Growing gas debts, conflicts threaten to freeze Ukrainians in their homes
As the first snow fell on Kyiv on the morning of Nov. 13, commuters in the city center met with an unpleasant surprise. A heating pipe under Velyka Vasylkivska Street exploded, turning one of downtown Kyiv’s main roads into a river of boiling water.
One car was half-swallowed by the crater left in the eruption’s wake, and the accident backed up traffic for blocks.
And it wasn’t an isolated incident. As freezing weather began to sweep across Ukraine in mid-November, heating pipes all over the capital have begun bursting, spewing forth geysers of hot water and damaging public and private property.
More than 300 Kyiv apartment buildings were left without heating and hot water after the Nov. 13 accident. As of Nov. 21, the city authorities had fixed more than 1,600 burst pipes but around 20 buildings remain without heating.
The situation is worse outside the capital. And with even colder weather on its way, the eruptions, breakdowns, and outages will likely continue.
Some observers are asking why Ukraine can’t keep its public utilities properly running. The answer is a complicated mixture of growing utilities debts, unrepaired heating infrastructure and legal disputes with the Naftogaz state gas company.
Combined, these problems threaten to leave Ukrainians freezing in their homes this winter.
The problem began in April, when Kyiv authorities broke a 17-year agreement with Kyivenergo, taking control of over 2,600 kilometers of pipes, two power stations, and a trash-burning factory.
Despite seizing these assets, the city refused to assume the company’s Hr 5 billion ($180 million) debt to Naftogaz.
That led to a series of other problems. The city authorities discovered that 80 percent of the pipes it inherited were in poor condition, Mayor Vitali Klitschko said during a Nov. 21 meeting with Kyiv district heads.
Later, in May, Naftogaz cut off gas supplies in an attempt to strong-arm the city into accepting the debt.
That approach worked: in October, Kyiv authorities accepted the debt — albeit with Hr 1.3 billion, or $46.8 million, in penalties written off. Now, the city owes some Hr 2.6 billion, or about $93.7 million.
But the damage had already been done. The gas shut-off “made the situation even worse, as the empty pipes were affected by corrosion,” Klitschko said.
Outside Kyiv, the new heating season has proven to be even more chaotic.
As of Nov. 15, 12 cities were with- out heating due to debts, according to Naftogaz. It went down to five cities by Nov. 20.
Across the country, debts, disputes and privatization processes have become stumbling blocks on the path to reliable heating. For these reasons, Naftogaz has stopped supplying gas to at least 20 of 1,220 Ukrainian heating plants, Naftogaz spokesperson Aliona Osmolovska told the Kyiv Post on Nov. 20.
Municipal heating companies and power plants owe more than Hr 28.4 billion, or about $1 billion.
Of that, Hr 9.7 billion, about $350 million, are debts to Naftogaz for gas consumed in 2018, the company reported on its website.
No money, no gas
Naftogaz sells gas to Ukrainian power plants and heating companies, who in turn provide heating and hot water across Ukraine with a 30-percent discount.
By law, they cannot cut the supplies even to consumers with growing debts, Osmolovska said.
But there are exceptions. Naftogaz is allowed to stop deliveries to companies that have not paid at least 90 percent of the cost for gas already consumed if the company has no
money, is under arrest, or is set for privatization.
Power plants in Kherson, Severodonetsk, and Kryvyi Rih were set for privatization in 2018 and transferred to the State Property Fund. But that agency has no budget to pay for gas.
The gas can also be cut if the new owner refuses to inherit its predecessor’s debts — as happened in Kyiv and Smila, a city nearly 200 kilometers to the south of Kyiv in Cherkasy Oblast.
Smila, a city of 70,000 people, has an Hr 85 million ($3 million) gas debt. The local government has refused to pay the debt after cutting ties with the city’s private heating company in 2018.
While in Kyiv, the authorities stated that the long-lasting conflict has brought good results and decreased the debt, Osmolovska believes that Kyivans were forced to live without hot water in vain.
“It is a normal procedure. The new owner must take over the debts of the previous owner,” she said. “The penalties could have been written off immediately and the debts restructured for five years.”
Naftogaz also cut supplies to the cities of the Russian-occupied Donetsk, Luhansk and Crimea regions. Now those territories are fueled directly by Russia’s Gazprom.
Even more cuts
Naftogaz has cut supplies to 20 heating companies for failing to pay for gas. To restart supplies, the gas monopoly has brokered a deal with the Cabinet of Ministers: it decreased the 90 percent payment norm to 78 percent for heating companies and 60 percent for power plants, Osmolovska said.
On Nov. 14, the Cabinet approved the new conditions and forbade gas cuts until the heating season ends. After that, heating returned to most Ukrainian cities.
“We couldn’t restart gas provision in any other legal way,” Osmolovska said. “But to make people freeze in their apartments also wasn’t an option.”
While heating companies cannot pay for gas already consumed, soon they will have to pay more for new supplies. The government hiked gas prices for consumers by 23.5 percent starting in November. Because of that, debts will continue to grow, according to Andriy Gerus, energy expert from Ukraine’s Utilities and Energy Consumers Association.
However, the heating companies need two more months to form the new higher heating tariffs for consumers.
So they “will have to work at a loss until January,” Osmolovska explained.
The government is supposed to compensate heating companies with subsidies for losses incurred due to the tariff transition. But the Finance Ministry pays subsidies with delays.
“As the result, municipal heating companies do not pay for gas in time,” Gerus explained.
“(Then) Naftogaz imposes penalties, which heating companies have no right to shift onto public companies and other consumers who don’t pay utilities.”
Moreover, experts say that, with higher prices, heating companies will have to locate more money to pay for gas. They also have to pay wages. As a result, almost nothing will be left for repairing the heating infrastructure.
A way out?
Osmolovska does not believe the Hr 28.4 billion gas debt can be repaid. In 2011, the government wrote off Hr 16 billion, or $576 million in gas debt.
She believes the only way out of this situation is not letting the debt grow further, consuming gas more responsibly, and modernizing the heating system to consume less gas.
Ukraine got a taste of living in a gas-saving regime in March. Back then, Russia’s Gazprom refused to comply with the Stockholm arbitration court ruling and renew gas supplies to Ukraine under updated conditions.
To compensate for the short-term gas shortage, Naftogaz called on Ukrainians to use less gas, launching a #prykruty (“turn the gas down”) flash mob.
The Stockholm court decision in February obliged Russia to pay $2.6 billion to Naftogaz and decreased the minimum amount of gas Ukraine must buy from Russia according to a 2009 contract from 52 billion cubic meters to 5 billion.
Gazprom was supposed to renew supplies to Ukraine starting March, but on the last minute returned the advance payment and decreased the pressure in the transit pipes going through Ukraine. Naftogaz CEO Andriy Kobolyev called that “revenge.”
“All the country mobilized and helped Naftogaz to cover the shortage of gas,” Gerus wrote.
To compensate for the shortage, in March heating plants and companies had either used fuel oil mazut instead of gas or cut the gas intake significantly.
Naftogaz should have rewarded them with financial compensations for every saved cubic meter of gas, Gerus said.
“That reward would be more than Hr 100 million — a sum that Kherson Power Plant, which used heating oil in spring and cut the gas consumption by 18 percent, would need today,” Gerus said.
The indebted Kherson power plant only began working on Nov. 14, when the government obliged Naftogaz to supply gas to the companies that paid at least 60 percent of their gas debt, cutting that from the previous 90 percent norm.
Still, Naftogaz broke no laws by cutting gas supplies to heating power plants that responded to its call and turned the gas consumption down in spring.
After four years of reform, the gas prices in Ukraine finally went up, responding to the demands of Ukraine’s international donors and lenders, mainly the International Monetary Fund. Naftogaz has become a profitable company. But municipal heating companies and heating and power plants continue losing money and increasing debts.
In numerous statements, Naftogaz and President Petro Poroshenko have put the blame on the inaction of local authorities.
Prime Minister Volodymyr Groysman and Poroshenko have threatened to fire mayors.
Mayors, like Klitschko, in turn, have threatened to fire the heads of city districts and municipal heating companies for inaction.
“As of now, energy sector reform hasn’t made our system more effective, but shifted the center of debts and losses from Naftogaz to municipal heating companies,” Gerus said.
“And the population now will have to pay more but might stay without heating and hot water.”
But there is a way out of the utilities chaos, the expert added. The government indeed has to raise gas and utilities prices. But also it has to improve the effectiveness of heat production, repair the infrastructure, and cut consumption as soon as possible.
Otherwise, soon there will be no pipes left to deliver heating and hot water to Ukrainian homes.
BY VERONIKA MELKOZEROVA People cross a street flooded with boiling water and shrouded by steam from an exploded heating pipe in the center of Kyiv on Nov. 15, 2018. (Pavlo Podufalov).
Emergency service workers inspect a car that fell through cracked asphalt on Kyiv's central Shota Rustaveli Street on Nov. 13, 2018. A busted water pipe caused damaged to the road and opened up the dangerous fissure. No injuries were reported. (Oleg Petrasiuk)