize what this loan agree­ment is, how can we use it,” Suprun said.

Four projects have been sub­mit­ted. They in­clude two new coal power plants in Kyiv, one new coal plant in Lviv, the mod­ern­iza­tion of state-owned gas ex­trac­tor Ukrgazvy­dobu­van­nya’s drill fleet, and the out­fit­ting of Ukrainian apart­ment com­plexes with new boil­ers.

The Kyiv projects would sub­sti­tute 600 mil­lion cu­bic me­ters of nat­u­ral gas an­nu­ally with coal, Suprun said, while the Ukrgazvy­dobu­van­nya re­fit­ting would in­crease the com­pany’s drilling ca­pac­ity by 45 bil­lion cu­bic me­ters over the equip­ment’s 15-year life cy­cle, ac­cord­ing to a rough es­ti­mate from Naftogaz.

In­ter­nal pres­sure

Suprun said that Naftogaz sub­mit­ted pro­pos­als for the projects to the min­istries of econ­omy and fi­nance for ap­proval in 2016, but that none have signed off on them.

Chi­nese of­fi­cials ex­tended the De­cem­ber 2016 dead­line by one year, Suprun said, adding that the ap­pli­ca­tions for projects un­der the

loan need to be sub­mit­ted by June 2017.

Suprun said that he hoped Ku­biv’s visit to Bei­jing next week would ac­cel­er­ate ap­prov­ing the pro­pos­als.

In­ter­nal pres­sure may also be play­ing a motivating role.

Dy­omin, the Ukrainian am­bas­sador to China, warned Kyiv through a se­ries of letters in 2016 that the coun­try may lose the credit.

“A lot of time and ef­fort has been spent on sup­port­ing these projects from the Chi­nese Min­istries of Com­merce and For­eign af­fairs,” Dy­omin wrote in a May 2016 missive to Ku­biv. “Po­lit­i­cally, dis­man­tling the en­ergy project co­op­er­a­tion that we have be­gun would neg­a­tively im­pact the en­tire spec­trum of UkraineChi­na co­op­er­a­tion on in­vest­ment.”

Spokes­peo­ple for the min­istries of econ­omy, en­ergy, and for­eign af­fairs did not re­ply to re­quests for com­ment.

Who prof­its?

It’s not clear whether the pro­pos­als have been de­layed due to pres­sure from vested in­ter­ests or ad­min­is­tra­tive in­com­pe­tence.

In March, the Gen­eral Prose­cu­tor’s Of­fice opened a criminal in­ves­ti­ga­tion into Suprun for “criminal neg­li­gence” over the de­lays. The Vu­glesin­tezgaz direc­tor de­nies wrong­do­ing.

DTEK, the en­ergy firm owned by bil­lion­aire oli­garch Ri­nat Akhme­tov’s Sys­tem Cap­i­tal Man­age­ment, has a lease through Kyiven­ergo on one the Kyiv power plants that would be re­placed un­der the loan — TETs-6.

One doc­u­ment re­viewed by the Kyiv Post showed that Kyiven­ergo has re­cently re­fused to grant Naftogaz sur­vey­ors ac­cess to the TETs-6 site.

Kyiven­ergo did not re­ply to a re­qeuest for com­ment.

At the same time, re­plac­ing a gas power plant with coal could be a se­ri­ous boon for DTEK’s coal sup­ply busi­ness.

“Coal is a trade­able com­mod­ity, if the sit­u­a­tion were not good, the project could burn coal from Poland no prob­lem. Poland’s coal — we’ve ex­am­ined it, and it’s per­fectly suit­able,” said Suprun.

“For the gov­ern­ment and lo­cal pro­duc­ers, which is DTEK, it should be in their in­ter­ests to be the sup­plier. They could bid for that,” he added.

A DTEK spokesman said the com­pany was un­aware of the project.

Yu­lia Ulasik, direc­tor of the Cen­ter for Con­tem­po­rary China, ar­gued that other failed China-funded projects — like the pro­posed ex­press train be­tween Bo­ryspil Air­port and Kyiv and a grain loan pro­gram — had be­come sore spots.

“At the level of the gov­ern­ment, it’s not ready to take on some­thing else again that it’s not pre­pared to ful­fill,” Ulasik said.

Kobal, the en­ergy con­sul­tant, said that Naftogaz’s pro­pos­als are “very dis­tant from the kind of work that Naftogaz usu­ally does. It seems like they’re al­ready far from syn­thetic nat­u­ral gas and are just try­ing to find some re­place­ment.”

Hedg­ing bets

The case may cause Chi­nese in­vestors to shy even more away from Ukraine. “For them, it’s an is­sue of los­ing face,” said An­drey Gon­charuk, a board mem­ber of the Ukrainian As­so­ci­a­tion of Si­nol­o­gists.

In spite of the de­lays, how­ever, the Chi­nese gov­ern­ment ap­pears to be po­si­tion­ing it­self for a longer stay both in Ukraine’s en­ergy mar­ket and for Ukrainian in­vest­ment more broadly.

The state-owned China Na­tional Build­ing Ma­te­rial’s Ukraine of­fice has an­nounced sev­eral plans, in­clud­ing a project that would turn part of the Chornobyl ex­clu­sion zone into a large so­lar farm.

The Chi­nese in­vest­ment con­sor­tium Bo­hai Com­mod­ity Ex­change also bought a for­mer state bank in a Novem­ber pri­va­ti­za­tion auc­tion from the State Prop­erty Fund for 3 mil­lion eu­ros.

Gon­charuk, the China ex­pert, said that the bank’s name — “Ukrainian Bank for Re­con­struc­tion and Devel­op­ment” — is no ac­ci­dent.

‘“They now have their own bank in Ukraine with which to fi­nance projects that in­ter­est them,” he said. “They bought a sign­board.”

Work­ers at the Kyiv-5 heat en­ergy plant in Au­gust 2014. Naftogaz en­vi­sions build­ing two new, more ef­fi­cient power plants in Kyiv with the Chi­nese loan. (Volodymyr Petrov)

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