The Story of How They Rip Us Off on Gas Tariffs

There are schemes of Firtash and Naftogaz officials on fleecing the state budget and our pockets using increasing tariffs for utilities.

On October 1 the price for gas will be increased for consumers by 25%. That is 8.75 UAH for 1 cubic meter of gas. If the economy and welfare of Ukrainian people showed better results due to governmental action we would not possibly notice that increase of prices. But in practice it turns out quite the other way. Increased tariffs hit the pockets of Ukrainians and dig huge holes in the state budgetary funds used for backing low-income groups and for purchase of gas for state-financed organizations.

Taking into account the whole situation we should understand that only a few people get the largest part of the money received from gas sales. And these people have nothing to do with the state budget. Dmytro Firtash is still holding the status of the main beneficiary in gas scheming. He certainly shares the income with state officials of higher ranks (like Ahmetov did using the scheme named Rotterdam+).

Dmytro Firtash owns 22 regional gas distribution companies (such a company is called ‘an oblgaz’) (it complies 70% of gas market) and he is factually a monopolist in the field of natural gas distribution. Today his regional gas distribution companies are the only natural gas suppliers in Ukraine.

The Regional Gas Company (RGC) belonging to Firtash is the biggest company owning regional gas distribution companies. This market segment is divided among his partners Serhiy Lyovochkin and Yulia Lyovochkina, Ivan Fursin and Yuriy Boyko who are members of the informal group of RosUkrEnergo.

Except Ukrainian people the regional gas distribution companies of Firtash supply natural gas to state-financed organizations such as kindergartens, schools and hospitals. These organizations allocate huge amounts of money for heating of their facilities and their boiler rooms work on gas as well. This kind of business is rather beneficial. The yearly consumption of gas by a small education department in the district can reach the amount of 10 billion UAH per year. And a substantial part of this money is received by private individuals.

For you to understand how the oligarch with his ‘servants of the people’ makes money on the increased household costs I offer you to look through one of the simplest schemes. To do this I am going to use tenders on gas for state financed organizations.

The Security Service of Ukraine in Zhytomyr oblast with a subsidiary of Firtash named LLC Zhytomyrgaz Zbut as its gas supplier will be our subjects of investigation.

Owing to the manipulations with prices only in February 2018 one of the subsidiaries controlled by Firtash and named LLC Zhytomyrgaz Zbut together with the administration of the Security Service of Ukraine in Zhytomyr oblast managed to illegally seize 130k UAH of budgetary funds. Moreover, their additional annual income can reach 0.5mln UAH.

In simple terms 26% of the budgetary funds allocated for gas purchase can simply be stolen. And this example is only a tiny particle in the huge pyramid of funds misappropriation depicted in just one particular tender.

It’s only one example. But if you think about the volumes of that misappropriation within the scope of the whole country the picture of how Firtash with his partners and the authorities got their fortune is becoming much clearer.

How they steal and divide money on gas

The supply of natural gas to household consumers and to a number of industrial and state financed organizations on the territory of Zhytomyr oblast is provided by LLC Zhytomyrgaz Zbut (with the exception of Korostyshiv region. LLC Polissyagaz is a supplier of natural gas here.).

Public JSC Khmelnytskgaz (24.3%) and Private JSC Gaztek (50.4%) pose as major owners of the aforementioned company through Public JSC Zhytomyrgaz. They say these companies are connected with Dmytro Firtash who is practically a monopolist in the field of natural gas distribution and supply.

The company has been actively participating in natural gas supply auctions since 2015. One of the auctions took place on February 5, 2018 and the Department of the Security Service of Ukraine in Zhytomyr oblast was its customer.

In accordance with tender documentation the calculated gas consumption volumes for 2018 reached 222.7k cubic meters of gas. LLC Zhytomyrgaz Zbut belonging to Firtash won the tender offering the price of 8.5k UAH for 1k cubic meters of gas.

On March 6, 2018 the Department of the Security Service of Ukraine in Zhytomyr oblast signed a natural gas supply contract for the period from February 15, 2018 to December 31, 2018.

The total contract amount was 1.9mln UAH.

At the time of signing the contract (March 2018) market value of gas was 8.9k UAH for 1k cubic meters of gas.

That very day on March 6, 2018 LLC Zhytomyrgaz Zbut immediately decided to increase the price for natural gas by 9% signing an additional agreement No.1. Moreover, the price increase appeared not since signing the additional agreement but since February 15, 2018. That very day the company of Firtash won the tender and agreed to supply gas for a lower price that was 8.5k UAH for 1k cubic meters of gas.

They alleged that the grounds for the increased price laid in the market value of gas. In accordance with the data provided by National Joint-Stock Company Naftogaz gas market value was 10.1k UAH for 1k cubic meters of gas at the end of February that was higher than the winning price at the auction.

Here we should go deep into the legislative nuances. According to the Law 922 (article 36 part 4 subparagraph 2) the price for gas can be increased only based on the increased price reported by National Joint-Stock Company. Though, in March 2018 when the contract was signed the market value of natural gas did not just rise but even dropped down by 11.9% that was 1.3k UAH.

Thereby the company of Firtash could not increase the price due to absence of price fluctuation towards an increase. And in February 2018 gas price did not fluctuate and remained stable.

On March 12, 2018 the price for natural gas was driven up to 10.1k UAH for 1k cubic meters of gas by signing the additional agreement No.2. And that second agreement came into effect on February 15, 2018 just like it was with the agreement No.1. At that time LLC Zhytomyrgaz Zbut could purchase gas for the Security Service of Ukraine at the price of 8.5 UAH for 1 cubic meter of gas.

On March 13, 2018 the price for natural gas was raised up again to 10.8k UAH for 1k cubic meters by signing an additional agreement No. 3. And again that agreement came into effect on February 15, 2018.

All of the agreements came into effect the same date but were registered on three different days. It was done in order to evade the law 922 (there can be just a one-time increase of the price and not more than by 10%).

Such a scheme gave LLC Zhytomyrgaz Zbut an opportunity to supply gas for 10.8k UAH per 1k cubic meters since the contract conclusion date when the legal price was 8.5k per 1k cubic meters of gas.

It means that the gas price was factually increased by 27.3% since February 15, 2018.

At the expense of the increased prices, planned gas consumption volumes reduced by almost 50k cubic meters to 175k cubic meters of natural gas per year and feasible misappropriation of budgetary funds could possibly reach 2.3k UAH per 1k cubic meters of gas.

This scheme is not an exception but has been used for a long time. Not long ago we reported similar swindling from LLC Lvivgaz Zbut that was also under control of Firtash.

This scheme is not the only fraudulent method Public JSC Zhytomyrgaz Zbut used to apply for illicit enrichment. According to numerous statements from commercial customers of natural gas in Zhytomyr oblast there is also huge swindling connected with the calculations of production losses.

Mr Firtash increased volumes of natural gas production losses for a lot of consumers receiving services from Open Joint Stock Company Zhytomyrgaz while the type of gas regulating equipment was the same and it remained technically stable.

And it all takes place despite the fact that the maintenance of gas equipment is completely provided by that same Zhytomyrgaz. There are even joint committees including representatives from gas-consumer enterprises and Zhytomyrgaz called together. The committees check and assess factual gas volumes of production losses registering these very losses (committee establishment is provided by the paragraph 5.8 of the Methodology approved by the Ministry of Fuel and Energy of Ukraine dd May 30, 2003 N 264).

Having done the checkups they conclude the results and correct losses. But after a certain consumption period (regardless of the control and full maintenance of gas equipment on the part of Zhytomyrgaz) the volumes of production losses increase by 10 times and in some cases even by 100 times. It all depends on total consumption volumes.

Thus, natural gas that was factually unaccounted is misappropriated by Public JSC Zhytomyrgaz and LLC Zhytomyrgaz Zbut. After that they repeatedly sell it and here we run upon another scheme of illicit enrichment of Firtash & Co.

Private facilities are not the only ones complaining about the actions of Zhytomyrgaz. Household consumers also are far from being satisfied as the figures in theirs bills rose up at least three times. And the reason for that rise was the installation of gas meters.

Despite the enacted Law of Ukraine ‘About the Market of Natural Gas’ strictly separating the functions of supply and distribution, regional gas distribution companies of Mr Firtash are trying to preserve monopoly in the field of natural gas supply as well.

To do so they win tenders resorting to underpricing and force end-consumers to work only with them as they can easily block gas supply through gas distribution networks. It’s all possible because they keep monopoly with the support of Firtash in this segment too.

According to the information from mass media Zhytomyrgaz was practiced intimidation of the state financed organizations that concluded contracts on gas supply with other gas trading companies that were not controlled by Mr Firtash. In case of the least gas limit delays by these trading companies Zhytomyrgas shut gas lines straight away. In such a way state financed organization were pressed towards ‘cooperation’.

If the intimidations were to no effect Zhytomyrgaz sent complaints to different instances and blocked payments in that way. Under such circumstances trading companies simply refused to supply gas and terminated contracts themselves.

Even though using all of these schemes Zhytomyrgaz suffered losses in the end of the year and now it’s looking for the alternatives that would allow raising gas prices for consumers.

You may mistakenly think that state authorities represented by Naftogaz have no idea about this whole situation but I am afraid to say that you are wrong. National Joint-Stock Company Naftogaz is a supplier of natural gas to the regional gas distribution companies of Ukraine. Moreover, it holds shares at some of them itself (Kirovogradgaz – 51%, Lvivgaz – 25%, Khmelnytskgaz – 25% etc.). In 2015 the Ministry of Internal Affairs suspected the officials of National Joint-Stock Company Naftogaz of conspiracy with the owners of gas companies (including Group DF) that led to substantial losses for the state.

In 2018 Naftogaz accused Dmytro Firtash of gas underpricing and blamed him for writing it off involving non-existent individuals (‘dead souls’ in other words). These kinds of misappropriation turn into debts to be paid to the state budget. For today such debts amount to nearly 30 billion UAH. A bit later LLC Regional Gas Company of Firtash (RGC) was searched and the management of RGC accused Naftogaz of initiating that search. The interesting part is that it was the first time in 4 years when National Joint-Stock Company Naftogaz laid accusations like that. And it happened right before the pending elections.

Such a delayed activity of Naftogaz is more likely to demonstrate its desire to receive a share out of the business of Firtash making money on sales of unaccounted and overpriced gas rather than its care about the state budget replenishment.

The President will definitely need this money for the elections.

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Александр Дубинский

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